# UNION BANKSHARES INC (UNB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UNION BANKSHARES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/706863/000070686322000020/unb-20211231.htm
Accession: 0000706863-22-000020
Filing date: 2022-03-24
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/UNB/
All MD&A years: /company/UNB/mda/
Next year: /company/UNB/mda/fy2022/ (FY 2022)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The following discussion and analysis by management focuses on those factors that, in management's view, had a material effect on the consolidated financial position of Union Bankshares, Inc. ("the Company," "our," "we," "us") and its subsidiary, Union Bank ("Union"), as of December 31, 2021 and 2020, and its consolidated results of operations for the years then ended. The Company is considered a "smaller reporting company" under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows, and changes in stockholders' equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems appropriate.

This discussion is being presented to provide a narrative explanation of the consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data contained in Item 8, Part II of this Annual Report. The purpose of this presentation is to enhance overall financial disclosures and to provide information about historical financial performance and developing trends as a means to assess to what extent past performance can be used to evaluate the prospects for future performance. Management is not aware of the occurrence of any events after December 31, 2021 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 53 of this Annual Report.

NON-GAAP FINANCIAL MEASURES

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure.

The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition

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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 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.

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.

Other

The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions, that are significant to understanding the Company's financial condition and results of operations, including investment securities. The

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most significant accounting policies followed by the Company are presented in Note 1 to 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

The Company's consolidated net income was $13.2 million, with basic earnings per share of $2.94 per share, for 2021 compared to $12.8 million, and basic earnings per share of $2.86 per share for 2020. The increase in net income reflects the combined effect of an increase in net interest income of $4.1 million or 13.0%, no provision for loan losses for 2021 compared to a provision of $2.2 million for 2020, partially offset by a decrease in noninterest income of $3.0 million, or 19.0%, and increases in noninterest expenses of $2.7 million, or 8.9%, and the provision for income taxes of $227 thousand, or 9.4%.

Sales of qualifying residential loans to the secondary market for the year ended December 31, 2021 were $216.8 million resulting in gain on sales of $5.0 million, compared to sales of $263.1 million and gain on sales of $8.2 million for the year ended December 31, 2020.

As of December 31, 2021, the Company had total consolidated assets of $1.2 billion, an increase of 10.2% compared to December 31, 2020. Total investments increased $162.1 million, or 151.8%, to $269.0 million, or 22.3% of total assets at December 31, 2021 compared to $106.8 million, or 9.8% of total assets, as of December 31, 2020. Net loans and loans held for sale decreased $1.7 million or 0.2%, to $793.2 million, or 65.8% of total assets, at December 31, 2021, compared to $794.9 million, or 72.7% of total assets, at December 31, 2020. The changes in percentages to total assets for investments and loans for the annual comparison periods was driven by the continued influx of customer deposits and investing those funds to maximize yield as opposed to leaving the monies in Federal Funds sold. This strategy also impacted the level of federal funds sold for the comparison periods which were $61.3 million at December 31, 2021 compared to $117.4 million at December 31, 2020.

Customer deposits, increased $100.8 million, or 10.1%, to reach $1.1 billion at December 31, 2021. The increase was attributable to proceeds from PPP loans deposited into customer accounts at Union and customers' receipt of government stimulus payments. The increase in customer deposit balances also reduced the need for reliance on wholesale funding. There were no borrowed funds at December 31, 2021 compared to $7.2 million at December 31, 2020.

Additionally, in August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate ("SOFR") plus 263 basis points. The Company may, at its option, beginning with the interest payment date of September 1, 2026 but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part. The Company used the proceeds to provide additional capital to Union to support its growth and for other general corporate purposes.

The Company's total capital increased from $80.9 million at December 31, 2020 to $84.3 million at December 31, 2021. This increase reflects net income of $13.2 million for 2021, partially offset by $5.9 million in regular cash dividends paid and $4.2 million in accumulated other comprehensive income. (See Capital Resources on pages 43 to 44.)

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The following per share information and key ratios presented in the table below depict several measurements of performance or financial condition at or for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","2021","2020"],["Return on average assets","1.16","%","1.33","%"],["Return on average equity","15.92","%","16.87","%"],["Net interest margin (1)","3.38","%","3.57","%"],["Efficiency ratio (2)","73.13","%","62.75","%"],["Net interest spread (3)","3.27","%","3.40","%"],["Loan to deposit ratio","73.13","%","80.80","%"],["Net (recoveries) charge-offs to total average loans","(0.01)","%","0.01","%"],["Allowance for loan losses to loans not held for sale","1.06","%","1.07","%"],["Nonperforming assets to total assets (4)","0.39","%","0.27","%"],["Equity to assets","7.00","%","7.39","%"],["Total capital to risk weighted assets","15.39","%","13.87","%"],["Book value per share","$","18.77","","$","18.05"],["Basic earnings per share","$","2.94","","$","2.86"],["Diluted earnings per share","$","2.92","","$","2.85"],["Dividends paid per share","$","1.32","","$","1.28"],["Dividend payout ratio (5)","44.90","%","44.76","%"]]
[[/GREPCENT_TABLE]]

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(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.

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RESULTS OF OPERATIONS

For the year ended December 31, 2021, net income was $13.2 million compared to $12.8 million for the year ended December 31, 2020. The primary components of these results, which include net interest income, provision for loan losses, 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 $35.7 million on a fully tax equivalent basis for 2021, compared to $31.6 million for 2020, an increase of $4.1 million, or 13.0%. The net interest spread decreased 13 bps to 3.27% for the year ended December 31, 2021, from 3.40% for the year ended December 31, 2020, reflecting the net effect of the 30 bps decrease in the average rate paid on interest bearing liabilities and the 43 bps decrease in the average yield earned on interest earning assets between periods. The net interest margin decreased 19 bps to 3.38% for the year ended December 31, 2021 compared to 3.57% for the year ended December 31, 2020.

