UNION BANKSHARES, INC. GENERAL
The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the consolidated financial position ofUnion Bankshares, Inc. ("the Company," "our," "we," "us") and its subsidiary, Union Bank ("Union"), as ofDecember 31, 2022 and 2021, and its consolidated results of operations for the years then ended. The Company is considered a "smaller reporting company" under the disclosure rules of theSEC . 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 afterDecember 31, 2022 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 52 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. TheSEC 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 theSEC , and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether theSEC 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. TheSEC 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 loan losses The Company believes the ALL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. The amount of the ALL is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. Changes in these qualitative factors may cause management's estimate of the ALL to increase or decrease 24 -------------------------------------------------------------------------------- and result in adjustments to the Company's provision for loan losses in future periods. For additional information, see FINANCIAL CONDITION- Allowance for Loan Losses and Credit Quality below. EffectiveJanuary 1, 2023 , the Company will adopt ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance in the ASU, which is referred to as the current expected credit loss model ("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. 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 initial adjustment upon the transition to CECL will not be reported in net income, but as a cumulative-effect adjustment to retained earnings. The Company conducted a parallel calculation under CECL as ofDecember 31, 2022 and has substantially completed the development of its CECL process and is in process of finalizing its calculation, internal CECL policy and internal control framework. Based on theDecember 31, 2022 parallel calculation, the Company anticipates that the adoption of CECL will result in an immaterial impact to its consolidated financial statements and the Company's and Union's regulatory capital ratios as ofJanuary 1, 2023 .The Company and Union are expected to continue to exceed regulatory guidelines, and Union's capital ratios will meet the requirements for it to be considered "well capitalized" under prompt corrective action provisions as of the transition date. The Company expects that CECL may create more volatility in the level of the ALL from quarter to quarter as the ALL will be dependent upon macroeconomic forecasts and conditions, loan portfolio volumes and credit quality, among other things. For additional information on CECL, refer to Note 1 of the consolidated financial statements.
Other than temporary impairment of securities
The OTTI decision is a critical accounting policy for the Company. Accounting guidance requires a company to perform periodic reviews of individual debt securities in its investment portfolio to determine whether a decline in the value of a security is OTT. A review of OTTI requires management to make certain judgments regarding the cause and materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery, the Company's intent and ability to continue to hold the security, and, with respect to debt securities, the likelihood that the Company will have to sell the security before its value recovers. Pursuant to these requirements, management assesses valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as the nature of the issuer and its financial condition, business prospects or other issuer-specific factors or (2) market-related factors, such as interest rates or equity market declines. Declines in the fair value of debt securities below their costs that are deemed by management to be OTT are recorded in earnings as realized losses to the extent they are deemed credit losses, with noncredit losses recorded in OCI (loss). Once an OTT loss on a debt security is realized, subsequent gains in the value of the security may not be recognized in income until the security is sold.
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. The Company also recorded acquired identifiable
intangible assets in connection with the 2011 Branch Acquisition, representing
the core deposit intangible which was subject to straight-line amortization over
the estimated 10 years average life of the acquired core deposit base. The core
deposit intangible was fully amortized in 2021.
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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 "Allowance for
Loan Losses and Credit Quality" 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
Concerns over interest rate levels, energy prices, domestic and global policy
issues, and geopolitical events, as well as the implications of those events on
the markets in general, add to the global uncertainty. There is also a risk that
interest rate increases to fight inflation could lead to a recession. The FRB
increased short-term interest rates in 2022 by a total of 425 bps to fight
inflation. Interest rate levels and energy prices, in combination with global
economic conditions, fiscal and monetary policy and the level of regulatory and
government scrutiny of financial institutions will continue to impact our
results in the coming years.
The Company's consolidated net income was $12.6 million , with basic earnings per
share of $2.81 , for 2022 compared to $13.2 million , and basic earnings per share
of $2.94 for 2021. The decrease in net income reflects the combined effect of a
decrease in noninterest income of $4.0 million , or 30.7%, and an increase in
noninterest expenses of $309 thousand , or 0.9%, partially offset by an increase
in net interest income of $3.7 million or 10.4%, and a decrease in the provision
for income taxes of $14 thousand , or 0.5%.
Sales of qualifying residential loans to the secondary market for the year ended
December 31, 2022 were $78.0 million resulting in gain on sales of $1.0 million ,
compared to sales of $216.8 million and gain on sales of $5.0 million for the
year ended December 31, 2021 .
As of December 31, 2022 , the Company had total consolidated assets of $1.3
billion , an increase of 10.9% compared to December 31, 2021 . Total investments
decreased $17.4 million , or 6.5%, to $251.5 million , or 18.8% of total assets at
December 31, 2022 compared to $269.0 million , or 22.3% of total assets, as of
December 31, 2021 primarily due to the increase in unrealized losses on the
portfolio from December 31, 2021 to December 31, 2022 . Net loans and loans held
for sale increased $159.1 million or 20.1%, to $952.3 million , or 71.3% of total
assets, at December 31, 2022 , compared to $793.2 million , or 65.8% of total
assets, at December 31, 2021 . The level of federal funds sold decreased $27.9
million , or 45.5%, to $33.4 million at December 31, 2022 compared to $61.3
million at December 31, 2021 .
Customer deposits increased
The Company's total capital decreased from$84.3 million atDecember 31, 2021 to$55.2 million atDecember 31, 2022 . This decrease primarily reflects an increase of$35.9 million in accumulated other comprehensive loss and regular cash dividends paid of$6.3 million , partially offset by net income of$12.6 million for 2022. (See Capital Resources on pages 43 to 44.) These changes also resulted in a decrease in the Company's book value per share to$12.25 atDecember 31, 2022 from$18.77 as ofDecember 31, 2021 . 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 16 bps for the year endedDecember 31, 2022 compared to 2021 primarily due to an increase in average assets of$128.3 million for the year endedDecember 31, 2022 . 26 -------------------------------------------------------------------------------- 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 endedDecember 31, 2022 and 2021: 2022
2021
Return on average assets 1.00 % 1.16 %
Return on average equity 19.65 % 15.92 %
Net interest margin (1) 3.28 % 3.38 %
Efficiency ratio (2) 67.84 % 73.13 %
Net interest spread (3) 3.13 % 3.27 %
Loan to deposit ratio 79.82 % 73.13 %
Net recoveries to total average loans - % (0.01) %
Allowance for loan losses to loans not held for sale 0.87 % 1.06 %
Nonperforming assets to total assets (4) 0.18 % 0.39 %
Equity to assets 4.13 % 7.00 %
Total capital to risk weighted assets 13.98 % 15.39 %
Book value per share $ 12.25 $18.77
Basic earnings per share $ 2.81 $ 2.94
Diluted earnings per share $ 2.79 $ 2.92
Dividends paid per share $ 1.40 $ 1.32
Dividend payout ratio (5) 49.82 %
44.90 %
__________________
(1)The ratio of tax equivalent net interest income to average earning assets.
