Union Bankshares, Inc. (UNB) is a community bank that has demonstrated its ability to navigate the challenging interest rate environment, marked by a prolonged and steep yield curve inversion. Despite the pressure on its net interest margin, the company has maintained a strong financial position, supported by a diverse deposit base, ample liquidity, excellent asset quality, and regulatory capital well in excess of required levels.

Business Overview

Union Bankshares, Inc. is the holding company for Union Bank, a community bank serving customers in Vermont. The bank offers a comprehensive suite of banking products and services, including commercial and consumer lending, wealth management, and deposit services. With a focus on building long-term relationships, Union Bank has established a strong presence in its local markets, catering to the financial needs of individuals, businesses, and municipalities.

Financials

For the full year 2023, Union Bankshares reported net income of $11.3 million on total revenue of $67.3 million. The company's annual operating cash flow was $9.9 million, while free cash flow reached $8.0 million. These results reflect the bank's ability to generate consistent earnings and cash flow, even in a challenging interest rate environment.

In the first quarter of 2024, the company reported net income of $2.4 million, a decrease of 18.8% compared to the same period in 2023. This decline was primarily driven by a $967,000 decrease in net interest income, which was partially offset by a $282,000 increase in noninterest income and a $304,000 decrease in credit loss expense.

The net interest margin for the first quarter of 2024 was 2.68%, down from 3.14% in the same period of 2023. This compression in the net interest margin reflects the impact of the inverted yield curve, as deposit and funding costs have risen at a faster pace than assets have repriced. The net interest spread also decreased, from 2.84% in the first quarter of 2023 to 2.23% in the first quarter of 2024.

Loan Portfolio and Asset Quality

Union Bankshares' loan portfolio totaled $1.04 billion as of March 31, 2024, representing 73.2% of the company's total assets. The portfolio is primarily composed of real estate-secured loans, including residential mortgages, commercial real estate, and construction loans. The company's asset quality remains strong, with nonperforming assets accounting for just 0.13% of total assets as of March 31, 2024.

The allowance for credit losses on loans stood at $6.6 million, or 0.64% of total loans, as of March 31, 2024. This level of reserves reflects management's conservative approach to credit risk management and the company's commitment to maintaining a high-quality loan portfolio.

Investment Portfolio and Liquidity

Union Bankshares' investment portfolio, consisting primarily of U.S. government-sponsored enterprise and agency mortgage-backed securities, totaled $257.7 million as of March 31, 2024. The portfolio provides the company with a significant source of liquidity and interest rate risk management.

The company's liquidity position remains strong, with cash and cash equivalents of $22.7 million and access to additional borrowing capacity from the Federal Home Loan Bank and the Federal Reserve Bank. Union Bankshares also maintains a diversified deposit base, with noninterest-bearing deposits accounting for 19.0% of total deposits as of March 31, 2024.

Funding and Capital

Union Bankshares has a well-diversified funding structure, with deposits representing the primary source of funding. As of March 31, 2024, total deposits were $1.17 billion, with a loan-to-deposit ratio of 88.6%. The company has also utilized wholesale funding sources, such as FHLB advances and the Federal Reserve's Bank Term Funding Program, to manage its interest rate risk and support loan growth.

The company's capital position remains strong, with a total risk-based capital ratio of 13.36% and a Tier 1 risk-based capital ratio of 10.72% as of March 31, 2024. These ratios exceed the regulatory requirements for a "well-capitalized" institution, providing a solid foundation for the company's operations and future growth.

Risks and Challenges

While Union Bankshares has demonstrated resilience in the face of the inverted yield curve, the company is not immune to the broader challenges facing the banking industry. Continued deposit runoff, unrealized securities losses, and rising interest expense remain key risks that the company must navigate.

Additionally, the company's reliance on real estate-secured lending exposes it to potential risks associated with the local and regional real estate markets. Fluctuations in housing prices, commercial real estate valuations, and construction activity could impact the performance of the company's loan portfolio.

Outlook

Despite the headwinds faced by the banking industry, Union Bankshares has proven its ability to adapt and maintain a strong financial position. The company's focus on building long-term customer relationships, conservative credit risk management, and diversified funding sources have positioned it well to weather the current interest rate environment.

As the yield curve eventually normalizes, Union Bankshares is poised to benefit from the repricing of its assets and liabilities. The company's commitment to prudent balance sheet management and strategic investments in technology and talent will be key to driving future growth and enhancing shareholder value.

Conclusion

Overall, Union Bankshares' resilience, strong liquidity, and well-capitalized position make it a compelling investment opportunity for those seeking exposure to a well-managed community bank navigating the challenges of the current interest rate environment.