Union Bankshares Inc.

03/25/2025 | Press release | Distributed by Public on 03/25/2025 14:09

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the consolidated financial position of Union Bankshares, Inc. ("the Company," "our," "we," "us") and its subsidiary, Union Bank ("Union"), as of December 31, 2024 and 2023, and its consolidated results of operations for the years then ended. The Company is considered a "smaller reporting company" under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows, and changes in stockholders' equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems appropriate.
This discussion is being presented to provide a narrative explanation of the consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and related notes and with other financial data contained in Item 8, Part II of this Annual Report. The purpose of this presentation is to enhance overall financial disclosures and to provide information about historical financial performance and developing trends as a means to assess to what extent past performance can be used to evaluate the prospects for future performance. Management is not aware of the occurrence of any events after December 31, 2024 which would materially affect the information presented.
CERTAIN DEFINITIONS
Capitalized terms used in the following discussion and not otherwise defined below have the meanings assigned to them in Note 1 to the Company's audited consolidated financial statements contained in Part II, item 8, page 54 of this Annual Report.
NON-GAAP FINANCIAL MEASURES
Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure.
The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company's financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherently uncertain. Based on this definition, management has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Nevertheless, because the nature of the judgments and assumptions made by management is inherently subject to a degree of uncertainty, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, capital, or the results of operations of the Company.
Allowance for credit losses on loans and on off-balance sheet credit exposures
ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is more commonly referred to as Current Expected Credit Losses (CECL), requires that expected credit losses for
financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the expected life of the asset. CECL also applies to certain off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar investments. The Company believes the allowance for credit losses (ACL) on loans and off-balance sheet credit exposures is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. CECL may create volatility in the level of the ACL from quarter to quarter as the ACL is dependent upon macroeconomic forecasts and conditions, loan portfolio volumes and credit quality, among other things.
Allowance for credit losses on AFS debt securities
CECL also impacts the accounting for AFS debt securities. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. The Company believes the ACL on AFS debt securities is a critical accounting policy due to the level of judgment involved to determine if credit-related impairment exists. If the impairment analysis indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount by which the amortized cost basis of the security exceeds its fair value.
Mortgage servicing rights
MSRs associated with loans originated and sold, where servicing is retained, are required to be capitalized and initially recorded at fair value on the acquisition date and are subsequently accounted for using the "amortization method". Mortgage servicing rights are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. The value of capitalized servicing rights represents the estimated present value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the mortgage servicing rights is periodically reviewed for impairment based on a determination of estimated fair value compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a reduction of non-interest income. Subsequent improvement (if any) in the estimated fair value of impaired mortgage servicing rights is reflected in a positive valuation adjustment and is recognized in non-interest income up to (but not in excess of) the amount of the prior impairment. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayments. Factors that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. The Company analyzes and accounts for the value of its servicing rights with the assistance of a third party consultant.
Intangible assets
The Company's intangible assets include goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in the 2011 Branch Acquisition. In accordance with current authoritative guidance, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company is less than its carrying amount, which could result in goodwill impairment.
Other
The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions, that are significant to understanding the Company's financial condition and results of operations, including investment securities. The most significant accounting policies followed by the Company are presented in Note 1 of the consolidated financial statements and in the section below under the caption "FINANCIAL CONDITION" and the subcaptions "Asset Quality", "Allowance for Credit Losses" and "Investment Activities." Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information available when such estimates, assumptions and judgments are made and can be impacted by future events and events outside the control of the Company. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
OVERVIEW
The Company, like other financial institutions, has experienced earnings pressure due to the prolonged and steep yield curve inversion. The sharp increases in short-term rates during 2022 and 2023 have had a significant impact on the Company's funding costs due to higher rates paid on deposit accounts and increased utilization of wholesale funding at higher costs. The Company's financial position remains strong, supported by a diverse deposit base, a strong liquidity position, excellent asset quality, and regulatory capital in excess of all required levels. The Company continues to focus on gathering deposits, optimization of the net interest margin and maintaining strong asset quality.
The Company's earnings have been impacted by the inverted yield curve, as deposit and funding costs have risen at a faster pace than assets have repriced, which has resulted in compression of the net interest margin and spread. The net interest margin was 2.77% for the year ended December 31, 2024 compared to 2.88% for the year ended December 31, 2023, while the net interest spreads for the same periods were 2.30% and 2.50%, respectively. We continue to manage the net interest margin and spread by remaining disciplined on loan and deposit pricing, utilizing FHLB advances and brokered CDs when appropriate to reduce our exposure to high short-term interest rates, and maximizing our balance sheet collateral (i.e. loans and investment securities) to obtain wholesale funding in a cost effective way to fund loan growth.
The Company completed a balance sheet repositioning related to its investment securities portfolio during the third quarter of 2024. The sale of lower-yielding AFS debt securities with a book value of $38.5 million was executed and recorded in August of 2024, resulting in a pre-tax realized loss on the sale of $1.3 million. The proceeds from the sale of these securities were used to purchase $26.0 million of AFS debt securities at higher yields to improve income going forward, and the remainder was used to fund loan growth. The Company estimates the loss on the sale will be recouped within approximately one year.
The Company's consolidated net income was $8.8 million, with basic earnings per share of $1.94 for 2024 compared to consolidated net income of $11.3 million, and basic earnings per share of $2.50 for 2023, while diluted earnings per share for the same periods were $1.92 and $2.48, respectively. The decrease in net income was due to the combined effects of the $1.3 million loss on the sale of AFS debt securities discussed above, increases in noninterest expenses of $2.7 million, or 7.5%, and $1.4 million in credit loss expense, partially offset by increases of $1.1 million in noninterest income, excluding the loss on the sale of AFS debt securities, an increase in net interest income of $521 thousand or 1.4%, and a reduction in the provision for income taxes of $1.3 million, or 77.2%.
Sales of qualifying residential loans to the secondary market for the year ended December 31, 2024 were $113.5 million resulting in gain on sales of $1.7 million, compared to sales of $75.6 million and gain on sales of $1.2 million for the year ended December 31, 2023.
As of December 31, 2024, the Company had total consolidated assets of $1.53 billion, an increase of 4.0% compared to total consolidated assets of $1.47 billion at December 31, 2023. Total investments decreased $13.6 million, or 5.1%, to $252.3 million, or 16.5% of total assets at December 31, 2024 compared to $265.9 million, or 18.1% of total assets, as of December 31, 2023. Net loans and loans held for sale increased $128.9 million or 12.6%, to $1.2 billion, or 75.6% of total assets, at December 31, 2024, compared to $1.0 billion, or 69.9% of total assets, at December 31, 2023. The level of federal funds sold decreased $62.6 million, or 85.4%, to $10.7 million at December 31, 2024 compared to $73.2 million at December 31, 2023.
Deposits decreased $136.7 million, or 10.5%, primarily due to a decrease in wholesale deposit funding. Total deposits were $1.17 billion at December 31, 2024 compared to $1.31 billion at December 31, 2023. There were $103.0 million of retail brokered deposits and $50.2 million of purchased ICS deposits at December 31, 2023, and no retail brokered deposits or purchased ICS deposits at December 31, 2024. Borrowed funds were $259.7 million at December 31, 2024 compared to $65.7 million at December 31, 2023.
The Company's total capital increased from $65.8 million at December 31, 2023 to $66.5 million at December 31, 2024. This increase primarily reflects net income of $8.8 million for 2024, partially offset by an increase of $2.0 million in accumulated other comprehensive loss and regular cash dividends paid of $6.5 million. (See Capital Resourceson pages 45 to 46.) These changes also resulted in an increase in the Company's book value per share to $14.65 at December 31, 2024 from $14.56 as of December 31, 2023.
