Executive Summary / Key Takeaways

• Strategic Evolution Driving Performance: Union Bankshares (UNB) is transforming from a traditional regional bank into a digitally enhanced, community-focused financial institution, leveraging its deep local ties in Vermont and New Hampshire while investing in technology to drive efficiency and customer loyalty.
• Solid Financial Momentum in H1 2025: The company reported a positive trajectory with net income increasing to $2.4 million in Q2 2025 (up 18.6% YoY) and $4.9 million for H1 2025 (up 10.4% YoY), driven by higher net interest income and effective balance sheet repositioning.
• Disciplined Capital Management and Shareholder Returns: UNB has demonstrated a commitment to shareholder value, rebuilding its dividend to pre-recession levels by Q4 2015 and authorizing a new $25 million share repurchase program, alongside a recent $40 million at-the-market equity offering to bolster capital for growth.
• Competitive Niche Amidst Headwinds: UNB maintains a strong competitive position in its niche markets through personalized service and municipal banking expertise, but faces broader industry challenges like an inverted yield curve, higher funding costs, and intense competition from larger regional and agile fintech players.
• Outlook Focused on Efficiency and Targeted Growth: Management projects continued net interest margin compression of 3-4 basis points quarterly in 2016 (based on two Fed rate hikes), but anticipates material reductions in OREO expenses ($500k-$700k quarterly) and a return to profitability for the mortgage segment, alongside mid-single-digit loan growth.

A Legacy Forged in Resilience and Digital Evolution

Union Bankshares, founded in 1891 and headquartered in Morrisville, Vermont, has long served as a cornerstone of its local communities across Vermont and New Hampshire. The company’s journey reflects a deep commitment to regional banking, evolving from its traditional roots to embrace modern financial services. This historical foundation, characterized by strong community ties and a personalized approach, continues to shape its strategic responses to a dynamic banking landscape.

The period following the 2008 financial crisis marked a significant test of UNB’s resilience. The company faced substantial challenges, including the acquisition of other real estate owned (OREO) properties and a necessary reduction in its quarterly dividend from $0.18 to $0.06 per share. However, by the fourth quarter of 2015, UNB had not only recovered but surpassed its pre-downturn dividend level, reaching $0.19 per share. This milestone underscored a successful recovery and a renewed commitment to shareholder returns, signaling a pivotal moment in its history.

UNB’s strategic evolution is deeply intertwined with its investment in technology. The company has actively enhanced its digital service offerings, recognizing the importance of convenience and efficiency for its customer base. In 2014, UNB rolled out global business banking, global check deposits, online account opening, and online loan applications. These initiatives were designed to build brand loyalty and streamline customer interactions.

Further technological advancements include online cash management services, offering account reconciliation, credit card depository, automated clearing house origination, wire transfers, positive pay, and night depository services. The company also provides merchant credit card services, remote deposit capture, and online mortgage application and consumer deposit account opening services. These digital tools collectively enhance the customer experience, contributing to UNB's competitive moat by offering accessible and efficient banking solutions that rival those of larger institutions, while maintaining a local touch. Recent software initiatives implemented in the online banking platform during the fourth quarter of 2024 further demonstrate UNB's ongoing commitment to technological improvement. While specific quantitative metrics on the direct impact of these technologies are not publicly detailed, the strategic intent is clear: to drive organic growth and improve operating efficiency across the enterprise.

Operational Excellence and Strategic Repositioning

UNB’s operational strategy emphasizes efficiency and prudent portfolio management. A significant balance sheet repositioning was completed in the third quarter of 2024, involving the sale of lower-yielding available-for-sale (AFS) debt securities at a loss. The proceeds from these sales were strategically reinvested into higher-yielding AFS debt securities and used to fund loans, directly contributing to the improvement in average yield and interest income observed in the first half of 2025.

In the fourth quarter of 2015, UNB undertook a critical re-evaluation of its long-held OREO properties. Recognizing that market forces had not recovered as anticipated, management shifted its disposal strategy from patiently awaiting market recovery to a more aggressive approach. This led to a $2.7 million after-tax valuation adjustment on two large OREO properties, including King Carter/Merry Point. This adjustment, as management explained, was a "pretty sobering conversation internally" but was deemed the "best course" to align values with the current market, allowing for more flexible and aggressive sales, including potential bulk transactions to builders. This move is expected to materially reduce OREO costs, with management projecting a quarterly run rate of $500,000 to $700,000 in 2016.

Further enhancing efficiency, UNB announced plans for branch optimization in 2016, including the net closure of four branches. This involves consolidating three branches in Winchester into a single new standalone location, building on seven branch closures in 2015. These initiatives are part of a broader effort to become a more efficient enterprise, with an anticipated quarterly operating expense run rate of approximately $53 million by mid-2016, despite incremental salary adjustments and investments in technology and risk management.