The average yield on average earning assets was 3.71% for the year ended December 31, 2021 compared to 4.14% for the year ended December 31, 2020, a decrease of 43 bps despite an increase in average earning assets of $171.6 million. The prolonged low interest rate environment continues to put downward pressure on asset yields. Interest income on investment securities increased $791 thousand year over year due to an increase in average balances of $78.1 million between the comparison periods partially offset by a decrease of 65 bps in the average yield. The average balance of PPP loans was $49.9 million for the year ended December 31, 2021 with an average yield of 6.67% which takes into account the 1.0% interest charged on PPP loans and related fee income recognized during 2021. Interest income on loans, excluding PPP loans, decreased $69 thousand between comparison periods due to a decrease in the average yield of 34 bps, despite an increase in the average volume of loans outstanding of $52.3 million. The current interest rate environment and competition for quality loans continue to put downward pressure on loan yields.

The average cost of funding, which is tied primarily to our customer deposits, decreased 30 bps to 0.44% for the year ended December 31, 2021, compared to 0.74% for the year ended December 31, 2020. Interest expense decreased $1.6 million to $3.6 million for the year ended December 31, 2021 compared to $5.1 million for the year ended December 31, 2020. The decrease in interest expense was primarily due to lower rates paid on interest bearing liabilities, partially offset by an increase in average balances of $106.1 million between periods. Higher customer deposit balances reduced reliance on wholesale funding, as evidenced by decreases of $16.9 million, or 70.5%, in the average balance of borrowed funds and $152 thousand in interest expense between the comparison periods. The issuance of subordinated debt in August of 2021 resulted in an average balance of $6.2 million for the year ended December 31, 2021 and an average rate of 3.19% and interest expense of $199 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:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","2020"],["","Average Balance (1)","Interest Earned/ Paid","Average Yield/ Rate","Average Balance (1)","Interest Earned/ Paid","Average Yield/ Rate"],["","(Dollars in thousands)"],["Average Assets:"],["Federal funds sold and overnight deposits","$","81,660","","$","100","","0.12","%","$","47,020","","$","92","","0.19","%"],["Interest bearing deposits in banks","13,299","","139","","1.05","%","8,919","","162","","1.81","%"],["Investment securities (2), (3)","165,424","","2,755","","1.74","%","87,352","","1,964","","2.39","%"],["PPP loans, net (4)","49,929","","3,330","","6.67","%","47,069","","1,435","","3.05","%"],["Loans (excluding PPP loans), net (2), (5)","758,965","","32,931","","4.38","%","706,710","","33,000","","4.72","%"],["Nonmarketable equity securities","1,158","","18","","1.54","%","1,795","","97","","5.40","%"],["Total interest earning assets (2)","1,070,435","","39,273","","3.71","%","898,865","","36,750","","4.14","%"],["Cash and due from banks","4,858","","","","5,265"],["Premises and equipment","21,302","","","","20,501"],["Other assets","37,332","","","","35,910"],["Total assets","$","1,133,927","","","","$","960,541"],["Average Liabilities and Stockholders' Equity:"],["Interest bearing checking accounts","$","255,031","","$","586","","0.23","%","$","197,698","","$","705","","0.36","%"],["Savings/money market accounts","416,245","","1,644","","0.39","%","330,085","","2,191","","0.66","%"],["Time deposits","118,145","","917","","0.78","%","144,856","","1,880","","1.30","%"],["Borrowed funds and other liabilities","7,080","","219","","3.05","%","24,015","","371","","1.52","%"],["Subordinated notes","6,244","","199","","3.19","%","\u2014","","\u2014","","\u2014","%"],["Total interest bearing liabilities","802,745","","3,565","","0.44","%","696,654","","5,147","","0.74","%"],["Noninterest bearing deposits","238,572","","","","177,792"],["Other liabilities","9,891","","","","10,188"],["Total liabilities","1,051,208","","","","884,634"],["Stockholders' equity","82,719","","","","75,907"],["Total liabilities and stockholders\u2019 equity","$","1,133,927","","","","$","960,541"],["Net interest income","","$","35,708","","","","$","31,603"],["Net interest spread (2)","","","3.27","%","","","3.40","%"],["Net interest margin (2)","","","3.38","%","","","3.57","%"]]
[[/GREPCENT_TABLE]]

____________________

(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 $2.1 million and $2.6 million for the years ended December 31, 2021 and 2020, 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, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","2020"],["","(Dollars in thousands)"],["Net interest income as presented","$","35,708","","$","31,603"],["Effect of tax-exempt interest"],["Investment securities","125","","121"],["Loans","299","","381"],["Net interest income, tax equivalent","$","36,132","","$","32,105"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Increase/(Decrease) Due to Change In","Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Increase/(Decrease) Due to Change In"],["","Volume","Rate","Net","Volume","Rate","Net"],["","(Dollars in thousands)"],["Interest earning assets:"],["Federal funds sold and overnight deposits","$","51","","$","(43)","","$","8","","$","163","","$","(261)","","$","(98)"],["Interest bearing deposits in banks","60","","(83)","","(23)","","25","","(58)","","(33)"],["Investment securities","1,491","","(700)","","791","","165","","(334)","","(169)"],["PPP loans, net","92","","1,803","","1,895","","1,435","","\u2014","","1,435"],["Loans (excluding PPP loans). net","2,418","","(2,487)","","(69)","","2,461","","(2,670)","","(209)"],["Nonmarketable equity securities","(26)","","(53)","","(79)","","(36)","","(10)","","(46)"],["Total interest earning assets","$","4,086","","$","(1,563)","","$","2,523","","$","4,213","","$","(3,333)","","$","880"],["Interest bearing liabilities:"],["Interest bearing checking accounts","$","172","","$","(291)","","$","(119)","","$","119","","$","99","","$","218"],["Savings/money market accounts","482","","(1,029)","","(547)","","465","","(211)","","254"],["Time deposits","(303)","","(660)","","(963)","","(17)","","(404)","","(421)"],["Borrowed funds","(365)","","213","","(152)","","(281)","","(223)","","(504)"],["Subordinated notes","199","","\u2014","","199","","\u2014","","\u2014","","\u2014"],["Total interest bearing liabilities","$","185","","$","(1,767)","","$","(1,582)","","$","286","","$","(739)","","$","(453)"],["Net change in net interest income","$","3,901","","$","204","","$","4,105","","$","3,927","","$","(2,594)","","$","1,333"]]
[[/GREPCENT_TABLE]]

Provision for Loan Losses. There was no provision for loan losses recorded for the year ended December 31, 2021 and $2.2 million recorded for year ended December 31, 2020. The higher provision in 2020 resulted from management's adjustment to the economic qualitative factors utilized to estimate the allowance for loan losses due to the economic disruption related to the COVID-19 pandemic impacting Union's borrowers. No provision for 2021 was deemed appropriate 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

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prevailing economic conditions. For further details, see FINANCIAL CONDITION Asset Quality and Allowance for Loan Losses below.