Return on average assets is a financial metric often utilized as an indicator of a financial institution's performance. The Company's return on average assets decreased 22 bps for the year ended December 31, 2024 compared to 2023 due to an increase in average assets of $88.0 million and a decrease in net income of $2.5 million for the year ended December 31, 2024.
The following per share information and key ratios presented in the table below depict several measurements of performance or financial condition at or for the years ended December 31, 2024 and 2023:
2024 2023
Return on average assets 0.60 % 0.82 %
Return on average equity 13.38 % 20.01 %
Net interest margin (1) 2.77 % 2.88 %
Efficiency ratio (2) 77.62 % 72.83 %
Net interest spread (3) 2.30 % 2.50 %
Loan to deposit ratio 99.32 % 78.99 %
Net (recoveries) charge-offs to total average loans
- % - %
ACL on loans to loans not held for sale 0.66 % 0.64 %
Nonperforming assets to total assets (4) 0.12 % 0.14 %
Equity to assets 4.35 % 4.48 %
Total capital to risk weighted assets 12.53 % 13.34 %
Book value per share $ 14.65 $ 14.56
Basic earnings per share $ 1.94 $ 2.50
Diluted earnings per share $ 1.92 $ 2.48
Dividends paid per share $ 1.44 $ 1.44
Dividend payout ratio (5) 74.23 % 57.60 %
__________________
(1)The ratio of tax equivalent net interest income to average earning assets. See page 32 for more information.
(2)The ratio of noninterest expenses to tax equivalent net interest income and noninterest income, excluding securities gains (losses).
(3)The difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. See page 32 for more information.
(4)Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as OREO or OAO.
(5)Cash dividends declared and paid per share divided by consolidated net income per share.
RESULTS OF OPERATIONS
For the year ended December 31, 2024, net income was $8.8 million compared to $11.3 million for the year ended December 31, 2023. The primary components of these results, which include net interest income, noninterest income, noninterest expenses, and provision for income taxes, are discussed below:
Net Interest Income.The largest component of the Company's operating income is net interest income, which is the difference between interest and dividend income received from interest earning assets and the interest paid on interest bearing liabilities. Net interest income is affected by various factors, including but not limited to: changes in interest rates, loan and deposit pricing strategies, the volume and mix of interest earning assets and interest bearing liabilities, and the level of nonperforming assets. The net interest margin is calculated as net interest income on a fully tax equivalent basis as a percentage of average interest earning assets.
Interest earned on average earning assets for the year ended December 31, 2024 was $68.0 million compared to $57.1 million for the year ended December 31, 2023, an increase of $10.8 million, or 19.0%. The average earning asset base increased $77.2 million between periods and the average yield on average earning assets increased 54 bps to 4.85% for the year ended December 31, 2024 compared to 4.31% for the year ended December 31, 2023.
The average yield on federal funds sold and overnight deposits increased 76 bps between the twelve month comparison periods due to an increase in the average balance maintained in Union's master account at the FRB and an increase in the average rate paid on these balances. Interest income on investment securities decreased $45 thousand between the comparison periods due to a decrease of $17.0 million in the average balance of the portfolio, partially offset by an increase of 5 bps in the average yield.
Interest income on loans increased $10.0 million between the twelve month comparison periods due to an increase in the average volume of loans outstanding of $83.6 million and an increase of 57 bps in the average yield. Loan demand has remained stable during 2024 despite inflationary pressure on construction materials and low housing inventory.
Average interest bearing liabilities increased $95.7 million between the twelve month comparison periods due to an increase in average borrowed funds of $125.8 million partially offset by a decrease in average interest bearing deposits of $30.1 million. The average rate paid on interest bearing liabilities increased 74 bps to 2.55% for the year ended December 31, 2024 compared to 1.81% for the year ended December 31, 2023. Interest expense increased $10.3 million, to $29.6 million for the year ended December 31, 2024 compared to $19.3 million for the year ended December 31, 2023. Higher rates paid on customer deposit accounts and utilization of higher cost funding of brokered deposits and advances from the FHLB and the FRB were drivers of the increase in interest expense.
The net interest spread decreased 20 bps to 2.30% for the year ended December 31, 2024, from 2.50% for the same period last year, reflecting the net effect of the 74 bps increase in the average rate paid on interest bearing liabilities, which was only partially offset by the 54 bps increase in the average yield earned on interest earning assets between periods. The net interest margin decreased 11 bps for the year ended December 31, 2024 compared to the year ended December 31, 2023 as a result of the changes discussed above. Despite the decreases in the net interest spread and net interest margin, net interest income increased $521 thousand to $38.4 million for the year ended December 31, 2024 compared to $37.8 million for the year ended December 31, 2023.
During 2024, Union, like many other financial institutions, offered higher rate time deposit specials to attract new deposit dollars and retain existing customer deposits. Although some new money was obtained, a shift of funds from non-maturity deposits to time deposit specials occurred. Interest expense on time deposits increased $2.9 million to $11.6 million for the year ended December 31, 2024 compared to $8.7 million for the year ended December 31, 2023 due to increases in the average volume of $24.7 million and 74 bps in the average rate paid. Despite a decrease of $30.1 million in the average balance of savings/money market accounts, interest expense increased $1.4 million between the twelve month comparison periods due to an increase of 47 bps in the average rate paid on those accounts. Interest expense on interest bearing checking accounts increased $335 thousand between the twelve month comparison periods resulting from an increase of 20 bps in the average rate paid, which more than offset the decrease of $24.7 million in the average balance. The average volume of borrowed funds increased $125.8 million and the average rate paid on borrowed funds increased 39 bps between the twelve month comparison periods, resulting in a $5.6 million increase in interest expense.
The following table shows for the periods indicated the total amount of tax equivalent interest income from average interest earning assets, the related average tax equivalent yields, the tax equivalent interest expense associated with average interest bearing liabilities, the related tax equivalent average rates paid, and the resulting tax equivalent net interest spread and margin:
Years Ended December 31,
2024 2023
Average
Balance (1) 		Interest
Earned/
Paid 		Average
Yield/
Rate 		Average
Balance (1) 		Interest
Earned/
Paid 		Average
Yield/
Rate
(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits $ 26,576 $ 1,132 4.19 % $ 18,131 $ 630 3.43 %
Interest bearing deposits in banks 13,242 480 3.63 % 15,527 401 2.59 %
Investment securities (2), (3) 294,669 6,488 2.27 % 311,649 6,533 2.22 %
Loans, net (2), (4) 1,077,543 59,313 5.57 % 993,959 49,283 5.00 %
Nonmarketable equity securities 8,207 541 6.58 % 3,808 263 6.92 %
Total interest earning assets (2) 1,420,237 67,954 4.85 % 1,343,074 57,110 4.31 %
Cash and due from banks 4,560 4,627
Premises and equipment 20,657 20,380
Other assets 19,972 9,300
Total assets $ 1,465,426 $ 1,377,381
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts $ 295,088 $ 3,605 1.22 % $ 319,824 $ 3,270 1.02 %
Savings/money market accounts 367,620 5,418 1.47 % 397,678 3,971 1.00 %
Time deposits 279,180 11,551 4.14 % 254,499 8,652 3.40 %
Borrowed funds and other liabilities 198,745 8,446 4.18 % 72,946 2,804 3.79 %
Subordinated notes 16,255 570 3.51 % 16,222 570 3.51 %
Total interest bearing liabilities 1,156,888 29,590 2.55 % 1,061,169 19,267 1.81 %
Noninterest bearing deposits 226,388 243,655
Other liabilities 16,688 16,299
Total liabilities 1,399,964 1,321,123
Stockholders' equity 65,462 56,258
Total liabilities and stockholders' equity $ 1,465,426 $ 1,377,381
Net interest income $ 38,364 $ 37,843
Net interest spread (2) 2.30 % 2.50 %
Net interest margin (2) 2.77 % 2.88 %
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(1)Average balances are calculated based on a daily averaging method.
