Washington, D.C. 20549
UNION BANKSHARES, INC.
P.O. BOX 667
Former name, former address and former fiscal year, if changed since last report: Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 1, 2017.April 30, 2018.
UNION BANKSHARES, INC.
Item 1. Financial Statements
See accompanying notes to unaudited interim consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
See accompanying notes to unaudited interim consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
See accompanying notes to unaudited interim consolidated financial statements.
See accompanying notes to unaudited interim consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
See accompanying notes to unaudited interim consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
Note 2. Legal Contingencies
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Note 6. Investment Securities
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of March 31, 20172018 were as follows:
Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities usually differ from contractual maturities on agency MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and are not included in the contractual maturity categories in the above maturity summary.
Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
An unrealized loss on a debt security is generally deemed to be OTT and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of OTTI write-down is recorded, net of tax effect, through net income as a component of net OTTI losses in the consolidated statementstatements of income, while the remaining portion of the impairment loss is recognized in OCI, provided the Company does not intend to sell the underlying debt security and it is "more likely than not" that the Company will not have to sell the debt security prior to recovery. Declines in the fair values of individual equity securities that are deemed by management to be OTT are reflected in noninterest income when identified.
Management considers the following factors in determining whether OTTI exists and the period over which the security is expected to recover:
The length of time, and extent to which, the fair value has been less than the amortized cost;
Adverse conditions specifically related to the security, industry, or geographic area;
The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;
Failure of the issuer of the security to make scheduled interest or principal payments;
Recoveries or additional declines in fair value subsequent to the balance sheet date; and
The nature of the issuer, including whether it is a private company, public entity or government-sponsored enterprise, and the existence or likelihood of any government or third party guaranty.
Note 7. Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the ALL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Generally, any unpaid interest previously accrued on those loans is reversed against current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual status or after all principal has been collected. Interest income generally is not recognized on impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent. Loans are considered in process of foreclosure when a judgment of foreclosure has been issued by the court.
Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company generally amortizes these amounts over the estimated average life of the related loans.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
Note 8. Allowance for Loan Losses and Credit Quality
The ALL is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. For all loan classes, loan losses are charged against the ALL when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ALL.
In addition, various regulatory agencies, as an integral part of their examination process, regularly review the Company's ALL. Such agencies may require the Company to recognize additions to the ALL, with a corresponding charge to earnings, based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
The ALL consists of specific, general and unallocated components. The specific component relates to the loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. A TDR classification may result from the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a
loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments), or a combination. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. 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. Management has established the threshold for individual impairment evaluation for commercial loans with balances greater than $500 thousand, based on an evaluation of the Company's historical loss experience on substandard commercial loans.
The general component represents the level of ALL allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:
An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the ALL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
All evaluations are inherently subjective as they require estimates that are susceptible to significant revision as more information becomes available or as changes occur in economic conditions or other relevant factors. Despite the allocation shown in the tables below, the ALL is general in nature and is available to absorb losses from any class of loan.
The allocation of the ALL, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates were as follows:
The recorded investment in loans, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates were as follows:
Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:
Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.
Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. When warranted, these credits may be monitored on the watch list.
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.
The following tables summarize the loan ratings applied to the Company's loans by class as of the balance sheet dates:
The following is a summary of TDR loans by class of loan as of the balance sheet dates:
The TDR loans above represent loan modifications in which a concession was provided to the borrower, including due date extensions, maturity date extensions, interest rate reductions or the forgiveness of accrued interest. Troubled loans, that are restructured and meet established thresholds, are classified as impaired and a specific reserve amount is allocated to the ALL 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.
There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three month periods ended March 31, 20172018 or March 31, 2016.2017. TDR loans are considered defaulted at 90 days past due.
Note 9. Defined Benefit Pension Plan
Note 10. Stock Based Compensation
Note 11. Other Comprehensive Income (Loss)
Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities AFS that are not OTTI and the unfunded liability for the defined benefit pension plan, are not reflected in the consolidated statements of income. The cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the consolidated balance sheetsheets (Accumulated OCI). OCI, along with net income, comprises the Company's total comprehensive income or loss.
As of the balance sheet dates, the components of Accumulated OCI, net of tax, were:
There were no reclassification adjustments from OCI for the three months ended March 31,, 2017 2018 and 2016.2017.
Note 12. Fair Value Measurement
The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:
Investment securities AFS: Marketable equity securities and mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1. However, the majority of theThe Company’s AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market
maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.