See page 29 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 29 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, 2022 , net income was $12.6 million compared to
$13.2 million for the year ended December 31, 2021 . 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.
Net interest income was $39.4 million on a fully tax equivalent basis for 2022,
compared to $35.7 million for 2021, an increase of $3.7 million , or 10.4%. The
net interest spread decreased 14 bps to 3.13% for the year ended December 31,
2022 , from 3.27% for the year ended December 31, 2021 , reflecting the combined
effect of the 6 bps decrease in the average yield earned on interest earning
assets and the 8 bps increase in the average rate paid on interest bearing
liabilities between periods. The net interest margin decreased 10 bps to 3.28%
for the year ended December 31, 2022 compared to 3.38% for the year ended
December 31, 2021 .
The average yield on average earning assets was 3.65% for the year ended
December 31, 2022 compared to 3.71% for the year ended December 31, 2021 , a
decrease of 6 bps while average earning assets increased $145.8 million .
Interest income on investment securities increased $2.4 million year over year
due to an increase in average balances of $127.1 million and an increase of 8
bps in average yield between the comparison periods. The average balance of PPP
loans was $4.1 million for the year ended December 31, 2022 with an average
yield of 14.61% which takes into account the 1.0% interest charged on PPP
27
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loans and related fee income recognized during 2022. Fee income recognized on
PPP loans was $551 thousand for the year ended December 31, 2022 compared to
$2.8 million for the year ended December 31, 2021 . Average loans, excluding PPP
loans, increased $112.5 million , or 14.82%, to $871.5 million for the year ended
December 31, 2022 compared to $759.0 million for the year ended December 31,
2021 . The increase in the average loans resulted in a $4.8 million increase in
interest income on loans between periods, despite a decrease of 1 bp in the
average yield. The decrease in the average yield is attributable to management's
decision to reduce the volume of residential loan sales to the secondary market
to hold more of such loans in portfolio. While these loans have contributed to
the increase in average loans and interest income, the yield on these loans is
lower than on other loan types. Management expects loan yields to improve in
future periods as new loans are being recorded at higher rates. Although loan
yields are expected to increase as a result of higher rates, competition and
other economic factors may impact the Company's ability to increase average loan
balances.
The average cost of funding, which is tied primarily to our customer deposits,
increased 8 bps to 0.52% for the year ended December 31, 2022 , compared to 0.44%
for the year ended December 31, 2021 . Interest expense increased $959 thousand
to $4.5 million for the year ended December 31, 2022 compared to $3.6 million
for the year ended December 31, 2021 . The increase in interest expense was
primarily due to the issuance of subordinated debt during the third quarter of
2021 and the utilization of wholesale funding during the fourth quarter of 2022
when the Company experienced a decrease in the excess liquidity levels that had
been consistent in 2021. The average balance of subordinated notes was $16.2
million for the year ended December 31, 2022 , with an average rate of 3.51% and
interest expense of $569 thousand compared to an average balance of $6.2 million
for the year ended December 31, 2021 , with an average rate of 3.19% and interest
expense of $199 thousand . Higher rates paid on customer deposit accounts and
increases in average interest bearing deposit balances of $57.0 million resulted
in an increase in interest expense of $375 thousand between the comparison
periods. The increase in average customer deposit balances is due to overall
growth of the Company and the utilization of $33.0 million in brokered deposits
included in time deposits as of December 31, 2022 . In addition to brokered
deposits, the Company utilized wholesale funding in the form of borrowed funds
from the FHLB with an average balance of $11.1 million for the year ended
December 31, 2022 , at an average rate of 3.86% and interest expense of $433
thousand compared to an average balance of $7.1 million for the year ended
December 31, 2021 , at an average rate of 3.05% and interest expense of $219
thousand .See the following tables for details.
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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,
2022 2021
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance (1) Paid Rate Balance (1) Paid Rate
(Dollars in thousands)
Average Assets:
Federal funds sold and overnight
deposits $ 32,707 $ 245 0.74 % $ 81,660 $ 100 0.12 %
Interest bearing deposits in banks 14,105 187 1.33 % 13,299 139 1.05 %
Investment securities (2), (3) 292,555 5,130 1.82 % 165,424 2,755 1.74 %
PPP loans, net (4) 4,053 592 14.61 % 49,929 3,330 6.67 %
Loans (excluding PPP loans), net (2),
(5) 871,475 37,766 4.37 % 758,965 32,931 4.38 %
Nonmarketable equity securities 1,324 28 2.11 % 1,158 18 1.54 %
Total interest earning assets (2) 1,216,219 43,948 3.65 % 1,070,435 39,273 3.71 %
Cash and due from banks 4,573 4,858
Premises and equipment 21,073 21,302
Other assets 20,352 37,332
Total assets $ 1,262,217 $ 1,133,927
Average Liabilities and Stockholders'
Equity:
Interest bearing checking accounts $ 292,850 $ 919 0.31 % $ 255,031 $ 586 0.23 %
Savings/money market accounts 434,492 1,588 0.37 % 416,245 1,644 0.39 %
Time deposits 119,081 1,015 0.85 % 118,145 917 0.78 %
Borrowed funds and other liabilities 11,050 433 3.86 % 7,080 219 3.05 %
Subordinated notes 16,188 569 3.51 % 6,244 199 3.19 %
Total interest bearing liabilities 873,661 4,524 0.52 % 802,745 3,565 0.44 %
Noninterest bearing deposits 311,444 238,572
Other liabilities 12,930 9,891
Total liabilities 1,198,035 1,051,208
Stockholders' equity 64,182 82,719
Total liabilities and stockholders'
equity $ 1,262,217 $ 1,133,927
Net interest income $ 39,424 $ 35,708
Net interest spread (2) 3.13 % 3.27 %
Net interest margin (2) 3.28 % 3.38 %
____________________
(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 unamortized costs and unamortized premiums.
