Business Overview and History Union Bankshares, Inc. (UNB) is a community bank with a rich history dating back to 1864, serving the financial needs of individuals and businesses in Vermont. Despite facing headwinds from an inverted yield curve, rising interest rates, and economic uncertainty, the bank has demonstrated resilience and a commitment to serving its local communities.
Union Bankshares was founded in 1872 and is headquartered in Morrisville, Vermont. The company's sole subsidiary is Union Bank, which provides commercial banking and financial services to individuals and businesses in Vermont. Over the decades, Union Bankshares has grown to become one of the leading community banks in the state. In the early 2000s, the company faced challenges as the 2008 financial crisis impacted its loan portfolio and deposit base. However, Union Bankshares was able to weather the storm through prudent risk management and a focus on serving its local communities.
Despite the challenges posed by the COVID-19 pandemic in 2020 and 2021, Union Bankshares maintained a strong financial position. The company's disciplined approach to lending and conservative underwriting practices allowed it to navigate the economic uncertainties without significant deterioration in asset quality. Union Bankshares also leveraged its digital capabilities to meet the evolving needs of its customer base during this period.
Today, Union Bankshares operates 22 full-service branches and 3 loan production offices, providing a comprehensive suite of banking products and services to its customers. The bank's loan portfolio is primarily composed of residential real estate (38.5%), commercial real estate (39.2%), and municipal loans (7.4%) as of December 31, 2023. The bank has maintained strong asset quality, with a non-performing asset ratio of 0.14% and an allowance for credit losses to total loans ratio of 0.64% at the end of 2023.
Financial Performance and Ratios Union Bankshares has demonstrated solid financial performance, with net income of $11.3 million and revenue of $46.8 million in the year ended December 31, 2023. The bank's return on assets (ROA) and return on equity (ROE) stood at 0.80% and 18.82%, respectively, during this period. The bank's capital ratios remain well above regulatory requirements, with a total risk-based capital ratio of 13.19% and a Tier 1 leverage ratio of 8.97% as of December 31, 2023.
The bank's net interest margin (NIM) has faced some compression, declining from 2.95% in the nine months ended September 30, 2023 to 2.73% in the same period of 2024, primarily due to the inverted yield curve and rising deposit costs. However, the bank has been proactive in managing its funding mix, utilizing FHLB advances and brokered deposits to mitigate the impact of higher short-term rates.
In the most recent quarter, Union Bankshares reported revenue of $20.1 million, representing a year-over-year increase of 35.4%. However, net income decreased by 47.7% to $1.32 million. This decline was primarily attributed to a $1.29 million loss on the sale of available-for-sale debt securities, increases in noninterest expenses, and credit loss expense. These factors were partially offset by increases in net interest income and noninterest income.
For the fiscal year ended December 31, 2023, the bank reported annual operating cash flow of $9.19 million and annual free cash flow of $7.25 million.
Liquidity and Solvency Union Bankshares maintains a strong liquidity position, with a loan-to-deposit ratio of 84.11% as of December 31, 2023. The bank has access to additional liquidity through its FHLB membership, federal funds lines, and the ability to sell loans and investment securities. The bank's long-term debt-to-capitalization ratio stood at 12.41% at the end of 2023, indicating a well-capitalized and solvent balance sheet.
As of the most recent reporting period, Union Bankshares had $47.26 million in cash and cash equivalents. The bank's debt-to-equity ratio was 3.55. Additionally, the company has access to unused lines of credit up to $34.8 million over and above the $276.5 million in combined outstanding FHLB borrowings and other credit, subject to collateralization. The bank also maintains a pre-approved federal funds line of credit totaling $15 million with an upstream correspondent bank, further enhancing its liquidity position.
Product Segments and Loan Portfolio Union Bankshares' loan portfolio is diversified across several key segments:
1. Residential Real Estate Loans: As of September 30, 2024, non-revolving residential real estate loans totaled $426.8 million (37.9% of the total loan portfolio), while revolving residential real estate loans amounted to $21.35 million (1.9% of the total).
2. Construction Real Estate Loans: Commercial construction real estate loans totaled $59.13 million (5.3% of the total), and residential construction real estate loans amounted to $51.14 million (4.5% of the total).
3. Commercial Real Estate Loans: Non-residential commercial real estate loans were $313.39 million (27.8% of the total), and multi-family residential real estate loans totaled $102.25 million (9.1% of the total).
4. Commercial Loans: Business loans secured by non-real estate assets totaled $38.6 million (3.4% of the total).
5. Consumer Loans: Personal loans and other consumer-oriented credit products amounted to $2.16 million (0.2% of the total).
6. Municipal Loans: Loans to municipalities within the company's service area totaled $102.63 million (9.1% of the total).
7. Loans Held for Sale: The bank had $8.45 million in loans held for sale (0.8% of total loans).
The total loan portfolio, including loans held for sale, was $1.13 billion as of September 30, 2024, representing an increase of $94.6 million (9.2%) compared to December 31, 2023. The total allowance for credit losses on loans was $7.37 million, or 0.65% of total loans.
Challenges and Strategic Initiatives Like many banks, Union Bankshares has faced headwinds from the inverted yield curve and rising interest rates. In response, the bank executed a strategic balance sheet repositioning in the third quarter of 2024, selling $38.8 million in lower-yielding available-for-sale securities and redeploying the proceeds into higher-yielding assets. This transaction resulted in a pre-tax realized loss of $1.3 million, which was partially offset by the improved earnings potential from the new investments.
To further bolster its net interest margin, the bank has been focused on optimizing its deposit mix, growing higher-yielding commercial and municipal deposits, and leveraging its FHLB and brokered deposit relationships to manage funding costs. Additionally, the bank continues to explore opportunities for organic growth and strategic acquisitions that align with its community banking model and risk appetite.
Regulatory Environment and Risk Factors As a community bank, Union Bankshares operates within a complex regulatory landscape, requiring the bank to maintain adequate capital levels, comply with various reporting and compliance requirements, and manage its risk profile effectively. The bank's management team closely monitors changes in regulations and adapts its policies and procedures accordingly.
Key risk factors for Union Bankshares include interest rate risk, credit risk, operational risk, and compliance risk. The bank's management team actively manages these risks through robust risk management practices, including regular portfolio reviews, stress testing, and the implementation of internal controls and risk mitigation strategies.
Conclusion Despite the challenging operating environment, Union Bankshares has demonstrated its ability to navigate through market cycles and maintain a strong financial position. The bank's focus on serving its local communities, prudent risk management, and strategic initiatives have positioned it well to weather the current headwinds and capitalize on future growth opportunities. As the bank continues to adapt and evolve, it remains a reliable community banking partner for individuals and businesses in Vermont.