Another strategic move in Q4 2015 was the divestiture of UNB's credit card portfolio to Elan. This transaction generated an $805,000 after-tax benefit and established an ongoing outsourced partnership. While the sale initially lowered the net interest margin by 4 basis points due to lost interest income, the combination of shared non-interest revenue, cost savings, and income from reinvested proceeds is expected to be accretive to overall earnings. This highlights UNB's willingness to adapt its business model to optimize profitability and focus on core strengths.

Financial Performance: A Story of Growth and Prudence

UNB has demonstrated a positive financial trajectory, particularly in the first half of 2025. Consolidated net income for the three months ended June 30, 2025, increased by 18.6% year-over-year to $2.4 million, or $0.53 per share, compared to $2.0 million, or $0.45 per share, in Q2 2024. For the six months ended June 30, 2025, net income rose 10.4% to $4.9 million, or $1.08 per share, from $4.4 million, or $0.98 per share, in H1 2024. This growth was primarily driven by a 10.1% increase in net interest income in Q2 2025 and a 12.0% increase for H1 2025, reflecting higher interest earned on average earning assets and increased average loan volume.

The net interest spread and net interest margin both improved in Q2 2025, indicating the positive impact of UNB's balance sheet repositioning and active interest rate management. Total assets stood at $1.48 billion at June 30, 2025, with gross loans and loans held for sale totaling $1.11 billion. Deposits were $1.10 billion, and borrowed funds amounted to $270.7 million. The loan portfolio experienced a seasonal decrease at June 30, 2025, primarily due to municipal customers reducing short-term debts, a trend that typically reverses in early July.

Analyzing UNB's latest TTM financial ratios reveals a Gross Profit Margin of 58.76%, an Operating Profit Margin of 16.41%, and a Net Profit Margin of 15.73%. The EBITDA Margin stands at 18.28%. These figures, while reflecting a regional banking model, provide a basis for comparison against its peers. For instance, M&T Bank (MTB) reported a TTM Gross Profit Margin of 64% and an Operating Profit Margin of 25%, suggesting MTB benefits from greater scale and potentially more diversified revenue streams. NBT Bank (NBTB) shows a TTM Gross Profit Margin of 71% and an Operating Profit Margin of 23%, indicating strong operational efficiency. Berkshire Bank (BHLB) has a TTM Gross Profit Margin of 56% and an Operating Profit Margin of 12%, while Community Bank System (CBU) reports a TTM Gross Profit Margin of 77% and an Operating Profit Margin of 25%. UNB's margins are competitive within this peer group, particularly against BHLB, but generally trail the larger, more diversified regional banks like MTB and CBU, highlighting the challenges of scale.

Credit Quality and Capital Discipline

UNB maintains a disciplined approach to credit quality and capital management. The allowance for credit losses (ACL) on loans stood at 0.75% of total loans not held for sale at June 30, 2025, compared to 0.66% at December 31, 2024. Nonperforming assets to total assets were 1.03% at June 30, 2025, an increase from 0.12% at December 31, 2024, primarily due to a commercial construction loan being placed in nonaccrual status. Management believes the ACL is appropriate to cover expected credit losses, but acknowledges the inherent uncertainty in future losses.

Capital resources are a key focus for UNB. In August 2021, the company completed a private placement of $16.5 million in fixed-to-floating rate subordinated notes due 2031, which qualify as Tier 2 capital. This move was primarily to bolster Tier 1 capital for its subsidiary, Union Bank, and support growth. As of June 30, 2025, both Union Bankshares and its subsidiary, Union Bank, met all regulatory capital adequacy requirements, with Union Bank exceeding the requirements for a well-capitalized bank.

The company actively manages its capital for shareholder enhancement. By Q4 2015, UNB's board authorized a new $25 million share repurchase program for 2016, having repurchased over $8 million in Q4 2015. More recently, in May 2025, UNB entered into an Equity Distribution Agreement for an at-the-market offering of up to $40 million in common stock, with approximately $39.7 million remaining available as of June 30, 2025. This demonstrates a proactive approach to capital generation to support ongoing operations and strategic initiatives.

Competitive Landscape: Local Strength in a Shifting Market

UNB operates in a competitive regional banking environment, primarily in Vermont and New Hampshire. Its core competitive advantage lies in its strong community ties and personalized service, which foster deep customer loyalty. This local expertise is particularly effective in serving municipal clients and small to medium-sized businesses, where tailored solutions and established relationships can outweigh the scale advantages of larger competitors. UNB's offerings, such as online cash management and specialized loan programs (SBA, USDA), are designed to meet specific local needs efficiently.

Compared to larger regional players like M&T Bank and Community Bank System, UNB's smaller scale and more concentrated geographic footprint present both opportunities and challenges. While UNB excels in localized service, MTB and CBU benefit from broader operational reach and greater resources for technological investment, potentially leading to faster innovation and more standardized, efficient processes. For instance, MTB's TTM Debt/Equity ratio is 0.47, and CBU's is 0.57, significantly lower than UNB's TTM Debt/Equity of 4.29, suggesting UNB carries a higher leverage relative to its equity base, which could impact its financial flexibility compared to these larger peers.