Noninterest Income. The following table sets forth the components of noninterest income for the years ended December 31, 2021 and 2020 :

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2021","2020","$ Variance","% Variance"],["","(Dollars in thousands)"],["Trust income","$","808","","$","707","","$","101","","14.3"],["Service fees","6,516","","5,924","","592","","10.0"],["Net gains on sales of loans held for sale","4,956","","8,168","","(3,212)","","(39.3)"],["Net gains on sales of investment securities AFS","\u2014","","11","","(11)","","(100.0)"],["Net (loss) gain on other investments","(21)","","240","","(261)","","(108.8)"],["Income from MSRs, net","243","","542","","(299)","","(55.2)"],["Income from Company-owned life insurance","309","","318","","(9)","","(2.8)"],["Other income","152","","93","","59","","63.4"],["Total noninterest income","$","12,963","","$","16,003","","$","(3,040)","","(19.0)"]]
[[/GREPCENT_TABLE]]

The significant changes in noninterest income for the year ended December 31, 2021 compared to the year ended December 31, 2020 are described below:

•Trust income. Trust income increased as dollars in managed fiduciary accounts grew between December 31, 2020 and 2021, aided by the improvement in the stock market during 2021.

•Service fees. Service fee income increased $592 thousand for the year ended December 31, 2021 compared to the same period in 2020 primarily due to increases of $395 thousand in ATM network income, $117 thousand in merchant program fee income, $60 thousand loan servicing fee income, and $18 thousand in wire transfer income.

•Net gains on sales of loans held for sale. The Company mitigates long-term interest rate risk by selling qualifying residential loans to the secondary market. Management reduced the volume of loans sold in 2021 compared to 2020 in order to utilize some of Union's excess liquidity. Residential loans totaling $216.8 million were sold to the secondary market during 2021, compared to residential and commercial loan sales of $263.2 million during 2020. The decrease of $3.2 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) gain 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 $21 thousand for the year ended December 31, 2021 compared to net gains of $240 thousand for the year ended December 31, 2020.

•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 decrease in the volume of sales of residential loans as discussed above resulted in a decrease in income of $299 thousand for 2021 compared to 2020.

•Other income. The increase in Other income is attributable to $38 thousand in prepayment penalties received from the early payoff of loans during 2021, in addition to an increase of $20 thousand in gains on the utilization of tax credits for 2021 compared to 2020.

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Noninterest Expenses. The following table sets forth the components of noninterest expenses for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2021","2020","$ Variance","% Variance"],["","(Dollars in thousands)"],["Salaries and wages","$","14,448","","$","13,220","","$","1,228","","9.3"],["Employee benefits","4,593","","4,580","","13","","0.3"],["Occupancy expense, net","1,890","","1,805","","85","","4.7"],["Equipment expense","3,447","","3,057","","390","","12.8"],["Vermont franchise tax","968","","759","","209","","27.5"],["Professional fees","922","","774","","148","","19.1"],["ATM and debit card expense","898","","800","","98","","12.3"],["FDIC insurance assessment","644","","443","","201","","45.4"],["Other loan related expenses","421","","346","","75","","21.7"],["Electronic banking expenses","381","","336","","45","","13.4"],["Trust expenses","353","","307","","46","","15.0"],["Prepayment penalties on borrowings","226","","66","","160","","242.4"],["Donations","208","","272","","(64)","","(23.5)"],["Other losses","86","","47","","39","","83.0"],["Amortization of core deposit intangible","71","","171","","(100)","","(58.5)"],["Other expenses","3,299","","3,199","","100","","3.1"],["Total noninterest expenses","$","32,855","","$","30,182","","$","2,673","","8.9"]]
[[/GREPCENT_TABLE]]

The significant changes in noninterest expense for the year ended December 31, 2021 compared to the year ended December 31, 2020 are described below:

•Salaries and wages. The $1.2 million increase in salaries and wages was primarily due to the deferral of loan origination costs in 2020, in addition to annual increases in employee's salaries and wages in 2021 and an increase in the accrual amounts for the annual incentive plan payments to select officers of Union. Salaries and wages are reduced by deferred loan origination costs at the time of origination. Deferred loan origination costs reduced salaries and wages by $43 thousand for the years ended December 31, 2021, compared to $430 thousand for the same period in 2020. The lower deferred loan origination costs for 2021 compared to 2020 is primarily attributable to the forgiveness of PPP loans during 2021. Additionally, $39 thousand was expensed for a one-time incentive that was paid to employees who have received the COVID-19 vaccination.

•Employee benefits. Employee benefit expense increased $13 thousand due to increases of $260 thousand in the cost of group health insurance and $43 thousand in 401k plan contributions, partially offset by a decrease of $281 thousand in employee benefits related to the Company's deferred compensation plans, and a decrease of $9 thousand in payroll taxes.

•Occupancy expense, net. The increase in occupancy expense, net, primarily relates to a $108 thousand loss recognized due to the disposition of a branch location in 2021. There was a loss on the disposal of leasehold improvements of $34 thousand recorded related to a branch closure in May of 2020. The branch closures and dispositions were not the result of the COVID-19 pandemic. Additionally, property tax expense increased $68 thousand primarily due to the opening of a new full service branch location during the fourth quarter of 2021. These increases were partially offset by decreases of $35 thousand in lease expense and $29 thousand in repairs and maintenance.