(5)Includes loans held for sale as well as nonaccrual loans, unamortized costs
and unamortized premiums and is net of the allowance for loan losses.
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Tax exempt interest income amounted to $2.3 million and $2.1 million for the
years ended December 31, 2022 and 2021, 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, 2022 and 2021:
Years Ended December 31,
2022 2021
(Dollars in thousands)
Net interest income as presented $ 39,424 $ 35,708
Effect of tax-exempt interest
Investment securities 201 125
Loans 301 299
Net interest income, tax equivalent $ 39,926 $ 36,132
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, 2022 Year Ended December 31, 2021
Compared to Year Ended Compared to Year Ended
December 31, 2021 December 31, 2020
Increase/(Decrease) Due to Change In Increase/(Decrease) Due to Change In
Volume Rate Net Volume Rate Net
Interest earning assets: (Dollars in thousands)
Federal funds sold and overnight deposits $ (93)$ 238 $ 145 $ 51$ (43) $ 8 Interest bearing deposits in banks 8 40 48 60 (83) (23) Investment securities 2,287 88 2,375 1,491 (700) 791 PPP loans, net (4,647) 1,909 (2,738) 92 1,803 1,895 Loans (excluding PPP loans). net 4,912 (77) 4,835 2,418 (2,487) (69) Nonmarketable equity securities 3 7 10 (26) (53) (79) Total interest earning assets$ 2,470 $ 2,205 $ 4,675 $ 4,086 $ (1,563) $ 2,523 Interest bearing liabilities: Interest bearing checking accounts $ 96$ 237 $ 333 $ 172 $ (291) $ (119) Savings/money market accounts 70 (126) (56) 482 (1,029) (547) Time deposits 7 91 98 (303) (660) (963) Borrowed funds 145 69 214 (365) 213 (152) Subordinated notes 348 22 370 199 - 199
Total interest bearing liabilities $ 666
Provision for Loan Losses. There was no provision for loan losses recorded for the years endedDecember 31, 2022 or 2021. No provision was deemed necessary by management based on the size and mix of the loan portfolio, the level of nonperforming loans, the results of the qualitative factor review and prevailing economic conditions. For further details, see FINANCIAL CONDITION Asset Quality and Allowance for Loan Losses below. 30 --------------------------------------------------------------------------------
Noninterest Income. The following table sets forth the components of noninterest
income for the years ended
For
the Years Ended
2022 2021 $ Variance % Variance
(Dollars in thousands)
Trust income $ 838 $ 808 $ 30 3.7
Service fees 6,859 6,516 343 5.3
Net gains on sales of loans held for sale 1,004 4,956 (3,952) (79.7)
Net gains on sales of investment securities AFS 31 - 31 -
Net loss on other investments (60) (21) (39) 185.7
(Expense) income from MSRs, net (465) 243 (708) (291.4)
Income from Company-owned life insurance 509 309 200 64.7
Other income 271 152 119 78.3
Total noninterest income $ 8,987 $ 12,963 $ (3,976) (30.7)
The significant changes in noninterest income for the year ended
•Trust income. Trust income increased as dollars in managed fiduciary accounts
grew between
•Service fees. Service fee income increased$343 thousand for the year endedDecember 31, 2022 compared to the same period in 2021 primarily due to increases of$247 thousand in overdraft fee income,$46 thousand in ATM network income, and$43 thousand in loan servicing fee income. •Net gains on sales of loans held for sale. Management reduced the volume of loans sold in 2022 compared to 2021 due to the increase in the 10-year treasury rate in 2022 and the related impact on the pricing of loans held for sale. Residential loans totaling$78.0 million were sold to the secondary market during 2022, compared to residential loan sales of$216.8 million during 2021. The decrease of$4.0 million in net gains on sales of loans held for sale is reflective of the lower sales volumes and lower premiums obtained on those sales. •Net loss 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 losses of$60 thousand and$21 thousand for the years endedDecember 31, 2022 and 2021, respectively. •(Expense) income from MSRs, net. Income from MSRs is derived from servicing rights acquired through the sale of loans where servicing is retained. Capitalized servicing rights are initially recorded at fair value and amortized in proportion to, and over the period of, the future estimate of servicing the underlying mortgages. The amortization of MSRs exceeded new capitalized MSRs which resulted in an expense of$465 thousand for 2022 compared to income of$243 thousand in 2021. The reduction in capitalized MSRs is consistent with the reduced volume of loan sales to the secondary market during 2022. •Income from Company-owned life insurance. The Company purchased$5.8 million of Company-owned life insurance covering select officers of Union during the fourth quarter of 2021. In addition,$77 thousand was received in proceeds from a death benefit, resulting in increased income for the year endedDecember 31, 2022 compared to 2021. •Other income. The increase in Other income is primarily attributable to an increase of$55 thousand in prepayment penalties received from the early payoff of loans during 2022 compared to 2021, in addition to$53 thousand of income received as a litigation settlement related to previous investment holdings in the Company's defined benefit pension plan that was terminated in 2018. 31 --------------------------------------------------------------------------------
Noninterest Expenses. The following table sets forth the components of
noninterest expenses for the years ended
For
the Years Ended
2022 2021 $ Variance % Variance
(Dollars in thousands)
Salaries and wages $ 14,083 $ 14,448 $ (365) (2.5)
Employee benefits 5,030 4,593 437 9.5
Occupancy expense, net 1,913 1,890 23 1.2
Equipment expense 3,692 3,447 245 7.1
Vermont franchise tax 1,087 968 119 12.3
Professional fees 877 922 (45) (4.9)
ATM network and debit card expense 980 898 82 9.1
FDIC insurance assessment 622 644 (22) (3.4)
Advertising and public relations 617 530 87 16.4
Other loan related expenses 390 421 (31) (7.4)
Electronic banking expenses 415 381 34 8.9
Trust expenses 387 353 34 9.6
Supplies and printing 334 368 (34) (9.2)
Prepayment penalties on borrowings - 226 (226) (100.0)
Legal fees 68 104 (36) (34.6)
Amortization of core deposit intangible - 71 (71) (100.0)
Travel and entertainment 190 103 87 84.5
Other expenses 2,479 2,488 (9) (0.4)
Total noninterest expenses $ 33,164 $ 32,855 $ 309 0.9
The significant changes in noninterest expenses for the year ended
•Salaries and wages. The$365 thousand decrease in salaries and wages was primarily due to employee turnover and the increased number of open positions that resulted during 2022, a reduction in commissions earned by mortgage loan originators and the deferral of loan origination costs, partially offset by annual salary adjustments. •Employee benefits. Employee benefit expense increased$437 thousand primarily due to increases of$413 thousand in the Company's medical and dental plans and$12 thousand in payroll tax expense for 2022.