NBT Bank and Berkshire Bank represent more direct peers in terms of regional focus. UNB's deep roots in Vermont and New Hampshire allow it to potentially offer greater efficiency in community-focused banking, fostering stronger customer retention. However, NBTB, with a TTM Debt/Equity of 0.27, and BHLB, with 0.42, demonstrate more conservative leverage profiles than UNB. NBTB's TTM P/E ratio of 16.02 and P/S ratio of 2.87 are higher than UNB's TTM P/E of 12.53 and P/S of 1.95, suggesting the market may assign a higher valuation to NBTB's growth and efficiency.

The competitive environment is further intensified by indirect competitors such as online banks and fintech platforms. These players offer alternative solutions like digital payment processing and peer-to-peer lending, which can attract customers with accessible and often cheaper services. UNB's ongoing investments in its digital banking platform are a direct response to these trends, aiming to maintain its competitive edge by offering modern conveniences without sacrificing its community-centric model. However, the pace of innovation and investment capacity of larger competitors or pure-play fintechs could pose a long-term challenge to UNB's market share and profitability.

Outlook and Investor Considerations

Management's forward-looking statements provide a clear roadmap for UNB's near-term performance. The net interest margin (NIM) is expected to experience modest core compression of 3 to 4 basis points per quarter throughout 2016, with stabilization anticipated towards the end of the year and into 2017. This outlook incorporates the assumption of two short-end rate increases by the Federal Reserve in 2016, with the expectation that long and intermediate rates will remain relatively stable, leading to a flattening yield curve. While the initial 25-basis point Fed hike did not materially impact deposit costs from competitors, management remains vigilant for changes with further rate increases.

Operational efficiency remains a key focus. The strategic shift in OREO disposal is projected to materially reduce OREO expenses to a quarterly run rate of $500,000 to $700,000. The mortgage segment, despite industry-wide predictions of decreased production due to a contraction in refinances, is expected to return to profitability in 2016. This is predicated on successful Loan Officer (LO) hiring and increased new originations, coupled with continued efforts to drive operating efficiencies. Loan growth is anticipated to remain in the mid-single-digit range for 2016, supported by a healthy pipeline and strategic expansion of lending teams. The effective tax rate for 2016 is projected to be approximately 26%. Furthermore, the allowance for loan losses, adjusted for purchase accounting, is expected to stabilize around 98 to 100 basis points.

Investors should note UNB's TTM dividend yield of 5.52%, which is attractive. However, recent news highlights that the company has not increased its payout since early 2023, signaling potential limitations in financial flexibility. Management's capital allocation strategy, including share repurchases and the recent at-the-market equity offering, aims to enhance long-term shareholder value while maintaining robust capital levels. On the M&A front, UNB maintains a methodical and patient approach, explicitly avoiding acquisitions that would push it above the $10 billion asset threshold at this time, prioritizing preparedness in operational infrastructure, efficiency, and risk management.

Risks to the Thesis

Despite its strategic initiatives and positive financial momentum, UNB faces several pertinent risks. The current macroeconomic and geopolitical environment, characterized by inflation, capital markets volatility, and potential for slower economic growth, could negatively impact its financial condition. The broader banking industry continues to contend with an inverted yield curve, unrealized securities losses, and elevated funding costs, which could pressure UNB's net interest margin and profitability.

The company's investment portfolio is exposed to market fluctuations, and a deterioration in credit quality or liquidity imbalances could adversely affect fair values and potentially lead to future credit losses. The increase in nonaccrual loans, such as the commercial construction loan in Q2 2025, underscores the ongoing credit risk in the loan portfolio, particularly with substandard loans posing a higher risk of becoming nonperforming. While management believes its ACL is adequate, there is no assurance that future losses will not exceed current reserves.

Competition remains intense across UNB's markets, with larger regional banks and agile fintechs vying for market share. This competitive pressure could limit UNB's pricing power and growth opportunities. Furthermore, while UNB's OREO disposal strategy has shifted, the actual pace and profitability of sales remain subject to real estate market conditions.

Conclusion

Union Bankshares is charting a course of strategic evolution, leveraging its century-old community banking heritage with modern digital capabilities to drive sustainable growth. The company's recent financial performance, marked by increased net interest income and improved margins in H1 2025, reflects the positive impact of its balance sheet repositioning and disciplined operational management. UNB's commitment to shareholder value is evident in its robust capital position, consistent dividend, and active share repurchase program, complemented by strategic equity raises to fund future growth.

While UNB's community-centric model and technological enhancements provide a strong competitive moat in its niche markets, the company operates within a challenging banking landscape characterized by macroeconomic uncertainties and intense competition. Its ability to maintain efficiency, manage credit quality, and strategically deploy capital will be crucial for long-term success. Investors should recognize UNB's foundational strengths and strategic agility as key drivers of its investment thesis, particularly as it continues to balance local market leadership with the demands of a rapidly evolving financial services industry.