•Equipment expense. Equipment expense increased by $390 thousand primarily due to increases in software license and maintenance costs for 2021 compared to 2020.

•Vermont franchise taxes. The Vermont franchise tax is determined based on a quarterly tax rate applied to the Company's average balance of Vermont customer deposit balances. The tax rate remained unchanged throughout 2021 and 2020; however, the average balances in Vermont deposit account balances increased for the year ended December 31, 2021, resulting in an increase in expense.

•Professional fees. During 2021, additional consultants were engaged to assist with employment searches and other advisory services that were not utilized in 2020, resulting in a $148 thousand increase between periods.

32

•ATM and debit card expense. The $98 thousand increase in expense between periods is due to changes in services with ATM and debit card service providers and an increase in the volume of activity.

•FDIC insurance assessment. The deposit insurance assessment base and assessment rate both increased in 2021 compared to 2020, resulting in an increase in expense.

•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 increased in 2021 compared to 2020 primarily due to the increase in loan volumes throughout the Company's market areas.

•Electronic banking expenses. Electronic banking expenses increased $45 thousand in 2021 compared to 2020 due to additional online banking services and an increase in the volume of activity.

•Trust expenses. The increase in trust expenses primarily relates to additional costs for professional assistance and data processing resulting from the growth in assets in managed accounts.

•Prepayment penalties on borrowings. During 2021, the Company paid prepayment penalties on the early payoff of FHLB advances of $226 thousand compared to $66 thousand of prepayment penalties paid in 2020.

•Donations. Charitable donations are made as part of the Company's commitment to continually help to enhance the economic vitality and social welfare of our communities. Donations for 2021 decreased $64 thousand compared to 2020.

•Other losses. The increase in expense is primarily due to business debit card fraud during the third quarter of 2021.

•Amortization of core deposit intangible. The core deposit intangible was fully amortized in 2021 resulting in a decrease in amortization expense from 2020 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 2021 and $2.4 million for 2020. The Company’s effective federal corporate income tax rate was 16.1% and 15.5% for 2021 and 2020, respectively.

Amortization expense related to limited partnership investments included as a component of tax expense amounted to $1.0 million and $935 thousand for the years ended December 31, 2021 and 2020, 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 and $987 thousand for the years ended December 31, 2021 and 2020, respectively. See Note 11 to the Company's consolidated financial statements.

FINANCIAL CONDITION

At December 31, 2021, the Company had total consolidated assets of $1.2 billion, including gross loans and loans held for sale (total loans) of $800.9 million, deposits of $1.1 billion and stockholders' equity of $84.3 million. The Company’s total assets increased $111.8 million, or 10.2%, from $1.1 billion at December 31, 2020.

Net loans and loans held for sale decreased $1.7 million, or 0.2%, to $793.2 million, or 65.8% of total assets, at December 31, 2021, compared to $794.9 million, or 72.7% of total assets, at December 31, 2020. (See Loan Portfolio below.)

Total deposits increased $100.8 million, or 10.1% to $1.1 billion at December 31, 2021, from $994.3 million at December 31, 2020. There were increases in interest bearing deposits of $86.1 million, or 13.5%, and noninterest bearing deposits of $49.6 million, or 23.1%, which were partially offset by a decrease in time deposits of $35.0 million, or 24.7%.

There were no borrowed funds at December 31, 2021. Borrowed funds, which consisted of FHLB advances, were $7.2 million at December 31, 2020. (See Borrowings on page 41.)

In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes are presented net of unamortized issuance costs of $329 thousand at December 31, 2021 in the consolidated balance sheets.

Total stockholders’ equity increased $3.5 million, or 4.3%, from $80.9 million at December 31, 2020 to $84.3 million at December 31, 2021. (See Capital Resources on pages 43 to 44.)

Loan Portfolio. The Company's gross loan portfolio (including loans held for sale) decreased $2.5 million, or 0.3%, to $800.9 million, representing 66.4% of assets at December 31, 2021, from $803.4 million, representing 73.5% of assets at December 31, 2020. 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 $670.6 million, or 83.7% of total loans, at December 31, 2021 compared to $593.4 million, or 73.9% of total loans, at December 31, 2020. The Company had 154 PPP loans totaling $13.6 million classified as commercial loans at December 31, 2021 compared to 679 PPP loans totaling $66.2

33

million at December 31, 2020. Changes in the composition of the Company's loan portfolio from December 31, 2020 (see table below) resulted primarily from the decrease in the commercial portfolio related to PPP loan forgiveness and a decrease in the municipal portfolio, partially offset by an increase in the volume of residential loans originated. There was no material change in the Company's lending programs or terms during 2021.

The composition of the Company's loan portfolio was as follows at December 31:

[[GREPCENT_TABLE]]
[["","2021","2020"],["","$","%","$","%"],["","(Dollars in thousands)"],["Residential real estate","$","246,827","","30.8","","$","183,166","","22.8"],["Construction real estate","65,149","","8.1","","57,417","","7.1"],["Commercial real estate","344,816","","43.1","","320,627","","39.9"],["Commercial","49,788","","6.2","","108,861","","13.6"],["Consumer","2,376","","0.3","","2,601","","0.3"],["Municipal","78,094","","9.8","","98,497","","12.3"],["Loans held for sale","13,829","","1.7","","32,188","","4.0"],["Total loans","$","800,879","","100.0","","$","803,357","","100.0"]]
[[/GREPCENT_TABLE]]

The Company originates and sells qualified residential mortgage loans in various secondary market avenues, with a majority of sales made to the FHLMC/Freddie Mac, generally with servicing rights retained. At December 31, 2021, the Company serviced an $898.8 million residential real estate mortgage portfolio, of which $13.8 million was held for sale and approximately $638.1 million was serviced for unaffiliated third parties. This compares to a residential real estate mortgage servicing portfolio of $819.6 million at December 31, 2020, of which $32.2 million was held for sale and approximately $604.2 million was serviced for unaffiliated third parties. Loans held for sale are accounted for at the lower of cost or fair value and are reviewed by management at least quarterly based on current market pricing.