(2)Average yields reported on a tax equivalent basis using a marginal federal corporate income tax rate of 21%.
(3)Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities, if applicable.
(4)Includes loans held for sale as well as nonaccrual loans, unamortized costs and unamortized premiums and is net of the ACL on loans.
Tax exempt interest income amounted to $5.8 million and $4.3 million for the years ended December 31, 2024 and 2023, respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal federal corporate income tax rate of 21% for the years ended December 31, 2024 and 2023:
Years Ended December 31,
2024 2023
(Dollars in thousands)
Net interest income as presented $ 38,364 $ 37,843
Effect of tax-exempt interest
Investment securities 201 372
Loans 705 448
Net interest income, tax equivalent $ 39,270 $ 38,663
Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates (on a fully tax equivalent basis) and changes in volume of average interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to:
•changes in volume (change in volume multiplied by prior rate);
•changes in rate (change in rate multiplied by prior volume); and
•total change in rate and volume.
Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2024
Compared to Year Ended
December 31, 2023
Increase/(Decrease) Due to Change In 		Year Ended December 31, 2023
Compared to Year Ended
December 31, 2022
Increase/(Decrease) Due to Change In
Volume Rate Net Volume Rate Net
Interest earning assets: (Dollars in thousands)
Federal funds sold and overnight deposits $ 339 $ 163 $ 502 $ (155) $ 540 $ 385
Interest bearing deposits in banks (65) 144 79 20 194 214
Investment securities (303) 258 (45) 274 1,129 1,403
Loans, net 4,255 5,775 10,030 5,507 5,418 10,925
Nonmarketable equity securities 291 (13) 278 105 130 235
Total interest earning assets $ 4,517 $ 6,327 $ 10,844 $ 5,751 $ 7,411 $ 13,162
Interest bearing liabilities:
Interest bearing checking accounts $ (267) $ 602 $ 335 $ 93 $ 2,258 $ 2,351
Savings/money market accounts (320) 1,767 1,447 (146) 2,529 2,383
Time deposits 895 2,004 2,899 2,105 5,532 7,637
Borrowed funds 5,282 360 5,642 2,363 8 2,371
Subordinated notes - - - 1 - 1
Total interest bearing liabilities $ 5,590 $ 4,733 $ 10,323 $ 4,416 $ 10,327 $ 14,743
Net change in net interest income $ (1,073) $ 1,594 $ 521 $ 1,335 $ (2,916) $ (1,581)
Credit Loss Expense (Benefit).Credit loss expense or benefit is made up of credit loss expense on loans and credit loss expense on off-balance sheet credit exposures. Credit loss expense on loans results from net charge-offs, changes to the projected loss drivers, prepayment speeds, curtailments and time to recovery that the Company forecasted over the reasonable and supportable forecast periods and changes in the volume and mix of the loan portfolio. Credit loss expense on off-balance sheet credit exposures results from changes in outstanding commitments and changes in funding rates and assumed loss rates period over period. For further details, see FINANCIAL CONDITION - Allowance for Credit Losses on Loansand Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements below.
Credit loss expense (benefit) was made up of the following components for the following periods:
For the Years Ended December 31,
2024 2023
(Dollars in thousands)
Credit loss expense (benefit) for loans $ 1,092 $ (274)
Credit loss benefit for off-balance sheet credit exposures (162) (225)
Credit loss expense (benefit), net $ 930 $ (499)
Noninterest Income.The following table sets forth the components of noninterest income for the years ended December 31, 2024 and 2023 :
For the Years Ended December 31,
2024 2023 $ Variance % Variance
(Dollars in thousands)
Wealth management income $ 1,067 $ 943 $ 124 13.1
Service fees 7,040 7,002 38 0.5
Net losses on sales of investment securities AFS (1,293) - (1,293) (100.0)
Net gains on sales of loans held for sale 1,697 1,163 534 45.9
Net gains on other investments 216 189 27 14.3
Income from Company-owned life insurance 716 447 269 60.2
Other income 280 160 120 75.0
Total noninterest income $ 9,723 $ 9,904 $ (181) (1.8)
The significant changes in noninterest income for the year ended December 31, 2024 compared to the year ended December 31, 2023 are described below:
•Wealth management income.Wealth management income increased as managed fiduciary accounts grew between December 31, 2023 and 2024, as did the value of assets within those accounts.
•Service fees.Service fee income increased $38 thousand for the year ended December 31, 2024 compared to the same period in 2023 due to increases in loan servicing and service charge income, partially offset by decreases in ATM and debit card network fees, and merchant program fees.
•Net losses on sales of investment securities AFS.As discussed above, the Company completed a balance sheet repositioning related to its investment securities portfolio during 2024. The sale of lower-yielding AFS debt securities with a book value of $38.5 million was executed and recorded in August of 2024, resulting in a pre-tax realized loss on the sale of $1.3 million.
•Net gains on sales of loans held for sale.Residential loans totaling $113.5 million were sold to the secondary market during 2024, compared to residential loan sales of $75.6 million during 2023. The increase of $534 thousand in net gains on sales of loans reflects the higher sales volume and higher premiums obtained on sales in 2024.
•Net gains on other investments.Participants in the 2020 Amended and Restated Nonqualified Excess Plan (the "2020 Deferred Compensation Plan") elect to defer receipt of current compensation from the Company or its subsidiary and select designated reference investments consisting of investment funds. The performance of those funds, over which the Company has no control, resulted in net gains of $216 thousand and $189 thousand for the years ended December 31, 2024 and 2023, respectively.
•Income from Company-owned life insurance.Death benefit proceeds of $235 thousand were received in 2024, while no such proceeds were received in 2023. Income also increased in 2024 due to a higher yield earned on the underlying life insurance policies.
•Other income.The Company received $117 thousand in prepayment penalties from the early payoff of loans during 2024 that were not received in 2023.
Noninterest Expenses.The following table sets forth the components of noninterest expenses for the years ended December 31, 2024 and 2023:
For the Years Ended December 31,
2024 2023 $ Variance % Variance
(Dollars in thousands)
Salaries and wages $ 15,678 $ 14,247 $ 1,431 10.0
Employee benefits 5,716 5,365 351 6.5
Occupancy expense, net 2,194 2,035 159 7.8
Equipment expense 3,992 3,722 270 7.3
ATM and debit card expense 1,259 908 351 38.7
FDIC insurance assessment 1,167 998 169 16.9
Vermont franchise tax 1,069 1,130 (61) (5.4)
Professional fees 1,062 1,016 46 4.5
Advertising and public relations 704 659 45 6.8
Electronic banking expense 504 421 83 19.7
Wealth management expenses 491 439 52 11.8
Training and development 186 234 (48) (20.5)
Amortization of MSRs, net 15 316 (301) (95.3)
Other expenses 3,990 3,879 111 2.9
Total noninterest expenses $ 38,027 $ 35,369 $ 2,658 7.5
The significant changes in noninterest expenses for the year ended December 31, 2024 compared to the year ended December 31, 2023 are described below:
•Salaries and wages.Salaries and wages increased $1.4 million due to annual salary adjustments for the 2024 fiscal year and a $380 thousand increase in the accrual amount for the annual incentive plan payments to select officers of Union for 2024 compared to 2023. In addition, $397 thousand of the increase related to a cash bonus payment to employees in December 2024 in lieu of a 401k profit sharing contribution that was included in employee benefits expense in 2023. The increase is also attributable to a separation of service agreement with an employee and the inclusion of salaries and wages for employees at our North Conway location, which became a full service branch during the fourth quarter of 2023.