Assets measured at fair value on a recurring basis at March 31, 20172018 and December 31, 20162017, segregated by fair value hierarchy level, are summarized below:
| | | Fair Value Measurements | Fair Value Measurements |
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
March 31, 2017: | (Dollars in thousands) | |
Investment securities available-for-sale (market approach) | | | |
Debt securities: | | |
March 31, 2018: | | (Dollars in thousands) |
Debt securities AFS: | | |
U.S. Government-sponsored enterprises | | $ | 7,261 |
| $ | — |
| $ | 7,261 |
| $ | — |
|
Agency mortgage-backed | | 32,560 |
| — |
| 32,560 |
| — |
|
State and political subdivisions | | 24,322 |
| — |
| 24,322 |
| — |
|
Corporate | | 4,297 |
| — |
| 4,297 |
| — |
|
Total debt securities | | $ | 68,440 |
| $ | — |
| $ | 68,440 |
| $ | — |
|
| | |
Other investments: | | |
Mutual funds | | $ | 502 |
| $ | 502 |
| $ | — |
| $ | — |
|
| | |
December 31, 2017: | | |
Debt securities AFS: | | |
U.S. Government-sponsored enterprises | $ | 9,822 |
| $ | — |
| $ | 9,822 |
| $ | — |
| $ | 7,695 |
| $ | — |
| $ | 7,695 |
| $ | — |
|
Agency mortgage-backed | 19,947 |
| — |
| 19,947 |
| — |
| 28,116 |
| — |
| 28,116 |
| — |
|
State and political subdivisions | 27,193 |
| — |
| 27,193 |
| — |
| 24,714 |
| — |
| 24,714 |
| — |
|
Corporate | 10,248 |
| — |
| 10,248 |
| — |
| 4,393 |
| — |
| 4,393 |
| — |
|
Total debt securities | 67,210 |
| — |
| 67,210 |
| — |
| 64,918 |
| — |
| 64,918 |
| — |
|
Mutual funds | 429 |
| 429 |
| — |
| — |
| 521 |
| 521 |
| — |
| — |
|
Total | $ | 67,639 |
| $ | 429 |
| $ | 67,210 |
| $ | — |
| $ | 65,439 |
| $ | 521 |
| $ | 64,918 |
| $ | — |
|
| | |
December 31, 2016: | | |
Investment securities available-for-sale (market approach) | | | |
Debt securities: | | |
U.S. Government-sponsored enterprises | $ | 10,040 |
| $ | — |
| $ | 10,040 |
| $ | — |
| |
Agency mortgage-backed | 18,041 |
| — |
| 18,041 |
| — |
| |
State and political subdivisions | 27,372 |
| — |
| 27,372 |
| — |
| |
Corporate | 9,700 |
| — |
| 9,700 |
| — |
| |
Total debt securities | 65,153 |
| — |
| 65,153 |
| — |
| |
Mutual funds | 403 |
| 403 |
| — |
| — |
| |
Total | $ | 65,556 |
| $ | 403 |
| $ | 65,153 |
| $ | — |
| |
There were no significant transfers in or out of Levels 1 and 2 during the three months ended March 31, 2017,2018, nor were there any Level 3 assets at any time during theeither period. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as collateral-dependent impaired loans, HTM securities, MSRs and OREO, were not considered material at March 31, 20172018 or December 31, 20162017. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.
FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.
Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its significant financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values and are classified as Level 1.
Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows and are classified as Level 2.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. Mutual funds have been valued using unadjusted quoted prices from active markets. Investment securities are classified as Level 1 or Level 2 depending on availability of recent trade information.
Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party vendors, resulting in a Level 2 classification.
Loans: The fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected loss experience and risk characteristics. As of March 31, 2018, the Company implemented exit pricing valuation methodologies which incorporate a liquidity premium adjustment into the fair value estimate of all loan portfolios. This adjustment factors the costs/market inefficiencies associated with the sale of a financial instrument into the fair value estimate. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that utilize unobservable inputs as defined by current accounting standards are classified as Level 3.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1, 2, or 3 in accordance with the classification of the related principal's valuation.
Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB stock, due to restrictions placed on their transferability.
Deposits: The fair values disclosed for noninterest bearing deposits and other interest bearing nontime deposits are, by definition, equal to the amount payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected maturities on such deposits, resulting in a Level 2 classification.
Borrowed funds: The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments, resulting in a Level 2 classification. The fair values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet, resulting in a Level 1 classification.
Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
| | | March 31, 2017 | March 31, 2018 |
| Fair Value Measurements | Fair Value Measurements |
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) | (Dollars in thousands) |
Financial assets | | |
Cash and cash equivalents | $ | 24,967 |
| $ | 24,967 |
| $ | 24,967 |
| $ | — |
| $ | — |
| $ | 13,246 |
| $ | 13,246 |
| $ | 13,246 |
| $ | — |
| $ | — |
|
Interest bearing deposits in banks | 8,508 |
| 8,518 |
| — |
| 8,518 |
| — |
| 9,601 |
| 9,510 |
| — |
| 9,510 |
| — |
|
Investment securities | 68,638 |
| 67,637 |
| 429 |
| 67,208 |
| — |
| 68,942 |
| 68,942 |
| 502 |
| 68,440 |
| — |
|