The Company sold $216.8 million of qualified residential real estate loans originated during 2021 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of $263.1 million during 2020. Residential mortgage loan origination activity continued to be strong during 2021, consisting of both refinancing and purchase activity. Customers continued to refinance existing mortgages in order to obtain lower rates and purchase activity continued to be strong despite low housing inventory. The Company originates and sells FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire locations without needing prior HUD underwriting approval. The Company sells FHA, VA and RD loans as originated with servicing released.Some of the government backed loans qualify for zero down payments without geographic or income restrictions. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities served, including low and moderate income borrowers, while the 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 $17.2 million and $70.2 million guaranteed under these various programs at December 31, 2021 and 2020, respectively, on aggregate balances of $18.5 million and $71.5 million in subject loans for the same time periods. These amounts include the $13.6 million and $66.2 million of PPP loans that were guaranteed 100% by SBA at December 31, 2021 and 2020, 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 loans sold during 2021 and $131 thousand in commercial real estate or commercial loans sold during 2020. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur.

The Company serviced $21.2 million and $25.2 million of commercial and commercial real estate loans for unaffiliated third parties as of December 31, 2021 and 2020, respectively. This includes $19.6 million and $23.7 million of commercial or commercial real estate loans the Company had participated out to other financial institutions at December 31, 2021 and 2020, respectively. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.

34

As of December 31, 2021, total loans serviced had grown to $1.5 billion, which includes total loans on the balance sheet of $800.9 million as well as total loans sold with servicing retained of $659.3 million, compared to total loans serviced of $1.4 billion as of December 31, 2020.

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 $2.5 million and $2.3 million as of December 31, 2021 and 2020, 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.

Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $224.4 million and $210.0 million were pledged as collateral for borrowings from the FHLB under a blanket lien at December 31, 2021 and 2020, respectively.

The following table breaks down by classification the contractual maturities of the gross loans held in portfolio and for sale as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Within 1 Year","2-5 Years","6-15 Years","Over 15 Years","Total"],["","(Dollars in thousands)"],["Fixed rate"],["Residential real estate","$","204","","$","1,269","","$","44,765","","$","142,262","","$","188,500"],["Construction real estate","27,014","","3,960","","6,541","","2,768","","40,283"],["Commercial real estate","1,240","","5,005","","33,466","","\u2014","","39,711"],["Commercial","464","","21,469","","19,858","","\u2014","","41,791"],["Consumer","1,252","","1,020","","86","","\u2014","","2,358"],["Municipal","62,871","","9,172","","6,051","","\u2014","","78,094"],["Total fixed rate","93,045","","41,895","","110,767","","145,030","","390,737"],["Variable rate"],["Residential real estate","856","","831","","49,848","","20,621","","72,156"],["Construction real estate","3,337","","6,541","","8,877","","6,111","","24,866"],["Commercial real estate","5,783","","2,837","","228,047","","68,438","","305,105"],["Commercial","2,137","","1,391","","4,469","","\u2014","","7,997"],["Consumer","18","","\u2014","","\u2014","","","18"],["Total variable rate","12,131","","11,600","","291,241","","95,170","","410,142"],["","$","105,176","","$","53,495","","$","402,008","","$","240,200","","$","800,879"]]
[[/GREPCENT_TABLE]]

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

35

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 tourism related loans. The Company has implemented risk management strategies to mitigate exposure to this industry through utilizing government guaranty programs as well as participations with other financial institutions as discussed above. Additionally, the loan portfolio contains many loans to seasoned and well established businesses and/or well secured loans which further reduce the Company's risk. Management closely follows the local and national economies and their impact on the local businesses, especially on the tourism industry, as part of the Company's risk management program.

The region's economic environment is seeing signs of improvement as the states of Vermont and New Hampshire are fully opened 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 industry is also facing some staffing challenges as workforce participation is lagging. Demand for homes has surged with the general safety and desirability of the region, low interest rates and the increased ability of working remotely. The Company’s management is focused on the impact COVID-19 is having on its borrowers and closely monitors industry and geographic concentrations, specifically the continuing impact on the region's tourist and restaurant industries. The Vermont unemployment rate was reported at 2.5% for December 2021 compared to 3.1% for December 2020 and the New Hampshire unemployment rate was 2.6% for December 2021 compared to 4.0% for December 2020. These rates compare favorably with the nationwide unemployment rate of 3.9% and 6.7%, 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.

In March 2020, the CARES Act was passed and federal banking agencies issued guidance, confirmed by the FASB, providing that certain short-term modifications made to loans to borrowers affected by the COVID-19 pandemic and government shutdown orders would not be considered TDRs under specified circumstances (See Note 1). Through December 31, 2021, the Company had executed modifications under this guidance and the CARES Act on outstanding loan balances of $139.9 million, with total accrued interest of $849 thousand. Of the total modifications executed, outstanding loan balances of $369 thousand remained subject to modified terms and carried accrued interest of $9 thousand as of December 31, 2021.