•Equipment expense. Equipment expense increased by
•Vermont franchise tax. TheVermont franchise tax is determined based on a quarterly tax rate applied to the Company's average balance ofVermont customer deposit balances. The tax rate remained unchanged throughout 2022 and 2021; however, the average balances inVermont deposit account balances increased for the year endedDecember 31, 2022 , resulting in an increase in expense. •Professional fees. During the first half of 2021, additional consultants were engaged to assist with employment searches and other advisory services that were not utilized in 2022, resulting in an overall decrease of$45 thousand in expense. •ATM network and debit card expense. The$82 thousand increase between periods relates to increases in the volume of ATM and debit card transactions and new card issuance costs.
•Advertising and public relations. The increase of
•Other loan related expenses. Other loan related expenses consist of other costs incurred for originating and servicing loans such as insurance and property tax tracking expenses, credit report fees and other real estate closing costs. These expenses decreased$31 thousand in 2022 compared to 2021 primarily due to lower volume of residential mortgage loan originations between periods. 32 --------------------------------------------------------------------------------
•Electronic banking expenses. Electronic banking expenses increased
•Trust expenses. The$34 thousand increase is primarily attributable to the growth in managed fiduciary accounts and the associated data processing and professional services. In addition, consulting services were engaged in 2022 that were not utilized in 2021. •Prepayment penalties on borrowings. During 2021, the Company paid prepayment penalties on the early payoff of FHLB advances of$226 thousand . There were no prepayment penalties paid in 2022.
•Legal fees. The decrease in legal fees of
•Travel and entertainment. The Company has resumed business travel, intercompany travel and events that were suspended due to the economic disruption caused by COVID-19, resulting in increased expense of$87 thousand for 2022 compared to 2021. Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the current and prior periods presented. The Company's net provision for income taxes was$2.6 million for 2022 and 2021. The Company's effective federal corporate income tax rate was 16.3% and 16.1% for 2022 and 2021, respectively. Amortization expense related to limited partnership investments included as a component of tax expense amounted to$1.1 million and$1.0 million for the years endedDecember 31, 2022 and 2021, 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$1.1 million for the years endedDecember 31, 2022 and 2021. See Note 10 to the Company's consolidated financial statements. FINANCIAL CONDITION AtDecember 31, 2022 , the Company had total consolidated assets of$1.3 billion , including gross loans and loans held for sale (total loans) of$959.3 million , deposits of$1.2 billion and stockholders' equity of$55.2 million . The Company's total assets increased$131.1 million , or 10.9%, from$1.2 billion atDecember 31, 2021 . Net loans and loans held for sale increased$159.1 million , or 20.1%, to$952.3 million , or 71.3% of total assets, atDecember 31, 2022 , compared to$793.2 million , or 65.8% of total assets, atDecember 31, 2021 . (See Loan Portfolio below.) Total deposits increased$106.8 million , or 9.8% to$1.2 billion atDecember 31, 2022 , from$1.1 billion atDecember 31, 2021 . There were increases in interest bearing deposits of$39.2 million , or 5.4%, noninterest bearing deposits of$21.3 million , or 8.0%, and time deposits of$46.3 million , or 43.4%. (See average balances and rates in the Yields Earned and Rates Paid table on page 29.) Borrowed funds consisted of$50.0 million in FHLB advances atDecember 31, 2022 and there were no borrowed funds atDecember 31, 2021 . InAugust 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 presented in the consolidated balance sheets net of unamortized issuance costs of$295 thousand and$329 thousand atDecember 31, 2022 and 2021, respectively. (See Borrowings on page 41.)
Total stockholders' equity decreased
Loan Portfolio. The Company's gross loan portfolio (including loans held for sale) increased$158.5 million , or 19.8%, to$959.3 million , representing 71.8% of assets atDecember 31, 2022 , from$800.9 million , representing 66.4% of assets atDecember 31, 2021 . 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$828.2 million , or 86.3% of total loans, atDecember 31, 2022 compared to$670.6 million , or 83.7% of total loans, atDecember 31, 2021 . The Company had four PPP loans totaling$205 thousand classified as commercial loans atDecember 31, 2022 compared to 154 PPP loans totaling$13.6 million atDecember 31, 2021 . Changes in the composition of the Company's loan portfolio fromDecember 31, 2021 (see table below) resulted primarily from an increase in the volume of residential loans not held for sale, construction, commercial real estate and municipal loans originated, partially offset by a decrease in the commercial portfolio related to PPP loans forgiveness. There was no material change in the Company's lending programs or terms during 2022. 33 -------------------------------------------------------------------------------- The composition of the Company's loan portfolio was as follows atDecember 31 : 2022 2021 $ % $ % (Dollars in thousands) Residential real estate$ 352,433 36.7$ 246,827 30.8 Construction real estate 96,620 10.1 65,149 8.1 Commercial real estate 377,947 39.4 344,816 43.1 Commercial 40,973 4.3 49,788 6.2 Consumer 2,204 0.2 2,376 0.3 Municipal 87,980 9.2 78,094 9.8 Loans held for sale 1,178 0.1 13,829 1.7 Total loans$ 959,335 100.0$ 800,879 100.0 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. AtDecember 31, 2022 , the Company serviced a$987.4 million residential real estate mortgage portfolio, of which$1.2 million was held for sale and approximately$633.7 million was serviced for unaffiliated third parties. This compares to a residential real estate mortgage servicing portfolio of$898.8 million atDecember 31, 2021 , of which$13.8 million was held for sale and approximately$638.1 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. In an effort to utilize some excess liquidity during the first half of 2022 and in light of the impact on the pricing of loans resulting from the increase in the 10-year treasury rate in 2022, the Company elected to retain in portfolio the majority of residential real estate loans originated in 2022. The Company sold$78.0 million of qualified residential real estate loans originated during 2022 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of$216.8 million during 2021. Residential mortgage loan origination activity continued to be stable during 2022, consisting of both refinancing and purchase activity, although there has been a decline in refinancing activity with the increase in interest rates. Reflecting low housing inventory, there was an increase in construction loan activity in 2022. 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 itsVermont orNew 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 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$3.2 million and$17.2 million guaranteed under these various programs atDecember 31, 2022 and 2021, respectively, on aggregate balances of$4.2 million and$18.5 million in subject loans for the same time periods. These amounts include the$205 thousand and$13.6 million of PPP loans that were guaranteed 100% by SBA atDecember 31, 2022 and 2021, 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 2022 or 2021. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur. The Company serviced$27.0 million and$21.2 million of commercial and commercial real estate loans for unaffiliated third parties as ofDecember 31, 2022 and 2021, respectively. This includes$25.7 million and$19.6 million of commercial or commercial real estate loans the Company had participated out to other financial institutions atDecember 31, 2022 and 2021, respectively. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes. As ofDecember 31, 2022 , total loans serviced had grown to$1.6 billion , which includes total loans on the balance sheet of$959.3 million as well as total loans sold with servicing retained of$660.7 million , compared to total loans serviced of$1.5 billion as ofDecember 31, 2021 . 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 as they occur. The unamortized balance of MSRs on loans sold with servicing retained was$2.0 million and$2.5 million as ofDecember 31, 2022 and 2021, respectively, 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. 34 -------------------------------------------------------------------------------- Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of$272.9 million and$224.4 million were pledged as collateral for borrowings from the FHLB under a blanket lien atDecember 31, 2022 and 2021, respectively.