•Employee benefits.Employee benefit expense increased $351 thousand due to increases of $496 thousand in premium expense for the Company's medical and dental plans, $132 thousand in payroll tax expense, and $15 thousand in employee benefits related to the Company's deferred compensation plans. These increases were partially offset by a decrease of $292 thousand in 401k contributions primarily due to no profit sharing contribution in 2024 compared to 2023 as discussed above.
•Occupancy expense, net.The increase in occupancy expense of $159 thousand is primarily due to increases in depreciation expense related to leasehold improvements to the North Conway location that became a full service branch during the fourth quarter of 2023, as well as increases in repair and maintenance expenses at other locations.
•Equipment expense.Equipment expense increased primarily due to an increase in software license and maintenance costs associated with outsourcing Union's core application processing system that was finalized during the fourth quarter of 2023.
•ATM and debit card expense.The $351 thousand increase between years primarily relates to the costs associated with outsourcing Union's core application processing system that was finalized during the fourth quarter of 2023, as well as costs associated with a change in the servicing arrangement in place for the ATM machines.
•FDIC insurance assessment.The FDIC insurance assessment increased by $169 thousand due to an increase in the assessment rate as well as overall growth in net assets.
•Vermont franchise tax.The Vermont franchise tax is determined based on a quarterly tax rate applied to the Company's average balance of Vermont customer deposit balances. The tax rate remained unchanged throughout 2024 and 2023; however, the average balances in Vermont deposit account balances decreased for the year ended December 31, 2024, resulting in a decrease in expense.
•Professional fees.Professional fees increased by $46 thousand due to annual increases in engagement fees and additional consultants that were engaged to assist with employment searches and other consulting services in 2024 that were not utilized in 2023.
•Advertising and public relations.The increase in advertising and public relations costs is primarily related to advertising campaigns and business development activities during 2024 that did not occur in 2023.
•Electronic banking expense.The increase in electronic banking expense related to software initiatives that were implemented to the online banking platform in the fourth quarter of 2024.
•Wealth management expenses.The $52 thousand increase was primarily attributable to the growth in managed fiduciary accounts and the associated data processing and professional services.
•Training and development.The cost associated with attending conferences and educational events during 2024 decreased $48 thousand compared to events attended in 2023.
•Amortization of MSRs, net.Income from MSRs is derived from servicing rights acquired through the sale of loans on which servicing is retained. Capitalized servicing rights are initially recorded at fair value and amortized in proportion to, and over the period of, the estimated future servicing period of the underlying loans. Amortization of MSRs exceeded new capitalized MSRs resulting in net expense of $15 thousand and $316 thousand for the years ended December 31, 2024 and 2023, respectively.
Provision for Income Taxes.The Company has provided for current and deferred federal income taxes for the current and prior period presented. The Company's net provision for income taxes was $369 thousand and $1.6 million for 2024 and 2023, respectively, reflecting lower net income and a higher proportion of tax-exempt income year over year, as well as the impact of limited partnership investments and related tax credits, discussed below. The Company's effective federal corporate income tax rate was 4.6% and 12.5% for 2024 and 2023, respectively.
Amortization expense related to limited partnership investments included as a component of income tax expense amounted to $1.7 million and $1.4 million for the years ended December 31, 2024 and 2023, respectively. These investments provide tax benefits, including tax credits. Low income housing tax credits with respect to limited partnership investments are also included as a component of income tax expense and amounted to $1.8 million and $1.4 million for the years ended December 31, 2024 and 2023, respectively. See Note 10 to the Company's consolidated financial statements.
FINANCIAL CONDITION
At December 31, 2024, the Company had total consolidated assets of $1.53 billion, including gross loans and loans held for sale (total loans) of $1.16 billion, deposits of $1.17 billion and stockholders' equity of $66.5 million. The Company's total assets increased $59.5 million, or 4.0%, from $1.47 billion at December 31, 2023.
Net loans and loans held for sale increased $128.9 million, or 12.6%, to $1.16 billion, or 75.6% of total assets, at December 31, 2024, compared to $1.03 billion, or 69.9% of total assets, at December 31, 2023. (See Loan Portfoliobelow.)
Total deposits decreased $136.7 million, or 10.5% to $1.17 billion at December 31, 2024, from $1.31 billion at December 31, 2023. There were decreases in noninterest bearing deposits of $24.9 million, or 9.9%, interest bearing deposits of $50.8 million, or 6.6%, and in time deposits of $60.9 million, or 21.1% .
Borrowed funds at December 31, 2024 consisted of FHLB advances of $259.7 million. Borrowed funds at December 31, 2023 were $65.7 million and consisted of $55.7 million of FHLB advances and $10.0 million of borrowings from the FRB. (See Borrowingson page 43.)
Total stockholders' equity increased $673 thousand, or 1.0%, from $65.8 million at December 31, 2023 to $66.5 million at December 31, 2024. (See Capital Resourceson pages 45 to 46.)
Loans Held for Sale and Loan Portfolio. The Company's gross loan portfolio (including loans held for sale) increased $129.6 million, or 12.6%, to $1.16 billion, representing 76.0% of assets at December 31, 2024, from $1.03 billion, representing 70.2% of assets at December 31, 2023. The Company's loans consist primarily of adjustable-rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. Real estate secured loans represented $1.01 billion, or 87.3% of total loans, at December 31, 2024 compared to $911.5 million, or 88.4% of total loans, at December 31, 2023. The net change in the Company's loan portfolio from December 31, 2023 (see table below) resulted primarily from an increase in the volume of residential, commercial real estate, commercial construction, and municipal loans originated. There was no material change in the Company's lending programs or terms during 2024.
The composition of the Company's loan portfolio, including loans held for sale, were as follows as of December 31:
December 31, 2024 December 31, 2023
Loan Class Amount Percent Amount Percent
Residential real estate (Dollars in thousands)
Non-revolving residential real estate $ 445,425 38.4 $ 397,409 38.5
Revolving residential real estate 21,884 1.9 18,902 1.8
Construction real estate
Commercial construction real estate 54,985 4.7 36,973 3.6
Residential construction real estate 51,202 4.4 51,662 5.0
Commercial real estate
Non-residential commercial real estate 330,010 28.4 298,148 29.0
Multi-family residential real estate 104,328 9.0 105,344 10.2
Commercial 35,175 3.0 40,448 3.9
Consumer 2,523 0.3 2,589 0.3
Municipal 110,204 9.5 76,795 7.4
Loans held for sale 5,204 0.4 3,070 0.3
Total loans 1,160,940 100.0 1,031,340 100.0
ACL on loans (7,680) (6,566)
Unamortized net loan costs 2,162 1,752
Net loans and loans held for sale $ 1,155,422 $ 1,026,526
The Company originates and sells qualified residential mortgage loans in various secondary market avenues, with a majority of sales made to the FHLMC/Freddie Mac, generally with servicing rights retained. At December 31, 2024, the Company serviced a $1.16 billion residential real estate mortgage portfolio, of which $5.2 million was held for sale and approximately $684.8 million was serviced for unaffiliated third parties. This compares to a residential real estate mortgage servicing portfolio of $1.07 billion at December 31, 2023, of which $3.1 million was held for sale and approximately $646.5 million was serviced for unaffiliated third parties. Loans held for sale are accounted for at the lower of cost or fair value and are reviewed by management at least quarterly based on current market pricing.
The Company sold $113.5 million of qualified residential real estate loans originated during 2024 to the secondary market compared to sales of $75.6 million during 2023. Residential mortgage loan origination activity was strong throughout 2024. Despite the low housing inventory and higher interest rates, purchase activity in the Company's markets is stable with continued construction loan activity. The Company originates and sells FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire locations without needing prior HUD underwriting approval. The Company sells FHA, VA and RD loans as originated with servicing released. Some of the government backed loans qualify for zero down payments without geographic or income restrictions. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities served, including low and moderate income borrowers, while the loan sales and government guaranty mitigates the Company's exposure to credit risk.