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 managements as of December 31:

[[GREPCENT_TABLE]]
[["","2021","2020"],["","(Dollars in thousands)"],["Nonaccrual loans","$","4,650","","$","2,410"],["Loans past due 90 days or more and still accruing interest","98","","511"],["Total nonperforming loans","4,748","","2,921"],["OREO","\u2014","","50"],["Total nonperforming assets","$","4,748","","$","2,971"],["Guarantees of U.S. or state government agencies on the above nonperforming loans","$","113","","$","177"],["TDR loans","$","2,215","","$","2,864"],["Allowance for loan losses","$","8,336","","$","8,271"],["Net (recoveries) charge-offs","$","(65)","","$","51"],["Total loans outstanding","$","800,879","","$","803,357"],["Total average loans outstanding","$","808,894","","$","753,779"]]
[[/GREPCENT_TABLE]]

36

The following table shows trends of certain asset quality ratios monitored by Company's management at December 31:

[[GREPCENT_TABLE]]
[["","2021","2020"],["","(Dollars in thousands)"],["Allowance for loan losses to total loans outstanding","1.04","%","1.03","%"],["Allowance for loan losses to nonperforming loans","175.57","%","283.16","%"],["Allowance for loan losses to nonaccrual loans","179.27","%","343.20","%"],["Nonperforming loans to total loans","0.59","%","0.36","%"],["Nonperforming assets to total assets","0.39","%","0.27","%"],["Nonaccrual loans to total loans","0.58","%","0.30","%"],["Delinquent loans (30 days to nonaccruing) to total loans","0.82","%","0.83","%"],["Net (recoveries) charge-offs to total average loans","(0.01)","%","0.01","%"],["Residential real estate","(0.03)","%","\u2014","%"],["Net (recoveries) charge-offs","$","(66)","","$","(8)"],["Total average loans","$","243,212","","$","217,588"],["Construction real estate","\u2014","%","\u2014","%"],["Net (recoveries) charge-offs","$","\u2014","","$","\u2014"],["Total average loans","$","62,678","","$","43,628"],["Commercial real estate","\u2014","%","0.02","%"],["Net (recoveries) charge-offs","$","\u2014","","$","54"],["Total average loans","$","324,101","","$","309,066"],["Commercial","\u2014","%","\u2014","%"],["Net (recoveries) charge-offs","$","\u2014","","$","\u2014"],["Total average loans","$","88,626","","$","92,382"],["Consumer","0.04","%","0.16","%"],["Net (recoveries) charge-offs","$","1","","$","5"],["Total average loans","$","2,608","","$","3,075"],["Municipal","\u2014","%","\u2014","%"],["Net (recoveries) charge-offs","$","\u2014","","$","\u2014"],["Total average loans","$","87,669","","$","88,040"]]
[[/GREPCENT_TABLE]]

Nonperforming loans at December 31, 2021 increased $1.8 million, or 62.5%, and increased as a percentage of assets from 0.27% at December 31, 2020 to 0.39% at December 31, 2021, with the ALL as a percentage of nonperforming loans decreasing from 283.16% to 175.57%. 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 were no residential real estate loans in process of foreclosure at December 31, 2021. The state-mandated moratorium on foreclosures in Vermont related to the COVID-19 emergency was lifted effective July 15, 2021. The aggregate interest on nonaccrual loans not recognized was $504 thousand and $420 thousand for the years ended December 31, 2021 and 2020, respectively.

The Company had loans rated substandard that were on a performing status totaling $769 thousand at December 31, 2021 and $2.2 million at December 31, 2020. 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;

37

•collateral is inadequate; or

•other unfavorable factors are present.

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 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. There were no such declines during 2021 and 2020. The Company evaluates each OREO property at least quarterly for changes in the fair value. The Company had no properties classified as OREO at December 31, 2021 and one residential real estate property valued at $50 thousand classified as OREO at December 31, 2020.

Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, whether due to the effects of the COVID-19 pandemic or otherwise, 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. The economic qualitative reserve factor assigned to each loan portfolio in the ALL estimate was increased during 2020 due to the economic disruption at the onset of the COVID-19 pandemic. During 2020, the economic qualitative reserve factor was increased 25 bps for the residential real estate, construction real estate, commercial real estate, commercial and consumer loan portfolios and 10 bps for the municipal loan portfolio. During 2021, the economic qualitative reserve factor assigned to each loan portfolio in the ALL estimate was decreased due to continued indications of economic improvement and with the majority of borrowers that had executed loan modifications due to COVID-19 no longer subject to modified terms. 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 during 2021. 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

38

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 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 $2.2 million of TDR loans, were $6.8 million at December 31, 2021, with government guaranties of $423 thousand and a specific reserve amount allocated of $46 thousand. Impaired loans, including $2.9 million of TDR loans, were $4.6 million at December 31, 2020, with government guaranties of $514 thousand and a specific reserve amount allocated of $58 thousand. The specific reserve amount allocated to individually identified impaired loans decreased $12 thousand as a result of the December 31, 2021 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 at December 31:

[[GREPCENT_TABLE]]
[["","2021","2020"],["","$","%","$","%"],["","(Dollars in thousands)"],["Residential real estate","$","2,068","","31.4","","$","1,776","","23.8"],["Construction real estate","837","","8.3","","763","","7.4"],["Commercial real estate","4,122","","43.8","","4,199","","41.6"],["Commercial","275","","6.3","","458","","14.1"],["Consumer","11","","0.3","","15","","0.3"],["Municipal","86","","9.9","","214","","12.8"],["Unallocated","937","","\u2014","","846","","\u2014"],["Total","$","8,336","","100.0","","8,271","","100.0"]]
[[/GREPCENT_TABLE]]

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 at December 31, 2021 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 at December 31, 2021. 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. At December 31, 2021, the fair value of investment securities AFS was $267.8 million, or 22.2% of total assets, compared to $105.8 million, or 9.7% of total assets, at December 31, 2020. The Company used excess liquidity to increase the investment portfolio during 2021 to obtain higher yields than what would have been earned at the current Federal Funds rate. There were no investment securities classified as HTM or as trading at December 31, 2021 or 2020. 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 at December 31, 2021 reflects a net unrealized loss of $2.0 million, compared to a net unrealized gain of $3.3 million at December 31, 2020.

At December 31, 2021, 110 debt securities had unrealized losses of $4.3 million, with aggregate depreciation of 1.58% from the Company's amortized cost basis. Securities are evaluated at least quarterly for OTTI and at December 31, 2021, 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

39

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 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.