The following table breaks down by classification the contractual maturities of
the gross loans held in portfolio and for sale as of
Within 1 2-5 6-15 Over 15
Year Years Years Years Total
(Dollars in thousands)
Fixed rate
Residential real estate
Construction real estate 31,180 9,533 6,179 - 46,892
Commercial real estate 1,045 5,669 45,137 - 51,851
Commercial 590 8,359 21,286 - 30,235
Consumer 1,102 1,077 8 - 2,187
Municipal 76,588 7,336 4,056 - 87,980
Total fixed rate 110,590 33,668 133,096 200,477 477,831
Variable rate
Residential real estate 723 762 61,730 31,710 94,925
Construction real estate 5,522 4,322 11,841 28,043 49,728
Commercial real estate 13,965 4,452 247,635 60,044 326,096
Commercial 3,107 1,719 5,912 - 10,738
Consumer 17 - - 17
Total variable rate 23,334 11,255 327,118 119,797 481,504
$ 133,924 $ 44,923 $ 460,214 $ 320,274 $ 959,335
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 advisory board 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. Although the Company lends up to
80% of the collateral value on commercial real estate loans to strong borrowers,
the majority of commercial real estate loans do not exceed 75% of the appraised
collateral value. 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
35
--------------------------------------------------------------------------------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 continues to see signs of improvement and the states ofVermont andNew Hampshire have been fully opened sinceJune 2021 , after the COVID-19 pandemic closure of large segments of the economy. There is demand for leisure travel and dining out which is supporting the region's tourist and restaurant industries; however, the industries are also facing some challenges due to less than normal workforce participation, supply chain delays and inflation. Demand for homes continues to be strong with the general safety and desirability of the region and the increased ability of working remotely. The Company's management is focused on the lingering impact of COVID-19 on its borrowers and closely monitors industry and geographic concentrations, specifically the continuing impact on the region's tourist and restaurant industries. TheVermont unemployment rate was reported at 2.6% forDecember 2022 compared to 2.5% forDecember 2021 and theNew Hampshire unemployment rate was 2.7% forDecember 2022 compared to 2.6% forDecember 2021 . These rates compare favorably with the nationwide unemployment rate of 3.5% and 3.9%, respectively, for the comparable periods. Management will continue to monitor the national, regional and local economic environment in relation to COVID-19 and its impact on unemployment, business outlook and real estate values in the Company's market area.
The Company also monitors its delinquency levels for any adverse trends. Management closely monitors the Company's loan and investment portfolios, OREO and OAO 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.
TDR loans involve one or more of the following: forgiving a portion of interest or principal, refinancing at a rate materially less than the market rate, rescheduling loan payments, or granting other concessions to a borrower due to financial or economic reasons related to the debtor's financial difficulties that the Company would not ordinarily grant. When evaluating the ALL, management makes a specific allocation for TDR loans as they are considered impaired.
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
2022 2021
(Dollars in thousands)
Nonaccrual loans $ 2,211 $ 4,650
Loans past due 90 days or more and still accruing interest 186 98
Total nonperforming loans and assets $
2,397
Guarantees ofU.S. or state government agencies on the above nonperforming loans $ 76$ 113 TDR loans$ 1,710 $ 2,215 Allowance for loan losses$ 8,339 $ 8,336 Net recoveries $ (3)$ (65) Total loans outstanding$ 959,335 $ 800,879 Total average loans outstanding$ 875,528 $ 808,894 36
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The following table shows trends of certain asset quality ratios monitored by
Company's management at
2022 2021
(Dollars in thousands)
Allowance for loan losses to total loans outstanding 0.87 %
1.04 %
Allowance for loan losses to nonperforming loans 347.89 % 175.57 % Allowance for loan losses to nonaccrual loans 377.16 % 179.27 % Nonperforming loans to total loans 0.25 % 0.59 % Nonperforming assets to total assets 0.18 % 0.39 % Nonaccrual loans to total loans 0.23 % 0.58 % Delinquent loans (30 days to nonaccruing) to total loans 0.57 % 0.82 % Net recoveries to total average loans - % (0.01) % Residential real estate - % (0.03) % Net recoveries $ -$ (66) Total average loans$ 304,778 $ 243,212 Construction real estate - % - % Net charge-offs $ - $ - Total average loans$ 67,272 $ 62,678 Commercial real estate - % - % Net recoveries $ - $ - Total average loans$ 373,657 $ 324,101 Commercial - % - % Net recoveries$ (1) $ - Total average loans$ 43,710 $ 88,626 Consumer (0.09) % 0.04 % Net (recoveries) charge-offs$ (2) $ 1 Total average loans$ 2,262 $ 2,608 Municipal - % - % Net charge-offs $ - $ - Total average loans$ 83,849 $ 87,669 Nonperforming loans atDecember 31, 2022 decreased$2.4 million , or 49.5% and decreased as a percentage of assets from 0.39% atDecember 31, 2021 to 0.18% atDecember 31, 2022 , with the ALL as a percentage of nonperforming loans increasing from 175.57% to 347.89%. Management considers the asset quality ratios to be at favorable levels. The Company's success at keeping the ratios at favorable levels is the result of continued focus on maintaining strict underwriting standards, as well as our practice, as a community bank, of actively working with troubled borrowers to resolve the borrower's delinquency, while maintaining the safe and sound credit practices of Union and safeguarding our strong capital position. There was one residential real estate loan totaling$28 thousand in process of foreclosure atDecember 31, 2022 and no loans in process of foreclosure atDecember 31, 2021 . The aggregate interest on nonaccrual loans not recognized was$59 thousand and$504 thousand for the years endedDecember 31, 2022 and 2021, respectively. The Company had loans rated substandard that were on a performing status totaling$1.3 million atDecember 31, 2022 and$769 thousand atDecember 31, 2021 . 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. 