The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs which provide a government agency guaranty for a portion of the loan amount. There was $2.0 million and $2.6 million guaranteed under these various programs at December 31, 2024 and 2023, respectively, on aggregate balances of $2.6 million and $3.4 million in subject loans for the same time periods, respectively. The Company occasionally sells the guaranteed portion of a loan to other financial concerns and retains servicing rights, which generates fee income. There were no commercial real estate or commercial loans sold during 2024 or 2023. The Company recognizes gains and losses on the sale of the principal portion of these loans at the time of sale.
The Company serviced $37.3 million and $25.7 million of commercial and commercial real estate loans for unaffiliated third parties as of December 31, 2024 and 2023, respectively. This includes $36.3 million and $24.7 million of commercial or commercial real estate loans the Company had participated out to other financial institutions at December 31, 2024 and 2023, respectively. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
As of December 31, 2024, total loans serviced had grown to $1.88 billion, which includes total loans on the balance sheet of $1.16 billion as well as total loans sold with servicing retained of $722.1 million, compared to total loans serviced of $1.70 billion as of December 31, 2023.
The Company capitalizes MSRs for all loans sold with servicing retained and recognizes gains and losses on the sale of the principal portion of these loans at the time of sale. The unamortized balance of MSRs on loans sold with servicing retained was $1.7 million at December 31, 2024 and 2023, with an estimated market value in excess of the carrying value at both year ends. Management periodically evaluates and measures the servicing assets for impairment.
Qualifying residential first lien mortgage loans and certain commercial real estate loans with a carrying value of $394.5 million and $343.7 million were pledged as collateral for borrowings from the FHLB under a blanket lien at December 31, 2024 and 2023, respectively.
The following table breaks down by classification the contractual maturities of the gross loans held in portfolio and for sale as of December 31, 2024:
Within 1
Year 		2-5
Years 		6-15
Years 		Over 15
Years 		Total
Fixed rate (Dollars in thousands)
Residential real estate
Non-revolving residential real estate $ 227 $ 1,775 $ 70,208 $ 297,582 $ 369,792
Revolving residential real estate 48 - - - 48
Construction real estate
Commercial construction real estate 7,692 115 6,372 - 14,179
Residential construction real estate 42,874 3,820 - - 46,694
Commercial real estate
Non-residential commercial real estate 747 4,539 18,922 - 24,208
Multi-family residential real estate - 175 15,920 - 16,095
Commercial 934 8,474 13,720 - 23,128
Consumer 1,836 579 92 - 2,507
Municipal 86,215 4,479 18,210 - 108,904
Total fixed rate 140,573 23,956 143,444 297,582 605,555
Variable rate
Residential real estate
Non-revolving residential real estate 354 1,262 47,456 31,765 80,837
Revolving residential real estate 37 78 21,713 8 21,836
Construction real estate
Commercial construction real estate 2,665 1,602 7,759 28,780 40,806
Residential construction real estate 1,658 766 - 2,084 4,508
Commercial real estate
Non-residential commercial real estate 18,172 4,575 227,045 56,010 305,802
Multi-family residential real estate 640 3,251 51,224 33,118 88,233
Commercial 4,060 459 7,048 480 12,047
Consumer 16 - - - 16
Municipal - 1,300 - - 1,300
Total variable rate 27,602 13,293 362,245 152,245 555,385
$ 168,175 $ 37,249 $ 505,689 $ 449,827 $ 1,160,940
Asset Quality.The Company, like all financial institutions, is exposed to certain credit risks, including those related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Consistent application of the Company's conservative loan policies has helped to mitigate this risk and has been prudent for both the Company and its customers. The Company's Board has set forth well-defined lending policies (which are periodically reviewed and revised as appropriate) that include conservative individual lending limits for officers, aggregate and Executive Loan Committee approval levels, Board approval for large credit relationships, a quality control program, a loan review program and other limits or standards deemed necessary and prudent. The Company's loan review program encompasses a review process for loan documentation and
underwriting for select loans as well as a monitoring process for credit extensions to assess the credit quality and degree of risk in the loan portfolio. Management performs, and shares with the Board, periodic concentration analyses based on various factors such as industries, collateral types, location, large credit sizes and officer portfolio loads. Board approved policies set forth portfolio diversification levels to mitigate concentration risk and the Company participates large credits out to other financial institutions to further mitigate that risk. The Company has established underwriting guidelines to be followed by its officers; material exceptions are required to be approved by a senior loan officer, the President or the Board.
The Company does not make loans that are interest only, have teaser rates or that result in negative amortization of the principal, except for construction, lines of credit and other short-term loans for either commercial or consumer purposes where the credit risk is evaluated on a borrower-by-borrower basis. The Company evaluates the borrower's ability to pay on variable-rate loans over a variety of interest rate scenarios, not only the rate at origination.
The majority of the Company's loan portfolio is secured by real estate located throughout the Company's primary market area of northern Vermont and New Hampshire. For residential loans, the Company generally does not lend more than 80% of the appraised value of the home without a government guaranty or the borrower purchasing private mortgage insurance. The Company may lend up to 80% of the collateral value on commercial real estate loans to strong borrowers. Rarely, the loan to value may go up to 100% on loans with government guarantees or other mitigating circumstances. Although the Company's loan portfolio consists of different business segments, there is a portion of the loan portfolio centered in leisure travel tourism related loans. The Company has implemented risk management strategies to mitigate exposure to this industry through utilizing government guaranty programs as well as participations with other financial institutions as discussed above. Additionally, the loan portfolio contains many loans to seasoned and well established businesses and/or well secured loans which further reduce the Company's risk. Management closely follows the local and national economies and their impact on the local businesses, especially on the tourism industry, as part of the Company's risk management program.
The region's economic environment displays continued resilience. There has been consistent demand for leisure travel and dining out which is supporting the region's tourist and restaurant industries; however, the industries also continue to face some challenges due to staffing and inflation. The Company's management is focused on the economy and the related impact on its borrowers and closely monitors industry and geographic concentrations, specifically the region's tourist and restaurant industries. The Vermont unemployment rate was reported at 2.4% for December 2024 compared to 2.2% for December 2023 and the New Hampshire unemployment rate was 2.6% for December 2024 compared to 2.5% for December 2023. These rates compare favorably with the nationwide unemployment rate of 4.1% and 3.7%, respectively, for the comparable periods.
The Company also monitors its delinquency levels for any adverse trends. Management closely monitors the Company's loan and investment portfolios, OREO and OAO; if any, for potential problems and reports to the Boards of the Company and Union at regularly scheduled meetings. Repossessed assets and loans or investments that are 90 days or more past due or in nonaccrual status are considered to be nonperforming assets.
The following table details the composition of the Company's nonperforming assets and amounts utilized to calculate certain asset quality ratios monitored by Company's management as of or for the years ended December 31:
2024 2023
(Dollars in thousands)
Nonaccrual loans $ 1,652 $ 1,858
Loans past due 90 days or more and still accruing interest 241 162
Total nonperforming loans and assets $ 1,893 $ 2,020
Guarantees of U.S. or state government agencies on the above nonperforming loans $ - $ 73
ACL on loans $ 7,680 $ 6,566
Net (recoveries) charge-offs $ (22) $ 4
Total loans outstanding $ 1,160,940 $ 1,031,340
Total average loans outstanding $ 1,077,543 $ 993,959
The following table shows trends of certain asset quality ratios monitored by Company's management at or for the years ended December 31:
2024 2023
(Dollars in thousands)
ACL on loans to total loans outstanding 0.66 % 0.64 %
ACL on loans to nonperforming loans 405.71 % 325.05 %
ACL on loans to nonaccrual loans 464.89 % 353.39 %
Nonperforming loans to total loans 0.16 % 0.20 %
Nonperforming assets to total assets 0.12 % 0.14 %
Nonaccrual loans to total loans 0.14 % 0.18 %
Delinquent loans (30 days to nonaccruing) to total loans 0.43 % 0.55 %
Net (recoveries) charge-offs to total average loans - % - %
Residential real estate (0.01) % - %
Net recoveries $ (24) $ (1)
Total average loans $ 441,561 $ 380,755
Commercial - % - %
Net recoveries $ (1) $ -
Total average loans $ 38,949 $ 40,759
Consumer 0.12 % 0.21 %
Net charge-offs $ 3 $ 5
Total average loans $ 2,499 $ 2,430
All other loan categories did not have charge-offs or recoveries for the periods presented above.