Loans held for sale | 2,847 |
| 2,905 |
| — |
| 2,905 |
| — |
| 2,938 |
| 2,969 |
| — |
| 2,969 |
| — |
|
Loans, net | | |
Residential real estate | 171,275 |
| 172,799 |
| — |
| — |
| 172,799 |
| 180,720 |
| 179,098 |
| — |
| — |
| 179,098 |
|
Construction real estate | 37,040 |
| 36,859 |
| — |
| — |
| 36,859 |
| 42,943 |
| 42,231 |
| — |
| — |
| 42,231 |
|
Commercial real estate | 244,417 |
| 243,129 |
| — |
| — |
| 243,129 |
| 257,965 |
| 257,596 |
| — |
| — |
| 257,596 |
|
Commercial | 43,574 |
| 43,088 |
| — |
| — |
| 43,088 |
| 46,581 |
| 45,339 |
| — |
| — |
| 45,339 |
|
Consumer | 3,554 |
| 3,619 |
| — |
| — |
| 3,619 |
| 3,505 |
| 3,521 |
| — |
| — |
| 3,521 |
|
Municipal | 33,119 |
| 33,519 |
| — |
| — |
| 33,519 |
| 55,338 |
| 55,143 |
| — |
| — |
| 55,143 |
|
Accrued interest receivable | 2,042 |
| 2,042 |
| — |
| 446 |
| 1,596 |
| 2,468 |
| 2,468 |
| — |
| 393 |
| 2,075 |
|
Nonmarketable equity securities | 2,354 |
| N/A |
| N/A |
| N/A |
| N/A |
| 2,331 |
| N/A |
| N/A |
| N/A |
| N/A |
|
Financial liabilities | | |
Deposits | | |
Noninterest bearing | $ | 110,087 |
| $ | 110,087 |
| $ | 110,087 |
| $ | — |
| $ | — |
| $ | 128,951 |
| $ | 128,951 |
| $ | 128,951 |
| $ | — |
| $ | — |
|
Interest bearing | 369,451 |
| 369,451 |
| 369,451 |
| — |
| — |
| 392,027 |
| 392,027 |
| 392,027 |
| — |
| — |
|
Time | 102,527 |
| 101,878 |
| — |
| 101,878 |
| — |
| 102,865 |
| 101,406 |
| — |
| 101,406 |
| — |
|
Borrowed funds | | |
Short-term | 1,301 |
| 1,301 |
| 1,301 |
| — |
| — |
| 122 |
| 122 |
| 122 |
| — |
| — |
|
Long-term | 30,426 |
| 30,359 |
| — |
| 30,359 |
| — |
| 31,143 |
| 30,951 |
| — |
| 30,951 |
| — |
|
Accrued interest payable | 89 |
| 89 |
| — |
| 89 |
| — |
| 97 |
| 97 |
| — |
| 97 |
| — |
|
| | | December 31, 2016 | December 31, 2017 |
| Fair Value Measurements | Fair Value Measurements |
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) | (Dollars in thousands) |
Financial assets | | |
Cash and cash equivalents | $ | 39,275 |
| $ | 39,275 |
| $ | 39,275 |
| $ | — |
| $ | — |
| $ | 38,508 |
| $ | 38,508 |
| $ | 38,508 |
| $ | — |
| $ | — |
|
Interest bearing deposits in banks | 9,504 |
| 9,528 |
| — |
| 9,528 |
| — |
| 9,352 |
| 9,333 |
| — |
| 9,333 |
| — |
|
Investment securities | 66,555 |
| 66,555 |
| 403 |
| 66,152 |
| — |
| 66,439 |
| 66,438 |
| 521 |
| 65,917 |
| — |
|
Loans held for sale | 7,803 |
| 7,958 |
| — |
| 7,958 |
| — |
| 7,947 |
| 8,111 |
| — |
| 8,111 |
| — |
|
Loans, net | | |
Residential real estate | 171,538 |
| 173,024 |
| — |
| — |
| 173,024 |
| 177,880 |
| 178,818 |
| — |
| — |
| 178,818 |
|
Construction real estate | 33,840 |
| 33,963 |
| — |
| — |
| 33,963 |
| 42,505 |
| 42,069 |
| — |
| — |
| 42,069 |
|
Commercial real estate | 246,317 |
| 245,979 |
| — |
| — |
| 245,979 |
| 251,566 |
| 248,746 |
| — |
| — |
| 248,746 |
|
Commercial | 41,708 |
| 41,491 |
| — |
| — |
| 41,491 |
| 50,393 |
| 49,132 |
| — |
| — |
| 49,132 |
|
Consumer | 3,941 |
| 4,014 |
| — |
| — |
| 4,014 |
| 3,869 |
| 3,919 |
| — |
| — |
| 3,919 |
|
Municipal | 31,348 |
| 31,749 |
| — |
| — |
| 31,749 |
| 55,789 |
| 55,778 |
| — |
| — |
| 55,778 |
|
Accrued interest receivable | 2,259 |
| 2,259 |
| — |
| 414 |
| 1,845 |
| 2,500 |
| 2,500 |
| — |
| 395 |
| 2,105 |
|
Nonmarketable equity securities | 2,354 |
| N/A |
| N/A |
| N/A |
| N/A |
| 2,331 |
| N/A |
| N/A |
| N/A |
| N/A |
|
Financial liabilities | | |
Deposits | | |
Noninterest bearing | $ | 112,384 |
| $ | 112,384 |
| $ | 112,384 |
| $ | — |
| $ | — |
| $ | 127,824 |
| $ | 127,824 |
| $ | 127,824 |
| $ | — |
| $ | — |
|
Interest bearing | 382,083 |
| 382,083 |
| 382,083 |
| — |
| — |
| 418,621 |
| 418,621 |
| 418,621 |
| — |
| — |
|
Time | 103,193 |
| 102,594 |
| — |
| 102,594 |
| — |
| 101,129 |
| 99,967 |
| — |
| 99,967 |
| — |
|
Borrowed funds | | |
Short-term | 1,099 |
| 1,099 |
| 1,099 |
| — |
| — |
| 1,365 |
| 1,364 |
| 1,364 |
| — |
| — |
|
Long-term | 30,496 |
| 30,423 |
| — |
| 30,423 |
| — |
| 30,216 |
| 29,039 |
| — |
| 29,039 |
| — |
|
Accrued interest payable | 92 |
| 92 |
| — |
| 92 |
| — |
| 97 |
| 97 |
| — |
| 97 |
| — |
|
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.
Note 13. Subsequent Events
Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to March 31, 20172018 have been evaluated as to their potential impact to the consolidated financial statements.
On April 19, 2017,18, 2018, the Company declared a regular quarterly cash dividend of $0.29$0.30 per share, payable May 10, 2017,2018, to stockholders of record on April 29, 2017.30, 2018.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the financial position of the Company as of March 31, 20172018 and December 31, 20162017, and its results of operations for the three months ended March 31, 20172018 and 20162017. 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 appearing elsewhere in this filing and with the Company's 2017 Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of the Company's management, the interim unaudited data reflectsconsolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments and disclosures necessary to fairly present the Company's consolidated financial position and results of operations for the interim periods presented. Management is not aware of the occurrence of any events after March 31, 20172018 which would materially affect the information presented.