37 -------------------------------------------------------------------------------- Although management believes that the Company's nonperforming and internally classified loans are generally well-secured and that probable credit losses inherent in the loan portfolio are provided for in the Company's ALL, there can be no assurance that future deterioration in economic conditions and/or collateral values, or changes in other relevant factors will not result in future credit losses. The Company's management is focused on the impact that the economy may have on its borrowers and closely monitors industry and geographic concentrations for evidence of financial problems. Management will continue to monitor the national, regional and local economic environment, particularly as it relates to the COVID-19 crisis and its residual impact on unemployment, business failures and real estate values in the Company's market area. 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 atDecember 31, 2022 or 2021. Allowance for Loan Losses. 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 ALL to absorb such losses. The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the evaluation date; however, actual loan losses may vary from management's current estimates. The ALL is evaluated quarterly using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specific loans when determining the appropriate level of the ALL, management also takes into consideration other qualitative factors such as changes in the mix and size of the loan portfolio, credit concentrations, historic loss experience, the amount of delinquencies and loans adversely classified, industry trends, and the impact of the local and regional economy on the Company's borrowers as well as the estimated value of any underlying collateral. The appropriate level of the ALL is assessed by an allocation process whereby specific loss allocations are made against impaired loans and general loss allocations are made against segments of the loan portfolio that have similar attributes. Although the ALL is assessed by allocating reserves by loan category, the total ALL is available to absorb losses that may occur within any loan category. The ALL is increased by a provision for loan losses charged to earnings, and reduced by charge-offs, net of recoveries. The provision for loan losses represents management's estimate of the current period credit cost associated with maintaining an appropriate ALL. Based on an evaluation of the loan portfolio and other relevant qualitative factors, management presents a quarterly analysis of the appropriate level of the ALL to the Board, indicating any changes in the ALL since the last review and any recommendations as to adjustments in the ALL and the level of future provisions. Credit quality of the commercial portfolio is quantified by a credit risk rating system designed to parallel regulatory criteria and categories of loan risk and has historically been well received by the various regulatory authorities. Individual loan officers and credit department personnel monitor loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of commercial and retail credit portfolios are also assessed on a regular basis by an independent loan review function. The level of ALL allocable to each loan portfolio category with similar risk characteristics is determined based on historical charge-offs, adjusted for qualitative risk factors. A quarterly analysis of various qualitative factors, including portfolio characteristics, national and local economic trends, overall market conditions, and levels of, and trends in, delinquencies and nonperforming loans, helps to ensure that areas with the potential risk for loss are considered in management's ALL estimate. Management increased certain economic qualitative factors utilized to estimate the ALL during 2020 at the onset of the COVID-19 pandemic. During 2021 and 2022, the economic qualitative reserve factor assigned to each loan portfolio in the ALL estimate was decreased due to continued indications of economic improvement. COVID-19 restrictions were lifted inJune 2021 and all borrowers that had executed loan modifications due to COVID-19 were no longer subject to modified terms atDecember 31, 2022 . During 2021, the economic qualitative reserve factor was decreased 10 bps for the residential real estate, commercial real estate, commercial, consumer and municipal loan portfolios and 5 bps for the construction real estate loan portfolio. Based on these continued improving economic trends during 2022, the economic qualitative reserve factor was decreased a further 15 bps for the residential real estate, commercial real estate, commercial, and consumer loan portfolios and a further 20 bps for the construction real estate loan portfolio. These reductions brought the economic qualitative reserve factor back to the pre-pandemic level for all loan portfolios. In addition to the qualitative risk factor analysis of each loan portfolio, loans meeting specified criteria are also evaluated for specific impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Commercial loans with balances greater than$500 thousand was established by management as the threshold for individual impairment evaluation with a 38 -------------------------------------------------------------------------------- specific reserve allocated when warranted. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. Impaired loans, including$1.7 million of TDR loans, were$9.5 million atDecember 31, 2022 , with government guaranties of$341 thousand and a specific reserve amount allocated of$30 thousand . Impaired loans, including$2.2 million of TDR loans, were$6.8 million atDecember 31, 2021 , with government guaranties of$423 thousand and a specific reserve amount allocated of$46 thousand . The specific reserve amount allocated to individually identified impaired loans decreased$16 thousand as a result of theDecember 31, 2022 impairment evaluation. The following table (net of loans held for sale) shows the internal breakdown by class of loans of the Company's ALL and the percentage of loans in each category to total loans in the respective portfolios atDecember 31 : 2022 2021 $ % $ % (Dollars in thousands) Residential real estate$ 2,417 36.8$ 2,068 31.4 Construction real estate 1,032 10.1 837 8.3 Commercial real estate 3,935 39.4 4,122 43.8 Commercial 301 4.3 275 6.3 Consumer 10 0.2 11 0.3 Municipal 95 9.2 86 9.9 Unallocated 549 - 937 - Total$ 8,339 100.0$ 8,336 100.0
Notwithstanding the categories shown in the table above or any specific allocation under the Company's ALL methodology, all funds in the ALL are available to absorb loan losses in the portfolio, regardless of loan category or specific allocation.