There was one residential real estate loan totaling $8 thousand in process of foreclosure at December 31, 2024 and one revolving residential real estate loan totaling $17 thousand in process of foreclosure at December 31, 2023. The aggregate interest on nonaccrual loans not recognized was $235 thousand and $143 thousand for the years ended December 31, 2024 and 2023, respectively.
The Company had loans rated substandard that were on a performing status totaling $768 thousand and $1.2 million at December 31, 2024 and December 31, 2023, respectively. In management's view, such loans represent a higher degree of risk of becoming nonperforming loans in the future. While still on a performing status, in accordance with the Company's credit policy, loans are internally classified when a review indicates the existence of any of the following conditions, making the likelihood of collection questionable:
•the financial condition of the borrower is unsatisfactory;
•repayment terms have not been met;
•the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth;
•confidence in the borrower's ability to repay is diminished;
•loan covenants have been violated;
•collateral is inadequate; or
•other unfavorable factors are present.
On occasion, the Company acquires residential or commercial real estate properties through or in lieu of loan foreclosure. These properties are held for sale and are initially recorded as OREO at fair value less estimated selling costs at the date of the Company's acquisition of the property, with fair value based on an appraisal for more significant properties and on a broker's price opinion for less significant properties. Holding costs and declines in fair value of properties acquired are expensed as incurred. Declines in the fair value after acquisition of the property result in charges against income before tax. The Company evaluates each OREO property at least quarterly for changes in the fair value. The Company had no properties classified as OREO at December 31, 2024 or 2023.
Allowance for Credit Losses on Loans.Some of the Company's loan customers ultimately do not make all of their contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ACL to absorb such losses. The level of the ACL on loans at December 31, 2024 represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. The Company's policy and methodologies related to establishing the ACL on loans are described in Note 1, Significant Accounting Policies and
Note 7, Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures to the Company's financial statements. The Company's ACL on loans was $7.7 million and $6.6 million at December 31, 2024 and December 31, 2023, respectively.
The following table reflects activity in the ACL on loans for the years ended December 31:
2024 2023
(Dollars in thousands)
Balance at beginning of period $ 6,566 $ 8,339
Impact of adoption of ASU No. 2016-13 - (1,495)
Charge-offs (3) (8)
Recoveries 25 4
Net recoveries (charge-offs) 22 (4)
Credit loss expense (benefit) 1,092 (274)
Balance at end of period $ 7,680 $ 6,566
The following table (net of loans held for sale) shows the internal breakdown by risk component of the Company's ACL on loans and the percentage of loans in each category to total loans in the respective portfolios at December 31:
2024 2023
Amount Percent Amount Percent
Residential real estate (Dollars in thousands)
Non-revolving residential real estate $ 3,212 38.5 $ 2,361 38.6
Revolving residential real estate 280 1.9 159 1.8
Construction real estate
Commercial construction real estate 651 4.8 1,035 3.6
Residential construction real estate 102 4.4 163 5.0
Commercial real estate
Non-residential commercial real estate 2,766 28.6 2,182 29.0
Multi-family residential real estate 212 9.0 244 10.2
Commercial 377 3.0 352 4.0
Consumer 6 0.2 5 0.3
Municipal 74 9.6 65 7.5
Total $ 7,680 100.0 $ 6,566 100.0
Notwithstanding the categories shown in the table above or any specific allocation under the Company's ACL methodology, all funds in the ACL on loans are available to absorb loan losses in the portfolio, regardless of loan category or specific allocation.
Management believes, in its best estimate, that the ACL on loans at December 31, 2024 is appropriate to cover expected credit losses over the expected life of the Company's loan portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods which could be greater than the size of the ACL on loans at December 31, 2024. In addition, our banking regulators, as an integral part of their examination process, periodically review our ACL. Such agencies may require us to recognize adjustments to the ACL based on their judgments about information available to them at the time of their examination. A large adjustment to the ACL on loans for losses in future periods could require increased credit loss expense to replenish the ACL on loans, which could negatively affect earnings.
Investment Activities. The investment portfolio is used to generate interest and dividend income, manage liquidity and mitigate interest rate sensitivity.
The Company completed a balance sheet repositioning related to its investment securities portfolio during the third quarter of 2024. This transaction consisted of the sale of lower-yielding AFS debt securities with a book value of $38.5 million, resulting in a pre-tax realized loss on the sale of $1.3 million, which was recorded in August of 2024. $26.0 million of the proceeds from the sale of these securities were used to purchase AFS debt securities at higher yields to improve income going forward, and the remainder was used to fund loan growth.
At December 31, 2024, investment securities classified as AFS, which are carried at fair value, decreased $13.9 million to $250.5 million, or 16.4% of total assets, compared to $264.4 million, or 18.0% of total assets, at December 31, 2023. The
decrease between periods is primarily due to the sale of securities with a book value of $38.5 million, returns of principal of $19.3 million and an increase in unrealized losses of $2.6 million, partially offset by $47.1 million of securities purchased.
There were no investment securities classified as HTM or as trading at December 31, 2024 or 2023. Investment securities classified as AFS are marked-to-market, with any unrealized gain or loss after estimated taxes charged to the equity portion of the balance sheet through the accumulated OCI component of stockholders' equity.
Net unrealized losses in the Company's AFS investment securities portfolio were $43.6 million at December 31, 2024 compared to net unrealized losses of $41.0 million at December 31, 2023. The Company's accumulated OCI component of stockholders' equity at December 31, 2024 and 2023 reflected cumulative net unrealized losses on investment securities of $34.0 million and $32.0 million, respectively. The unrealized losses are primarily attributable to changes in long-term interest rates which are tied to the pricing indexes for the securities. No declines in value were deemed by management to be impairment related to credit losses at December 31, 2024 and 2023. Deterioration in credit quality and/or imbalances in liquidity that may result from changes in financial market conditions might adversely affect the fair values of the Company's investment portfolio and the amount of gains or losses ultimately realized on the sale of such securities and may also increase the potential that credit losses may be identified in future periods, resulting in credit loss expense recorded in earnings.
Investment securities AFS with a fair value of $96.0 million and $926 thousand were pledged as collateral for FHLB borrowings and other credit subject to collateralization, public unit deposits or for other purposes as required or permitted by law at December 31, 2024 and 2023, respectively. Investment securities AFS pledged as collateral for the discount window and BTFP borrowings at the FRB consisted of U.S. government-sponsored enterprises and Agency MBS with a fair value of $9.7 million and $8.9 million at December 31, 2024 and December 31, 2023, respectively.