Please refer to Note 1 in the Company's unaudited interim consolidated financial statements at Part I, Item 1 of this Report for definitions of acronyms, abbreviations and capitalized terms used throughout the following discussion and analysis.
CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS
The Company, "we," "us," "our," may from time to time make written or oral statements that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance or conditions and assumptions relating thereto. The Company may include forward-looking statements in its filings with the SEC, in its reports to stockholders, including this quarterly report, in press releases, other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are subject to uncertainties, both general and specific, and risk exists that actual results will differ from those predictions, forecasts, projections and other estimates contained in forward-looking statements. These risks cannot be readily quantified. When management uses any of the words “believes,” “expects,” “anticipates,” “intends,” "projects," “plans,” “seeks,” “estimates,” "targets," "goals," “may,” "might," “could,” “would,” “should,” or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company.
Factors that may cause results or performance to differ materially from those expressed in forward-looking statements include, but are not limited to: (1) general
General economic conditions and financial instability, either nationally, internationally, regionally or locally; (2) increased
Increased competitive pressures, including those from tax-advantaged credit unions and other financial service providers in the Company'sour northern Vermont and New Hampshire market area or in the financial services industry generally, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (3) the effect of and changes
Interest rates change in the United States monetary and fiscal policies, including interest rates changes in waysa way that continues to putputs pressure on the Company's margins, or that results in lower fee income and lower gain on sale of real estate loans, or that increases our interest spread or margins as depositors will be seeking higher rates on deposit accounts (4) changescosts;
Changes in laws or government rules, or the way in which courts or government agencies interpret or implement those laws or rules, that increase our costs of doing business or otherwise adversely affect the Company'sour business; (5)
Further changes in federal or state tax policy; (6) the effect of federal and state health care reform efforts; (7) changes
Changes in theour level of nonperforming assets and charge-offs; (8) changes
Changes in depositor behavior resulting in movement of funds out of bank deposits and into the stock market or other higher-yielding investments;
Changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (9) changes
Changes in information technology that require increased capital spending; (10) changesspending or that result in new or increased risks;
Changes in consumer and business spending, borrowing and savings habits; (11) increased cyber security threats.
Changes in accounting principles, including those governing the manner of estimating our credit risk and calculating our loan loss reserve;
Changes affecting the calculation of the amount of the contribution that will be required to settle our obligations in connection with termination of our defined benefit pension plan and the impact of such termination on our net income in 2018;
Further changes to the regulations governing the calculation of the Company’s regulatory capital ratios;
Increased cybersecurity threats; and
The effect of and changes in the United States monetary and fiscal policies, including interest rate policies and regulation of the money supply by the FRB.
When evaluating forward-looking statements to make decisions with respect toabout the Company and our stock, investors and others are cautioned to consider these and other risks and uncertainties, and are reminded not to place undue reliance on such statements. Investors should not consider the foregoing list of factors to be a complete list of risks or uncertainties. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.
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 consolidated 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 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. TheThey include establishing the amount of ALL, evaluating our investment securities for OTTI, valuing our intangible assets and determining the amount of our defined benefit pension plan obligation and net periodic cost/(benefit) as well as the amount of our required contribution in connection with termination of the Plan.The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, or capital, and/or the results of operations of the Company.
Please refer to the Company's 2017 Annual Report on Form 10-K for the year ended December 31, 2016 for a more in-depth discussion of the Company's critical accounting policies. There have been no changes to the Company's critical accounting policies since the filing of that report.
OVERVIEW
As discussed in the Company's 2017 Annual Report , on October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the Plan by December 31, 2018. Once the process is complete, the Company will no longer have any remaining defined benefit pension plan obligations and thus no periodic pension expense in future periods.
Additionally, passage of the 2017 Tax Act reduced the Company's federal income tax rate from 34% to 21% effective January 1, 2018. The rate reduction has had a positive impact on earnings for the first three months of 2018.(See Results of Operations, Provision for Income Taxes on page 31.)
The Company's net income was $2.7 million for the quarter ended March 31, 2018 compared to $1.9 million for the quarter ended March 31, 2017, compared to $1.8 million for the quarter ended March 31, 2016, an increase of $171$817 thousand,, or 9.7%42.3%. These results reflected an increase in the Company's net interest income of $367$622 thousand, or 6.2%9.9%, an increase in noninterest income of $238 thousand, or 10.7%, and a decrease in the provision for loan lossesincome taxes of $75$151 thousand, or 100.0%, and an increase in noninterest income of $47 thousand, or 2.2%22.7%. These positive changes were partially offset by an increase in noninterest expenses of $238$194 thousand, or 4.2% and an increase in the provision for income taxes of $80 thousand, or 13.7%3.3%.
At March 31, 2017,2018, the Company had total consolidated assets of $676.5$722.7 million, including gross loans and loans held for sale (total loans) of $540.4$594.6 million, deposits of $582.1$623.8 million and stockholders' equity of $57.2$59.2 million. The Company’s total assets
at March 31, 20172018 decreased $14.9$23.1 million, or 2.2%3.1%, from $691.4$745.8 million at December 31, 2016,2017, and increased $35.6$46.3 million, or 5.6%6.8%, compared to March 31, 2016.
2017. (See Financial Condition on page 31.)