Management of the Company believes, in its best estimate, that the ALL atDecember 31, 2022 is appropriate to cover probable credit losses inherent in 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 ALL atDecember 31, 2022 . In addition, our banking regulators, as an integral part of their examination process, periodically review our ALL. Such agencies may require us to recognize adjustments to the ALL based on their judgments about information available to them at the time of their examination. A large adjustment to the ALL for losses in future periods may require increased provisions to replenish the ALL, 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. AtDecember 31, 2022 , the fair value of investment securities AFS was$250.3 million , or 18.7% of total assets, compared to$267.8 million , or 22.2% of total assets, atDecember 31, 2021 . There were no investment securities classified as HTM or as trading atDecember 31, 2022 or 2021. 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. The fair value of investment securities AFS atDecember 31, 2022 reflects a net unrealized loss of$47.4 million , compared to a net unrealized loss of$2.0 million atDecember 31, 2021 . Despite the decrease in the overall fair value of the investment portfolio, the amortized cost of investment securities classified as AFS increased$27.9 million during 2022. The Company used excess liquidity to increase the investment portfolio during 2021 and the first half of 2022 to obtain higher yields than what would have been earned at the Federal Funds rate. AtDecember 31, 2022 , 207 debt securities had gross unrealized losses of$47.8 million , with aggregate depreciation of 16.04% from the Company's amortized cost basis. Securities are evaluated at least quarterly for OTTI and atDecember 31, 2022 , in management's estimation, no security was OTTI. Management's evaluation of OTTI is subject to risks and uncertainties and is intended to determine the appropriate amount and timing of recognition of any impairment charge. The assessment of whether such impairment for debt securities has occurred is based on management's best estimate of the cash flows expected to be collected at the individual security level. We regularly monitor our investment portfolio to ensure securities that may be OTTI are identified in a timely manner and that any impairment charge is recognized in the proper period and, with respect to debt securities, that the impairment is properly allocated between credit losses recognized in earnings and noncredit unrealized losses recognized in OCI. Further deterioration in credit quality, imbalances in liquidity in the financial marketplace or a quick rise in 39 -------------------------------------------------------------------------------- interest rates might adversely affect the fair value of the Company's investment portfolio and may increase the potential that certain unrealized losses will be designated as OTT in future periods, resulting in write-downs and related charges to earnings.Federal Home Loan Bank of Boston Stock . Union is a member of the FHLB, with an investment of$2.7 million and$1.1 million in its Class B common stock atDecember 31, 2022 and 2021, respectively. Union 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. Although the FHLB was in compliance with all regulatory capital ratios as ofDecember 31, 2022 and 2021, 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 OTTI, the Company has evaluated 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 atDecember 31, 2022 .
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
2022 2021
Percent Percent
Average of Total Average Average of Total Average
Balance Deposits Rate Paid Balance Deposits Rate Paid
(Dollars in thousands)
Nontime deposits:
Noninterest bearing deposits $ 311,444 26.9 - $ 238,572 23.2 -
Interest bearing checking accounts 292,850 25.3 0.31 % 255,031 24.8 0.23 %
Money market accounts 246,867 21.3 0.62 % 248,864 24.2 0.62 %
Savings accounts 187,625 16.2 0.04 % 167,381 16.3 0.06 %
Total nontime deposits 1,038,786 89.7 0.24 % 909,848 88.5 0.25 %
Total time deposits 119,081 10.3 0.85 % 118,145 11.5 0.78 %
Total deposits $ 1,157,867 100.0 0.30 % $ 1,027,993 100.0 0.31 %
Deposits grew $106.8 million , or 9.8%, from $1.1 billion at December 31, 2021 to
$1.2 billion at December 31, 2022 . Total average deposits grew $129.9 million ,
or 12.6%, between years, with average nontime deposits growing $128.9 million ,
or 14.2%, and average time deposits increasing $936 thousand , or 0.8%, during
the same time frame. The increase in average balances for nontime deposits was
attributable to the overall growth in franchise. The average balances of time
deposits increased due to retail brokered deposits issued during 2022 under a
master certificate of deposit program with a broker, along with customers taking
advantage of time deposit rate promotions offered at the end of 2022.
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, 2022 or December 31, 2021 . There
were $12.3 million of time deposits of $250,000 or less on the balance sheets at
December 31, 2022 and $13.6 million at December 31, 2021 , 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 $209.3 million and $155.3 million in exchanged ICS
demand and money market deposits on the balance sheets at December 31, 2022 and
December 31, 2021 , respectively. There were no purchased ICS deposits at
December 31, 2022 or December 31, 2021 .
At December 31, 2022 , there were $33.0 million of retail brokered deposits at a
rate of 3.45% issued under a master certificate of deposit program with a
deposit broker for the purpose of providing a supplemental source of funding and
liquidity. These deposits matured in January 2023 and were replaced with $33.0
million of retail brokered deposits at a rate of 4.7% for a 12 month term. There
were no retail brokered deposits at December 31, 2021 .
40
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A provision of the Dodd-Frank Act permanently raised FDIC deposit insurance
coverage to $250 thousand per depositor per insured depository institution for
each account ownership category. 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, 2022 , the Company
had estimated uninsured deposit accounts totaling $342.8 million , or 28.5% of
total deposits. Uninsured deposits include $30.4 million of municipal deposits
and were collateralized under applicable state regulations by investment
securities or letters of credit issued by the FHLB at December 31, 2022 , 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 :
2022 2021
(Dollars in thousands)
Three months or less $ 1,011 $ 4,249
Over three months through six months 4,001 5,576
Over six months through twelve months 11,462 4,536
Over twelve months 9,883 1,862
$ 26,357 $ 16,223 Uninsured time deposits with balances greater than
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 were comprised of FHLB advances of$50.0 million with a weighted average rate of 4.41% atDecember 31, 2022 . The Company had no borrowed funds atDecember 31, 2021 . Average borrowings outstanding for 2022 were$11.1 million , compared to average borrowings outstanding for 2021 of$7.1 million , with the weighted average interest rate on the Company's borrowings increasing from 3.05% for 2021 to 3.86% for 2022. A$7.0 million FHLB advance was prepaid during the fourth quarter of 2021 utilizing excess liquidity, resulting in penalties paid of$226 thousand which are included in Other expenses on the Company's consolidated statement of income for the year endedDecember 31, 2021 . The Company had no overnight federal funds purchased onDecember 31, 2022 or 2021. 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$42.5 million and$37.5 million were utilized as collateral for these deposits atDecember 31, 2022 andDecember 31, 2021 , respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were$34 thousand and$45 thousand for the years endedDecember 31, 2022 and 2021, respectively. InAugust 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, untilSeptember 1, 2026 . From and includingSeptember 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$295 thousand and$329 thousand atDecember 31, 2022 and 2021, 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 41 --------------------------------------------------------------------------------
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
Contract or Notional Amount
2023 2024 2025 2026 2027 Thereafter Total
(Dollars in thousands)
Commitments to originate loans $ 39,217 $ - $ - $ - $ - $ - $ 39,217
Unused lines of credit 130,872 36,222 11,206 185 375 6,679 185,539
Standby and commercial letters of
credit 487 240 39 - - 996 1,762
Credit card arrangements 241 - - - - - 241
MPF credit enhancement obligation, net 396 - - - - - 396
Commitment to purchase investment in
a real estate limited partnership 3,000 - - - - - 3,000 Total$ 174,213 $ 36,462 $ 11,245 $ 185 $ 375 $ 7,675 $ 230,155 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$13.4 million of lines available under the overdraft privilege program and is included in the 2023 funding period. Approximately$48.7 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. Unused lines of credit increased$17.1 million , or 10.2%, from$168.4 million atDecember 31, 2021 to$185.5 million atDecember 31, 2022 . Some of the larger lines have underlying participation agreements in place with other financial institutions in order to permit the Company to support the credit needs of larger dollar borrowers without bearing all the credit risk in the Company's balance sheet. Commitments to originate loans decreased$9.7 million , or 19.8%, from$48.9 million atDecember 31, 2021 to$39.2 million atDecember 31, 2022 .