At December 31, 2021, the Company had no investments in a single company or entity (other than U.S. Government-sponsored enterprise securities) that had an aggregate book value in excess of 2% of stockholders' equity. As of December 31, 2021, all MBS the Company owned were issued by the Government National Mortgage Association, Fannie Mae or the FHLMC/Freddie Mac. Although the Fannie Mae and Freddie Mac debt securities are not explicitly guaranteed by the federal government, one of the stated purposes of the U.S. Treasury's September, 2008 conservatorship and capital support of the two institutions was to stabilize the market in their debt securities, and that purpose was again evident in legislation passed by Congress in late 2009 which effectively lifted any dollar ceiling on the implicit U.S. Treasury guaranty of Fannie Mae and Freddie Mac debt securities.

Federal Home Loan Bank of Boston Stock. Union is a member of the FHLB, with an investment of $1.1 million and $1.0 million in its Class B common stock at December 31, 2021 and 2020, 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 of December 31, 2021 and 2020, 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 at December 31, 2021.

Deposits. The following table shows information concerning the Company's average deposits by account type and the weighted average nominal rates at which interest was paid on such deposits for the years ended December 31:

[[GREPCENT_TABLE]]
[["","2021","2020"],["","Average Balance","Percent of Total Deposits","Average Rate Paid","Average Balance","Percent of Total Deposits","Average Rate Paid"],["","(Dollars in thousands)"],["Nontime deposits:"],["Noninterest bearing deposits","$","238,572","","23.2","","\u2014","","$","177,792","","20.9","","\u2014"],["Interest bearing checking accounts","255,031","","24.8","","0.23","%","197,698","","23.2","","0.36","%"],["Money market accounts","248,864","","24.2","","0.62","%","206,466","","24.3","","0.99","%"],["Savings accounts","167,381","","16.3","","0.06","%","123,619","","14.6","","0.12","%"],["Total nontime deposits","909,848","","88.5","","0.25","%","705,575","","83.0","","0.41","%"],["Time deposits:"],["Less than $100,000","57,187","","5.6","","0.69","%","73,880","","8.7","","1.10","%"],["$100,000 and over","60,958","","5.9","","0.86","%","70,976","","8.3","","1.50","%"],["Total time deposits","118,145","","11.5","","0.78","%","144,856","","17.0","","1.30","%"],["Total deposits","$","1,027,993","","100.0","","0.31","%","$","850,431","","100.0","","0.56","%"]]
[[/GREPCENT_TABLE]]

Deposits grew $100.8 million, or 10.1%, from $994.3 million at December 31, 2020 to $1.1 billion at December 31, 2021. Total average deposits grew $177.6 million, or 20.9%, between years, with average nontime deposits growing $204.3 million, or 29.0%, and average time deposits decreasing $26.7 million, or 18.4%, during the same time frame. The increase in average balances for nontime deposits was attributable to proceeds from PPP loans deposited into customer accounts at Union, customer's receipt of government stimulus payments, and the general reduction in spending by customers due to supply chain delays. The average balances of time deposits decreased due to the maturity of higher rate paying time deposit accounts that customers have primarily transferred into other deposit account types.

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

40

funding and liquidity through the purchase of deposits. There were no purchased CDARS deposits as of December 31, 2021 or December 31, 2020. There were $13.6 million of time deposits of $250,000 or less on the balance sheet at December 31, 2021 and $14.2 million at December 31, 2020, 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 $155.3 million and $146.2 million in exchanged ICS demand and money market deposits on the balance sheet at December 31, 2021 and December 31, 2020, respectively. There were no purchased ICS deposits at December 31, 2021 or December 31, 2020.

At December 31, 2020, there were $15.0 million in retail brokered deposits issued under a master certificate of deposit program with a deposit broker for the purpose of providing a supplemental source of funding and liquidity. There were no retail brokered deposits at December 31, 2021.

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, 2021, the Company had uninsured deposit accounts totaling $353.0 million, or 32.2% of total deposits. Uninsured deposits include $31.5 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, 2021, 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:

[[GREPCENT_TABLE]]
[["","","2021","2020"],["","","(Dollars in thousands)"],["","Three months or less","$","4,249","","7,603"],["","Over three months through six months","5,576","","3,857"],["","Over six months through twelve months","4,536","","9,424"],["","Over twelve months","1,862","","1,506"],["","","$","16,223","","$","22,390"]]
[[/GREPCENT_TABLE]]

At December 31, 2021 and 2020, the Company had $16.2 million and $22.4 million, respectively, in uninsured time deposits with balances greater than $250 thousand. The decrease of $6.2 million, or 27.5%, between December 31, 2020 and December 31, 2021, resulted primarily from the maturity, without renewal, of customer time deposits originated in prior periods when rate promotions were offered.

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. The Company had no borrowed funds at December 31, 2021. Borrowed funds were comprised of FHLB advances of $7.2 million, with a weighted average rate of 3.07% at December 31, 2020. 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 ended December 31, 2021. Average borrowings outstanding for 2021 were $7.1 million, compared to average borrowings outstanding for 2020 of $24.0 million, with the weighted average interest rate on the Company's borrowings increasing from 1.52% for 2020 to 3.05% for 2021. The Company had no overnight federal funds purchased on December 31, 2021 or 2020.

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 $37.5 million and $23.6 million were utilized as collateral for these deposits at December 31, 2021 and December 31, 2020, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $45 thousand and $30 thousand for the years ended December 31, 2021 and 2020, respectively.

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In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. The Notes are presented net of unamortized issuance costs of $329 thousand at December 31, 2021 in the consolidated balance sheets. For the year ended December 31, 2021, $11 thousand in issuance costs were recorded in interest expense.

Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates, and to implement its strategic objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contractual or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument.

The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company’s exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.