The Company's total capital increased from $56.3$58.7 million at December 31, 20162017 to $57.2$59.2 million at March 31, 2017.2018. This increase primarily reflects net income of $1.9$2.7 million for the first three months of 2017 and2018, partially offset by an increase of $225$950 thousand in accumulated OCI, lessother comprehensive loss and regular cash dividends paid of $1.3 million. (See Capital Resources on page 38.)
The following unaudited per share information and key ratios depict several measurements of performance or financial condition at or for the three months ended March 31, 20172018 and 20162017, respectively:
| | | Three Months Ended or At March 31, | Three Months Ended or At March 31, |
| 2017 | 2016 | 2018 | 2017 |
Return on average assets (ROA) (1) | 1.14 | % | 1.11 | % | |
Return on average assets (1) | | 1.51 | % | 1.14 | % |
Return on average equity (1) | 13.67 | % | 12.90 | % | 18.76 | % | 13.67 | % |
Net interest margin (1)(2) | 4.15 | % | 4.14 | % | 4.15 | % | 4.15 | % |
Efficiency ratio (3) | 67.95 | % | 70.01 | % | 64.48 | % | 67.95 | % |
Net interest spread (4) | 4.06 | % | 4.05 | % | 4.04 | % | 4.06 | % |
Loan to deposit ratio | 92.84 | % | 92.90 | % | 95.31 | % | 92.84 | % |
Net loan charge-offs to average loans not held for sale (1) | 0.04 | % | 0.12 | % | — | % | 0.04 | % |
Allowance for loan losses to loans not held for sale | 0.97 | % | 1.00 | % | 0.91 | % | 0.97 | % |
Nonperforming assets to total assets (5) | 0.49 | % | 0.48 | % | 0.23 | % | 0.49 | % |
Equity to assets | 8.45 | % | 8.53 | % | 8.19 | % | 8.45 | % |
Total capital to risk weighted assets | 13.40 | % | 13.15 | % | 13.96 | % | 13.40 | % |
Book value per share | $ | 12.81 |
| $ | 12.26 |
| $ | 13.25 |
| $ | 12.81 |
|
Earnings per share | $ | 0.43 |
| $ | 0.39 |
| $ | 0.62 |
| $ | 0.43 |
|
Dividends paid per share | $ | 0.29 |
| $ | 0.27 |
| $ | 0.30 |
| $ | 0.29 |
|
Dividend payout ratio (6) | 67.44 | % | 69.23 | % | 48.39 | % | 67.44 | % |
______________________________________
| |
(2) | The ratio of tax equivalent net interest income to average earning assets. See page 28 for more information. |
| |
(3) | The ratio of noninterest expense to tax equivalent net interest income and noninterest income, excluding securities gains (losses). |
| |
(4) | The difference between the average rate earnedyield on earning assets and the average rate paid on interest bearing liabilities. See page 28 for more information. |
| |
(5) | Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as OREO or OAO. |
| |
(6) | Cash dividends declared and paid per share divided by consolidated net income per share. |
RESULTS OF OPERATIONS
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 interest expense 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. Net interest margin is calculated as the net interest income on a fully tax equivalent basis as a percentage of average earning assets. As a result of the 2017 Tax Act, our corporate tax rate has declined from 34% in prior years to 21% in 2018. Accordingly, the factor utilized in calculating tax equivalent interest income has declined, resulting in lower yields on the tax advantaged earning assets.
The Company’s net interest income increased $622 thousand, or 9.9%, to $6.9 million for the three months ended March 31, 2018 from $6.3 million for the three months ended March 31, 2017. The net interest margin was 4.15% and 4.14%spread decreased two bps to 4.04% for the first quarter of 2018, from 4.06% for the same period last year, reflecting a six bp increase in the average rate paid on interest bearing liabilities, partially offset by a four bp increase in the average yield earned on interest earning assets between periods. Interest income on loans increased $677 thousand to $7.0 million for the three months ended March 31, 2018 from $6.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively.due to an increase in the average volume of loans outstanding of $53.2 million during the 20
18 comparison period. Interest income was $6.8 million, on investment securities increased $17 thousand between periods despite a fullyslight decline in average volume and a 15 bp decrease in the average yield as a result of a decrease in the tax equivalent basisfactor.
The average rate paid on interest bearing liabilities increased six bps, to 0.49% for the first quarter of 2018 compared to 0.43% for the first quarter of 2017. Average rates paid increased in all deposit categories while the average rate paid on borrowed funds remained unchanged. The Company may need to continue to increase rates paid on deposit accounts to remain competitive as short term interest rates and competition for deposit monies continues to increase. Additionally, funding sources other than core deposits may be necessary to fund loan demand which may have a higher cost. These changes could result in increased pressure on our net interest spread. The net interest margin was unchanged at 4.15% for the three months ended March 31, 2017, compared to $6.4 million for the three months ended2018 and March 31, 2016, an increase of $391 thousand, or 7.29%. The average yield on earning assets remained flat for the comparison periods, however, the volume of earning assets increased $43.2 million. Although the FRB initiated two 25 bp increases in short-term rates, one in December 2016 and the other in March 2017, our average yield on loans for the quarter ended March 31, 2017 increased by only 2 bps over the same period last year, as not all of our loans are set to reprice immediately, or may be in the initial fixed period. The Company did see an improvement in interest income on loans of $327 thousand, however this was primarily attributable to the $30.5 million increase in the average balances for the comparison periods.