Federal Home Loan Bank of Boston Stock. Union is a member of the FHLB and is required to invest in $100 par value stock of the FHLB in an amount tied to the unpaid principal balances on qualifying loans, plus an amount to satisfy an activity based requirement. The stock is nonmarketable, and is redeemable by the FHLB at par value. With the increase in FHLB advances outstanding of $204.0 million, the investment in FHLB Class B common stock has increased to $11.2 million at December 31, 2024 compared to $3.1 million at December 31, 2023. Although the FHLB was in compliance with all regulatory capital ratios as of December 31, 2024 and 2023, there is the possibility of future capital calls by the FHLB on member banks to ensure compliance with its capital plan. Union's investment in FHLB stock is carried at cost in Other assets on the consolidated balance sheets. Similar to evaluating investment securities for potential credit losses, the Company periodically evaluates its investment in the FHLB. Management's most recent evaluation of the Company's holdings of FHLB common stock concluded that the investment was not impaired at December 31, 2024.
Deposits.The following table shows information concerning the Company's average deposits by account type and the weighted average nominal rates at which interest was paid on such deposits for the years ended December 31:
2024 2023
Average
Balance 		Percent
of Total
Deposits 		Average
Rate Paid 		Average
Balance 		Percent
of Total
Deposits 		Average
Rate Paid
(Dollars in thousands)
Nontime deposits:
Noninterest bearing deposits $ 226,388 19.4 - $ 243,655 20.0 -
Interest bearing checking accounts 295,088 25.3 1.22 % 319,824 26.3 1.02 %
Money market accounts 222,871 19.0 2.40 % 233,225 19.2 1.68 %
Savings accounts 144,749 12.4 0.05 % 164,453 13.5 0.04 %
Total nontime deposits 889,096 76.1 1.01 % 961,157 79.0 0.75 %
Total time deposits 279,180 23.9 4.14 % 254,499 21.0 3.40 %
Total deposits $ 1,168,276 100.0 1.76 % $ 1,215,656 100.0 1.31 %
Deposits decreased by $136.7 million, or 10.5%, from $1.31 billion at December 31, 2023 to $1.17 billion at December 31, 2024. Total average deposits decreased by $47.4 million, or 3.9%, between years, with average time deposits increasing $24.7 million, or 9.7%, and average nontime deposits decreasing $72.1 million, or 7.5%, during the same time frame. The increase in the average time deposit balances of $117.6 million between comparison periods is due to customers taking advantage of higher rate paying CDs, partially offset by a decrease of $92.9 million in average retail brokered deposits. The decrease in average balances of nontime deposits reflected decreases in the average balances of all categories, with decreases of $17.3 million in noninterest bearing deposits, $24.7 million in interest bearing checking accounts, $10.4 million in money market accounts, and
$19.7 million in saving accounts. The decreases in these categories are attributable to customers spending down deposit balances, the loss of deposit dollars to competing financial institutions and brokerage firms, and customers shifting monies into time deposits as they continue to seek higher yields. In addition, average interest bearing checking accounts decreased due to the maturity and early payoff of purchased nonreciprocal ICS deposits from IntraFi during the first quarter of 2024.
The Company participates in CDARS, which permits the Company to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. CDARS also provides the Company with an additional source of funding and liquidity through the purchase of deposits. There were no purchased CDARS deposits as of December 31, 2024 or December 31, 2023. There were $13.3 million of time deposits of $250,000 or less on the balance sheets at December 31, 2024 and $11.7 million at December 31, 2023, which were exchanged with other CDARS participants.
The Company also participates in the ICS program, a service through which Union can offer its customers demand or savings products with access to unlimited FDIC insurance, while receiving reciprocal deposits from other FDIC-insured banks. Like the exchange of certificate of deposit accounts through CDARS, exchange of demand or savings deposits through ICS provides a depositor with full deposit insurance coverage of excess balances, thereby helping the Company retain the full amount of the deposit on its balance sheet. As with the CDARS program, in addition to reciprocal deposits, participating banks may also purchase one-way ICS deposits. There were $256.5 million and $232.6 million in exchanged ICS demand and money market deposits on the balance sheets at December 31, 2024 and December 31, 2023, respectively. There were no purchased ICS deposits at December 31, 2024, however, there were $50.2 million in purchased ICS deposits included in savings and money market deposits at December 31, 2023.
There were no retail brokered deposits at December 31, 2024. At December 31, 2023, there were $103.0 million of retail brokered deposits at a weighted average rate of 5.07% issued under a master certificate of deposit program with a deposit broker for terms of six, nine and twelve months, which provided a supplemental source of funding and liquidity.
Uninsured deposits have been estimated to include deposits with balances greater than the FDIC insurance coverage limit of $250 thousand. This estimate is based on the same methodologies and assumptions used for regulatory reporting requirements. At December 31, 2024, the Company had estimated uninsured deposit accounts totaling $436.6 million, or 37.4% of total deposits. Uninsured deposits include $30.9 million of municipal deposits that were collateralized under applicable state regulations by investment securities or letters of credit issued by the FHLB at December 31, 2024, as described below under Borrowings.
The following table provides a maturity distribution of the Company's time deposits in amounts in excess of the $250 thousand FDIC insurance limit at December 31:
2024 2023
(Dollars in thousands)
Three months or less $ 24,544 $ 11,512
Over three months through six months 16,004 10,800
Over six months through twelve months 20,257 19,872
Over twelve months 918 622
$ 61,723 $ 42,806
Borrowings.Advances from the FHLB are another key source of funds to support earning assets. These funds are also used to manage the Bank's interest rate and liquidity risk exposures. Borrowed funds included FHLB advances of $259.7 million with a weighted average rate of 4.17% at December 31, 2024 and $55.7 million with a weighted average rate of 3.68% at December 31, 2023.
The Company has the authority, up to its available borrowing capacity with the FHLB, to collateralize public unit deposits with letters of credit issued by the FHLB. FHLB letters of credit in the amount of $47.3 million and $42.4 million were utilized as collateral for these deposits at December 31, 2024 and December 31, 2023, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $44 thousand for the years ended December 31, 2024 and 2023.
In March 2023, the FRB created the BTFP to provide an additional source of liquidity funding to U.S. depository institutions. Advances under this program were secured by qualifying investment assets consisting of eligible U.S. Government-sponsored enterprises and Agency MBS securities valued at par. The Company had no outstanding advances under this program at December 31, 2024 and $10.0 million outstanding under the program at a rate of 4.85% at December 31, 2023. The FRB ceased making new loans under this program on March 11, 2024.
In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and
including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. The Notes are presented in the consolidated balance sheets net of unamortized issuance costs of $227 thousand and $261 thousand at December 31, 2024 and 2023, respectively. See Note 13 to the Company's consolidated financial statements.
Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements.The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates, and to implement its strategic objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contractual or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument.
The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company's exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
The following table details the contractual or notional amount of financial instruments that represented credit risk at December 31, 2024:
Contract or Notional Amount
2025 2026 2027 2028 2029 Thereafter Total
(Dollars in thousands)
Commitments to originate loans $ 47,696 $ - $ - $ - $ - $ - $ 47,696
Unused lines of credit 139,939 42,076 1,592 2,643 5 5,137 191,392
Standby and commercial letters of credit 397 338 19 - - 886 1,640
Credit card arrangements 154 - - - - - 154
MPF credit enhancement obligation, net 865 - - - - - 865
Commitment to purchase investment in
a real estate limited partnership 		2,000 - - - - - 2,000
Total $ 191,051 $ 42,414 $ 1,611 $ 2,643 $ 5 $ 6,023 $ 243,747
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have a fixed expiration date or other termination clause and may require payment of a fee. The unused lines of credit total includes $13.8 million of lines available under the overdraft privilege program and is included in the 2025 funding period. Approximately $45.2 million of the unused lines of credit relate to real estate construction loans that are expected to fund within the next twelve months. The remaining lines primarily relate to revolving lines of credit for other real estate or commercial loans. Since many of the loan commitments are expected to expire without being drawn upon and not all credit lines will be utilized, the total commitment amounts do not necessarily represent future cash requirements. Lines of credit incur seasonal volume fluctuations due to the nature of some customers' businesses, such as tourism.