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
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 ofDecember 31, 2022 , the Company had sold loans through the MPF program totaling$33.9 million with an outstanding balance of$9.1 million . The volume of loans sold to the MPF program and the corresponding Credit Enhancement Obligation are closely monitored by management. As ofDecember 31, 2022 , the notional amount of the maximum contingent contractual liability related to this program was$415 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. 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, 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 our 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 42 --------------------------------------------------------------------------------
rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.
AtDecember 31, 2022 , Union, as a member of FHLB, had access to unused lines of credit of$76.9 million , over and above the$93.5 million in combined outstanding borrowings and other credit subject to collateralization, subject 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 atDecember 31, 2022 . 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, one-way buy options with CDARS and ICS as well as access to the FRB discount window, which would require pledging of qualifying investment securities or loans. In addition to the funding sources available to Union, the Company maintains a$5.0 million revolving line of credit with a correspondent bank. AtDecember 31, 2022 there were no purchased CDARS or ICS deposits,$33.0 million in retail brokered deposits issued under a master certificate of deposit program with a broker, and no outstanding advances at the FRB discount window or on the Union or Company correspondent lines. 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. We also have additional contingent liquidity sources with 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 and Union continue to satisfy all capital adequacy requirements to which they are subject and Union is considered well capitalized under theFDIC's Prompt Corrective Action framework. The Company continues to evaluate growth opportunities both through internal growth, including potential new locations. The dividend payouts and stock repurchases during the last few years reflect the Board's desire to utilize our capital for the benefit of the stockholders. InAugust 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 decreased from$84.3 million atDecember 31, 2021 to$55.2 million atDecember 31, 2022 , reflecting an increase of$35.9 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS securities, cash dividends declared of$6.3 million , and stock repurchases of$79 thousand during 2022. These decreases were partially offset by net income of$12.6 million for 2022, an increase of$446 thousand from stock based compensation, and a$60 thousand increase due to the issuance of common stock under the DRIP. The Company has 7,500,000 shares of$2.00 par value common stock authorized. As ofDecember 31, 2022 , the Company had 4,982,523 shares issued, of which 4,508,587 were outstanding and 473,936 were held in treasury. As ofDecember 31, 2022 , there were outstanding unvested RSUs under the Company's 2014 Equity Plan with respect to 1,745 shares under RSU grants in 2021 and 7,822 shares under RSU grants in 2022. InJanuary 2022 , the Company's Board reauthorized for 2022 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 repurchased 2,650 shares under this program during 2022 at a total cost of$79 thousand . Since inception, as ofDecember 31, 2022 , the Company had repurchased 20,440 shares under the program, for a total cost of$553 thousand . InJanuary 2023 , the Board reauthorized the limited stock repurchase plan for 2023 on similar terms. 43
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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 ofDecember 31, 2022 , 7,583 shares of stock had been issued from treasury stock since inception of the DRIP, including 2,153 shares in 2022. The Company's total capital to risk weighted assets decreased to 14.0% atDecember 31, 2022 , from 15.4% atDecember 31, 2021 . Tier I capital to risk weighted assets decreased to 11.0% atDecember 31, 2022 , from 11.9% atDecember 31, 2021 , and Tier I capital to average assets decreased to 6.7% atDecember 31, 2022 from 7.1% atDecember 31, 2021 . AtDecember 31, 2022 and 2021, 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 betweenDecember 31, 2022 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. TheFederal Reserve moved boldly in 2022 with interest rate increases to try to reduce inflation. The federal funds target range increased seven times during 2022 from a range of 0% to 0.25% to a range of 4.25% to 4.50% and increased another 50 bps during the first quarter of 2023 to a range of 4.75% to 5.0%. With inflation well above 2%, theFOMC will likely continue to increase the federal funds target range in 2023. The Company's balance sheet depicts an asset sensitive posture as net interest income is expected to benefit as interest rates rise and worsen as interest rates decline. The degree of benefit will depend on the pace and extent of interest rate increases, the slope of the yield curve, and the Company's overall deposit pricing strategy. Customer deposit balances increased during 2022 and are expected to increase in 2023 due to deposit growth initiatives, including continued expansion in the Company's newest markets and the ability to open new accounts online within the states ofVermont andNew Hampshire . The cost of funds, which is primarily tied to rates paid on customer deposits, increased 8 bps during 2022. Management is projecting continued increases in the cost of funds for 2023 as interest rates on wholesale funds are expected to increase with furtherFOMC increases in rates and rising rates exert continued upward pressure on rates paid on customer deposit accounts in order to defend the existing deposit base and attract new customers. Market rates are out of the Company's control but can have a dramatic impact on net interest income. Interest rates do not necessarily move in the same direction or change in the same magnitude as the prices of goods and services. Inflation in the price of goods and services, while not having a substantial impact on the operating results of the Company, does affect all customers and therefore may impact their ability to keep funds on deposit or make timely loan payments. The Company is aware of and evaluates this 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.
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