The average cost of funds, which is tied primarily to our customer deposits, decreased 1 bp to 0.43% for the three months ended March 31, 2017 compared to 0.44% for the same period last year. During the third quarter of 2016, Union began offering fully FDIC insured money market and demand deposit accounts through the Promontory Interfinancial Network. Several municipal and commercial customers began utilizing these products and as monies in time deposits matured they were transfered into these money market and demand accounts. As a result, an increase in the average balance and average rate paid on interest bearing
checking accounts and savings and money market accounts occurred for the three months ended March 31, 2017, with a corresponding decrease in time deposits. See the following table for details.2017.
The following table shows for the periods indicated the total amount of income recorded from average interest earning assets, the related average tax equivalent yields, the interest expense associated with average interest bearing liabilities, the related average rates paid, and the resulting tax equivalent net interest spread and margin.
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | 2016 | 2018 | 2017 |
| Average Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Paid | Average Yield/ Rate |
| (Dollars in thousands) | (Dollars in thousands) |
Average Assets: | | | | | | | | |
Federal funds sold and overnight deposits | $ | 19,217 |
| $ | 30 |
| 0.63 | % | $ | 9,166 |
| $ | 5 |
| 0.20 | % | $ | 16,457 |
| $ | 53 |
| 1.28 | % | $ | 19,217 |
| $ | 30 |
| 0.63 | % |
Interest bearing deposits in banks | 9,252 |
| 35 |
| 1.54 | % | 12,674 |
| 45 |
| 1.42 | % | 9,957 |
| 45 |
| 1.83 | % | 9,252 |
| 35 |
| 1.54 | % |
Investment securities (1), (2) | 68,456 |
| 428 |
| 2.96 | % | 62,861 |
| 387 |
| 2.86 | % | 68,413 |
| 445 |
| 2.81 | % | 68,456 |
| 428 |
| 2.96 | % |
Loans, net (1), (3) | 537,117 |
| 6,322 |
| 4.87 | % | 506,613 |
| 5,995 |
| 4.85 | % | 590,321 |
| 6,999 |
| 4.87 | % | 537,117 |
| 6,322 |
| 4.87 | % |
Nonmarketable equity securities | 2,354 |
| 24 |
| 4.16 | % | 1,867 |
| 16 |
| 3.41 | % | 2,362 |
| 29 |
| 4.95 | % | 2,354 |
| 24 |
| 4.16 | % |
Total interest earning assets (1) | 636,396 |
| 6,839 |
| 4.49 | % | 593,181 |
| 6,448 |
| 4.49 | % | 687,510 |
| 7,571 |
| 4.53 | % | 636,396 |
| 6,839 |
| 4.49 | % |
Cash and due from banks | 4,123 |
| | | 4,604 |
| | | 3,945 |
| | | 4,123 |
| | |
| 13,416 |
| | | 13,057 |
| | | |
Premises and equipment | | 14,177 |
| | | 13,416 |
| | |
Other assets | 22,062 |
| | | 22,279 |
| | | 22,359 |
| | | 22,062 |
| | |
Total assets | $ | 675,997 |
| | | $ | 633,121 |
| | | $ | 727,991 |
| | | $ | 675,997 |
| | |
Average Liabilities and Stockholders' Equity: | | | | | | | | | | |
Interest bearing checking accounts | $ | 140,253 |
| 39 |
| 0.11 | % | $ | 118,641 |
| 23 |
| 0.08 | % | $ | 145,091 |
| 47 |
| 0.13 | % | $ | 140,253 |
| 39 |
| 0.11 | % |
Savings/money market accounts | 230,935 |
| 211 |
| 0.37 | % | 184,727 |
| 79 |
| 0.17 | % | 258,066 |
| 298 |
| 0.47 | % | 230,935 |
| 211 |
| 0.37 | % |
Time deposits | 103,723 |
| 172 |
| 0.67 | % | 149,883 |
| 323 |
| 0.86 | % | 101,793 |
| 188 |
| 0.75 | % | 103,723 |
| 172 |
| 0.67 | % |
Borrowed funds | 32,720 |
| 115 |
| 1.41 | % | 18,265 |
| 88 |
| 1.91 | % | 32,343 |
| 114 |
| 1.41 | % | 32,720 |
| 115 |
| 1.41 | % |
Total interest bearing liabilities | 507,631 |
| 537 |
| 0.43 | % | 471,516 |
| 513 |
| 0.44 | % | 537,293 |
| 647 |
| 0.49 | % | 507,631 |
| 537 |
| 0.43 | % |
Noninterest bearing deposits | 106,794 |
| | | 102,254 |
| | | 124,875 |
| | | 106,794 |
| | |
Other liabilities | 5,109 |
| | | 4,800 |
| | | 7,265 |
| | | 5,109 |
| | |
Total liabilities | 619,534 |
| | | 578,570 |
| | | 669,433 |
| | | 619,534 |
| | |
Stockholders' equity | 56,463 |
| | | 54,551 |
| | | 58,558 |
| | | 56,463 |
| | |
Total liabilities and stockholders’ equity | $ | 675,997 |
| | | $ | 633,121 |
| | | $ | 727,991 |
| | | $ | 675,997 |
| | |
Net interest income | | $ | 6,302 |
| | | $ | 5,935 |
| | | $ | 6,924 |
| | | $ | 6,302 |
| |
Net interest spread (1) | | 4.06 | % | | 4.05 | % | | 4.04 | % | | 4.06 | % |
Net interest margin (1) | | 4.15 | % | | 4.14 | % | | 4.15 | % | | 4.15 | % |
__________________
| |
(1) | Average yields reported on a tax equivalent basis using a marginal tax rate of 21% and 34%. for the three months ended March 31, 2018 and 2017, respectively. |
| |
(2) | Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities, if applicable. |
| |
(3) | Includes loans held for sale as well as nonaccrual loans, unamortized costs and unamortized premiums and is net of the allowance for loan losses. |
Tax exempt interest income amounted to $433506 thousand and $428433 thousand for the three months ended March 31, 20172018 and 20162017, respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018and2017, and 2016 three month comparison periods: respectively:
| | | For The Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2017 | 2016 | 2018 | 2017 |
| (Dollars in thousands) | (Dollars in thousands) |
Net interest income as presented | $ | 6,302 |
| $ | 5,935 |
| |
Net interest income, as presented | | $ | 6,924 |
| $ | 6,302 |
|
Effect of tax-exempt interest | | |
Investment securities | 79 |
| 62 |
| 34 |
| 79 |
|
Loans | 130 |
| 131 |
| 85 |
| 130 |
|
Net interest income, tax equivalent | $ | 6,511 |
| $ | 6,128 |
| $ | 7,043 |
| $ | 6,511 |
|
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.
| | | Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 Increase/(Decrease) Due to Change In | Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017 Increase/(Decrease) Due to Change In |
| Volume | Rate | Net | Volume (1) | Rate (1) | Net |
| (Dollars in thousands) | (Dollars in thousands) |
Interest earning assets: | | |
Federal funds sold and overnight deposits | $ | 9 |
| $ | 16 |
| $ | 25 |
| $ | (4 | ) | $ | 27 |
| $ | 23 |
|
Interest bearing deposits in banks | (13 | ) | 3 |
| (10 | ) | 3 |
| 7 |
| 10 |
|
Investment securities | 33 |
| 8 |
| 41 |
| — |
| 17 |
| 17 |
|
Loans, net | 301 |
| 26 |
| 327 |
| 677 |
| — |
| 677 |
|
Nonmarketable equity securities | 5 |
| 3 |
| 8 |
| — |
| 5 |
| 5 |
|
Total interest earning assets | $ | 335 |
| $ | 56 |
| $ | 391 |
| $ | 676 |
| $ | 56 |
| $ | 732 |
|
Interest bearing liabilities: | | |
Interest bearing checking accounts | $ | 5 |
| $ | 11 |
| $ | 16 |
| $ | 2 |
| $ | 6 |
| $ | 8 |
|
Savings/money market accounts | 23 |
| 109 |
| 132 |
| 27 |
| 60 |
| 87 |
|
Time deposits | (87 | ) | (64 | ) | (151 | ) | (3 | ) | 19 |
| 16 |
|
Borrowed funds | 55 |
| (28 | ) | 27 |
| (1 | ) | — |
| (1 | ) |
Total interest bearing liabilities | $ | (4 | ) | $ | 28 |
| $ | 24 |
| $ | 25 |
| $ | 85 |
| $ | 110 |
|
Net change in net interest income | $ | 339 |
| $ | 28 |
| $ | 367 |
| $ | 651 |
| $ | (29 | ) | $ | 622 |
|
__________________
| |
(1) | Tax equivalent interest income is calculated using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018 and 2017, respectively. |
Provision for Loan Losses. There was no loan loss provision recorded for the three monthsmonth periods ended March 31, 2017 compared to $75 thousand for the three months ended2018 or March 31, 2016.2017. No provision for the first three months of 20172018 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 the outlook for futureprevailing existing economic conditions. For further details, see FINANCIAL CONDITION- Allowance for Loan Losses and Asset Quality below.
Noninterest Income. Noninterest income was $2.5 million for the three months ended March 31, 2018, compared to $2.2 million, or 24.6% of total income for the three months ended March 31, 2017, compared to $2.2 million, or 25.3% of total income for the three months ended March 31, 2016. The following table sets forth the components of noninterest income and changes from 20162017 to 20172018:
| | | For The Three Months Ended March 31, | For The Three Months Ended March 31, |
| 2017 | 2016 | $ Variance | % Variance | 2018 | 2017 | $ Variance | % Variance |
| (Dollars in thousands) | (Dollars in thousands) |
Trust income | $ | 178 |
| $ | 172 |
| $ | 6 |
| 3.5 |
| $ | 193 |
| $ | 178 |
| $ | 15 |
| 8.4 |
|
Service fees | 1,440 |
| 1,412 |
| 28 |
| 2.0 |
| 1,487 |
| 1,440 |
| 47 |
| 3.3 |
|
Net gains on sales of loans held for sale | 508 |
| 500 |
| 8 |
| 1.6 |
| 295 |
| 508 |
| (213 | ) | (41.9 | ) |
Income from Company-owned life insurance | 60 |
| 73 |
| (13 | ) | (17.8 | ) | 312 |
| 60 |
| 252 |
| 420.0 |
|
Other income | 47 |
| 29 |
| 18 |
| 62.1 |
| 184 |
| 47 |
| 137 |
| 291.5 |
|
Total noninterest income | $ | 2,233 |
| $ | 2,186 |
| $ | 47 |
| 2.2 |
| $ | 2,471 |
| $ | 2,233 |
| $ | 238 |
| 10.7 |
|
The significant changes in noninterest income for the three months ended March 31, 20172018 compared to the same period inof 20162017 are described below:
Service fees. Total service fees increased $28$47 thousand for the three months ended March 31, 20172018 compared to the same period in 20162017 due to increases of $20$23 thousand in overdraft fees and $40$31 thousand in loan servicing income, partially offset by a decrease of $26 thousandnominal decreases in service charges on deposit accounts.other miscellaneous fee income.