The Company may, from time-to-time, enter into commitments to purchase, participate or sell loans, securities, certificates of deposit, or other investment instruments which involve market and interest rate risk. At December 31, 2024, the Company had binding commitments to sell residential mortgage loans at fixed rates totaling $3.9 million.
The Company sells 1-4 family residential mortgage loans under the MPF loss-sharing program with FHLB, when management believes it is economically advantageous to do so. Under this program the Company shares in the credit risk of each mortgage, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation based on the credit quality of these loans. FHLB funds a first loss account based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLB first loss account funds are then utilized, followed by the member's Credit Enhancement Obligation, with the balance the responsibility of FHLB. These loans must meet specific underwriting standards of the FHLB. As of December 31, 2024, the Company had sold loans through the MPF program totaling $53.2 million with an outstanding balance of $25.3 million. The volume of loans sold to the MPF program and the
corresponding Credit Enhancement Obligation are closely monitored by management. As of December 31, 2024, the notional amount of the maximum contingent contractual liability related to this program was $884 thousand, of which $19 thousand was recorded as a reserve through Other liabilities. Since inception of the Company's MPF participation in 2015, the Company has not experienced any losses under this program.
The Company records an ACL on off-balance sheet credit exposures through a charge or credit to Credit loss expense (benefit) on the consolidated statements of income to account for the change in the ACL on off-balance sheet exposures between reporting periods. The ACL on off-balance sheet credit exposures totaled $1.1 million and $1.2 million at December 31, 2024 and 2023, respectively, and was included in Accrued interest and other liabilities on the consolidated balance sheets. There was $162 thousand and $225 thousand of credit loss benefit for off-balance sheet credit exposures recorded for the years ended December 31, 2024 and 2023, respectively.
Liquidity.Liquidity is a measurement of the Company's ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, purchase and lease commitments, and for other general business purposes. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet cash flow needs in the most economical and expedient manner. The Company's principal sources of funds are deposits; wholesale funding options including purchased deposits, amortization, prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities AFS and loans; earnings; and funds provided from operations. Contractual principal repayments on loans are a relatively predictable source of funds; however, deposit flows and loan and investment prepayments are less predictable and can be significantly influenced by market interest rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.
At December 31, 2024, Union, as a member of FHLB, had access to unused lines of credit up to $13.2 million, over and above the $309.3 million in combined outstanding borrowings and other credit subject to collateralization and to the purchase of required FHLB Class B common stock and evaluation by the FHLB of the underlying collateral available. This line of credit can be used for either short-term or long-term liquidity or other funding needs.
Union also maintains an IDEAL Way Line of Credit with the FHLB. The total line available was $551 thousand at December 31, 2024. There were no borrowings against this line of credit as of such date. Interest on this line is chargeable at a rate determined by the FHLB and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.
In addition to its borrowing arrangements with the FHLB, Union maintains a pre-approved federal funds line of credit totaling $15.0 million with an upstream correspondent bank, a master brokered deposit agreement with a brokerage firm, and one-way buy options with CDARS and ICS. There were no purchased CDARS deposits, no purchased ICS deposits, no retail brokered deposits issued under a master certificate of deposit program with a broker, and no outstanding advances on the Union correspondent line as of December 31, 2024.
Union's investment and residential loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. Additional contingent liquidity sources are available with further access to the brokered deposit market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.
Capital Resources.Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management's internal assessment of economic capital, funds the Company's business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments, maintain required regulatory capital levels and provide continued support for deposits. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions.
In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes are structured to qualify as a Tier 2 capital for the Company under bank regulatory guidelines. The proceeds from the sale of the Notes were utilized to provide additional capital to Union to support its growth and for other general corporate purposes.
Stockholders' equity increased from $65.8 million at December 31, 2023 to $66.5 million at December 31, 2024, reflecting net income of $8.8 million for 2024, an increase of $398 thousand in common stock and additional paid in capital from the vesting of stock based compensation, and a $67 thousand increase due to the issuance of common stock under the DRIP. These increases were partially offset by cash dividends declared of $6.5 million and an increase of $2.0 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS securities.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of December 31, 2024, the Company had 5,012,084 shares issued, of which 4,538,009 were outstanding and 474,075 were held in treasury. As of December 31, 2024, there were outstanding unvested RSUs under the Company's 2014 Equity Plan with respect to 2,508 shares under RSU grants in 2023 and 11,280 shares under RSU grants in 2024.
In December 2023, the Company's Board reauthorized for 2024 the limited stock repurchase plan that was initially established in May of 2010. The limited stock repurchase plan allows the repurchase of up to a fixed number of shares of the Company's common stock each calendar quarter in open market purchases or privately negotiated transactions, as management may deem advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter (currently 2,500 shares) expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The Company had no repurchases under this program during 2024. Since inception, as of December 31, 2024, the Company had repurchased 26,140 shares under the program, for a total cost of $682 thousand. In December 2024, the Board reauthorized the limited stock repurchase plan for 2025 and 2026 on similar terms. The Company also repurchased 30 shares outside of the limited stock repurchase program at a cost of $1 thousand during 2023.
The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of December 31, 2024, 13,174 shares of stock had been issued from treasury stock since inception of the DRIP, including 2,425 shares in 2024.
The Company's total capital to risk weighted assets decreased to 12.5% at December 31, 2024, from 13.3% at December 31, 2023. Tier I capital to risk weighted assets decreased to 10.0% at December 31, 2024, from 10.7% at December 31, 2023, and Tier I capital to average assets decreased to 6.3% at December 31, 2024 from 6.5% at December 31, 2023. At December 31, 2024 and 2023, Union was categorized as well capitalized under the Prompt Corrective Action regulatory framework and the Company exceeded applicable minimum capital adequacy requirements. There were no conditions or events between December 31, 2024 and the date of this report that management believes have changed either the Company's or Union's regulatory capital category. See Note 22 to the Company's consolidated financial statements for additional discussion of the Company's and Union's regulatory capital ratios.
Impact of Inflation and Changing Prices. The Company's consolidated financial statements have been prepared in accordance with GAAP, which allows for the measurement of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature, and their general and administrative costs constitute relatively small percentages of total expenses. Thus, increases in the general price levels for goods and services have a relatively minor effect on the Company's total expenses but could have an impact on our loan customers' financial condition. Interest rates have a more significant impact on the Company's financial performance than the effect of general inflation.
Inevitably, not all of our interest rate-sensitive assets and liabilities will re-price simultaneously and in equal volume in response to changes in the federal funds rate, and therefore the potential for interest rate exposure exists. Management believes that several factors will affect the actual impact of interest rate changes on our balance sheet and operating results, including, but not limited to, actual changes in interest rates or expectations of future changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. The Company is aware of and evaluates interest rate risk along with others in making business decisions. The levels of deficit spending by federal, state and local governments and control of the money supply by the FRB, including further changes to monetary or fiscal policies, may have unanticipated effects on interest rates or inflation in future periods that could have an unfavorable impact on the future operating results of the Company.
The federal funds rate, and greater industry-wide competition for deposits have had a significant impact on our cost of interest-bearing liabilities. To assist in meeting our loan-growth needs, we have placed additional reliance on wholesale funding in the form of borrowings and purchased brokered deposits. These funding sources generally have a higher cost than deposits originating within the markets we serve and are not our preferred sources of funding.
The cost of funds, which is primarily tied to rates paid on customer deposits, increased 74 bps during 2024. Management is projecting some relief in the cost of funds for 2025 as interest rates on customer deposits decline in 2025 due to the cumulative 100 bps decrease in the Federal Funds target range during 2024. Market rates are out of the Company's control but can have a dramatic impact on net interest income.