The following table details the contractual or notional amount of financial instruments that represented credit risk at December 31, 2021:

[[GREPCENT_TABLE]]
[["","Contract or Notional Amount"],["","2022","2023","2024","2025","2026","Thereafter","Total"],["","(Dollars in thousands)"],["Commitments to originate loans","$","48,910","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","48,910"],["Unused lines of credit","108,913","","32,274","","25,741","","31","","1,450","","33","","168,442"],["Standby and commercial letters of credit","342","","255","","191","","39","","\u2014","","1,331","","2,158"],["Credit card arrangements","170","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","170"],["MPF credit enhancement obligation, net","818","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","818"],["Commitment to purchase investment in a real estate limited partnership","4,574","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","4,574"],["Total","$","163,727","","$","32,529","","$","25,932","","$","70","","$","1,450","","$","1,364","","$","225,072"]]
[[/GREPCENT_TABLE]]

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 $13.1 million of lines available under the overdraft privilege program and is included in the 2022 funding period. Approximately $32.1 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 $35.9 million, or 27.1%, from $132.5 million at December 31, 2020 to $168.4 million at December 31, 2021. 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 $12.5 million, or 20.4%, from $61.4 million at December 31, 2020 to $48.9 million at December 31, 2021.

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The Company may, from time-to-time, enter into commitments to purchase, participate or sell loans, securities, certificates of deposit, or other investment instruments which involve market and interest rate risk. At December 31, 2021, the Company had binding commitments to sell residential mortgage loans at fixed rates totaling $2.7 million.

The Company sells 1-4 family residential mortgage loans under the MPF loss-sharing program with FHLB, when management believes it is economically advantageous to do so. Under this program the Company shares in the credit risk of each mortgage, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation based on the credit quality of these loans. FHLB funds a first loss account based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLB first loss account funds are then utilized, followed by the member's Credit Enhancement Obligation, with the balance the responsibility of FHLB. These loans must meet specific underwriting standards of the FHLB. As of December 31, 2021, the Company had sold loans through the MPF program totaling $33.5 million with an outstanding balance of $9.5 million. The volume of loans sold to the MPF program and the corresponding Credit Enhancement Obligation are closely monitored by management. As of December 31, 2021, the notional amount of the maximum contingent contractual liability related to this program was $837 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 rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.

At December 31, 2021, Union, as a member of FHLB, had access to unused lines of credit of $116.7 million, over and above the $22.0 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 at December 31, 2021. 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 qualified assets. In addition to the funding sources available to Union, the Company maintains a $5.0 million revolving line of credit with a correspondent bank. At December 31, 2021 there were no purchased CDARS or ICS deposits, no retail brokered deposits, and no outstanding advances at the FRB discount window or on the Union or Company correspondent lines.

Additionally, Union also has qualifying investment securities that are available to be pledged as collateral to the FRB to have access to the discount window borrowing facility. As of December 31, 2021, there were no outstanding advances from the discount window.

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 due to 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

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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 the FDIC's Prompt Corrective Action framework. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions. 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.

In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes have been structured to qualify as Tier 2 capital for the Company under bank regulatory guidelines. The proceeds from the sale of the Notes were utilized to provide additional capital to Union to support its growth and for other general corporate purposes.

Stockholders’ equity increased from $80.9 million at December 31, 2020 to $84.3 million at December 31, 2021, reflecting net income of $13.2 million for 2021, an increase of $299 thousand from stock based compensation, a $72 thousand increase due to the issuance of 3,000 shares of common stock from the exercise of incentive stock options and a $40 thousand increase due to the issuance of common stock under the DRIP. These increases were partially offset by a decrease of $4.2 million in accumulated OCI due to a decrease in the fair market value of the Company's AFS securities, cash dividends declared of $5.9 million, and stock repurchases of $2 thousand.

The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of December 31, 2021, the Company had 4,967,093 shares issued, of which 4,493,655 were outstanding and 473,438 were held in treasury. Following stockholder approval in 2014, the Company adopted the 2014 Equity Plan which replaced the 2008 ISO Plan. As of December 31, 2021, there were outstanding RSUs issued under the 2014 Equity Plan with respect to 1,355 shares granted in 2020 and 10,051 shares granted in 2021 as to which vesting requirements had not yet been met.

In January 2021, the Company's Board reauthorized for 2021 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 97 shares under this program during 2021 at a total cost of $2 thousand. Since inception, as of December 31, 2021, the Company had repurchased 17,790 shares under the program, for a total cost of $474 thousand.

The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of December 31, 2021, 5,430 shares of stock had been issued from treasury stock since inception of the DRIP, including 1,291 shares in 2021.

The Company's total capital to risk weighted assets increased to 15.4% at December 31, 2021, from 13.9% at December 31, 2020. Tier I capital to risk weighted assets decreased to 11.9% at December 31, 2021, from 12.6% at December 31, 2020, and Tier I capital to average assets decreased to 7.1% at December 31, 2021 from 7.3% at December 31, 2020. At December 31, 2021 and 2020, Union was categorized as well capitalized under the Prompt Corrective Action regulatory framework and the Company exceeded applicable minimum capital adequacy requirements. There were no conditions or events between December 31, 2021 and the date of this report that management believes have changed either the Company’s or Union's regulatory capital category. See Note 23 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. The federal funds target range of 0% to 0.25% remained unchanged during 2021 and thus far in 2022. Recent FOMC meetings indicate that members of the committee recognize that indicators of economic activity and employment has continued to strengthen and that higher inflation is due to pandemic related supply and demand imbalances. With inflation well above 2% and a strong labor market, the FOMC expects it will soon be appropriate to raise the target range for the federal funds rate and also decided to continue to reduce the pace of its net asset purchases, bringing them to an end in March 2022. 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 continued to increase during 2021 and are expected to increase in 2022 due to increases in money supply driven by federal stimulus programs as well as organic growth of the Company through its branch

44

network. The cost of funds, which is primarily tied to rates paid on customer deposits, decreased 30 bps during 2021. Management has projected the cost of funds for 2022 to remain consistent with 2021, however, customer behavior patterns, higher rates offered by competition, and the continued emergence of fintech companies, could result in increases in rates paid on customer deposit accounts and more than expected interest expense. Further decreases or no change in the target federal funds rate in 2022 may result in less than expected interest income on loans and investments. 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, although periods of increased inflation may accompany a rising interest rate environment. 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 impacts on interest rates or inflation in future periods that could have an unfavorable impact on the future operating results of the Company.