Net gains on sales of loans held for sale. Continuing the Company's strategy to mitigate long-term interest rate risk, residential and commercial loans totaling $23.1 million were sold during the first quarter of 2018, versus residential loan sales of $28.5 million during the first quarter of 2017. The decline in net gains on sales of real estate loans is due to a combination of lower volumes of loans sold and lower average premiums on sold loans between periods reflecting a rising interest rate environment.
Income from Company-owned life insurance. IncomeProceeds from Company-owned lifethe death benefit on an insurance decreased $13 thousand for the three months ended March 31, 2017 compared to the same period in 2016. The total yieldpolicy on the policies has decreased as insurance costs have increased as each participant is another year older. Additionally, onelife of a former director resulted in $252 thousand of additional income during the higher yielding policies was redeemed in the secondfirst quarter of 2016 due to the death of an insured director.2018.
Other income. Mortgage servicing rightsOther income increased $24 thousand for the three months ended March 31, 2017 comparedbetween periods due to the same period in 2016. This increase was partially offset bygain on the sale of a decrease in miscellaneous noninterest incomebank owned branch building of $7$191 thousand during the first three monthsquarter of 2017 compared to the same period2018, partially offset by decreases of $43 thousand in 2016.MSR income and $11 thousand of miscellaneous noninterest income.
Noninterest Expense. Noninterest expense increased $238$194 thousand, or 4.2%3.3%, for the three months ended March 31, 20172018 compared to the same period in 2016.2017. The following table sets forth the components of noninterest expense and changes between the three month comparison periods of 20172018 and 2016:2017:
| | | For The Three Months Ended March 31, | For The Three Months Ended March 31, |
| 2017 | 2016 | $ Variance | % Variance | 2018 | 2017 | $ Variance | % Variance |
| (Dollars in thousands) | (Dollars in thousands) |
Salaries and wages | $ | 2,568 |
| $ | 2,458 |
| $ | 110 |
| 4.5 |
| $ | 2,649 |
| $ | 2,568 |
| $ | 81 |
| 3.2 |
|
Pension and employee benefits | 879 |
| 943 |
| (64 | ) | (6.8 | ) | 958 |
| 879 |
| 79 |
| 9.0 |
|
Occupancy expense, net | 390 |
| 317 |
| 73 |
| 23.0 |
| 395 |
| 390 |
| 5 |
| 1.3 |
|
Equipment expense | 534 |
| 509 |
| 25 |
| 4.9 |
| 535 |
| 534 |
| 1 |
| 0.2 |
|
Vermont franchise tax | 143 |
| 137 |
| 6 |
| 4.4 |
| |
FDIC insurance assessment | 95 |
| 83 |
| 12 |
| 14.5 |
| |
Electronic banking expenses | | 68 |
| 28 |
| 40 |
| 142.9 |
|
Other expenses | 1,332 |
| 1,256 |
| 76 |
| 6.1 |
| 1,530 |
| 1,542 |
| (12 | ) | (0.8 | ) |
Total noninterest expense | $ | 5,941 |
| $ | 5,703 |
| $ | 238 |
| 4.2 |
| $ | 6,135 |
| $ | 5,941 |
| $ | 194 |
| 3.3 |
|
The significant changes in noninterest expense for the first quarterthree months ended March 31, 2018 compared to the same period in 2016of 2017 are described below:
Salaries and wages. The increase of $110Salaries and wages increased $81 thousand for the comparisonthree months ended March 31, 2018 compared to the same period representsof 2017 due to normal annual salary increases, andpartially offset by a $23 thousand increasereduction in expense relatedcommissions paid to the deferral of salary expense due to accounting methods utilized to account formortgage loan origination costs The deferral of salary expense related to loan origination costs would typically reduce the Company's total salary expense, however due to the timing of loan originations and sales to the secondary market during the comparison periods this resulted in an increase to salary expense.originators.
Pension and employee benefits. Pension and employee benefits decreased $64increased $79 thousand for the three months ended March 31, 20172018 compared to the same period in 2016.2017. The decreaseincrease is the result of an increase in pension expense of $190 thousand,
partially offset by a reduction in the cost of the Company's medical plan of $95 thousand from receiving$119 thousand. The reduction in the Company's medical plan costs in 2018 reflects a $130$242 thousand plan credit due to favorable 20162017 claims experience. A similar experience partially offset by increasesbased credit received in premium rates for2017 was $130 thousand. As discussed in Note 9, the current year. Additionally, theCompany plans to terminate its defined benefit received from the pension plan was reduced by $22 thousand forduring 2018 with the three months ended March 31, 2017, comparedsettlement of assets and liabilities expected to occur during the same period in 2016 based onfourth quarter of 2018. The Company will continue to recognize pension related costs during its interim periods until the actuarial valuation report prepared as of December 31, 2016 for the 2017 fiscal year. Lastly, the Company's 401k contribution expense was $25 thousand less for the three months ended March 31, 2017 compared to the same period in 2016 as the 2016 profit sharing contribution paid to employees was less than the amount accrued based on the end of year employee census information.
plan has been settled.Occupancy expense.Electronic banking expenses. The Company experienced increased costs in repairs and maintenanceDuring the first quarter of 2018 Union changed its service provider for its facilities betweeninternet and mobile banking product. The new product was selected to provide a more robust product to Union's customers that includes additional functionality. The utilization of the three month periods ended March 31, 2017 and 2016. The mild winter experienced in Vermont and New Hampshire in 2016product resulted in lower than normal plowing costs. Also, the Company's janitorial services increased approximately $13an increase in electronic banking expenses of $40 thousand during the comparison period due to a change in vendor.
Equipment expense. Increases in software and license maintenance contracts of $34 thousand partially offset by a $9 thousand reduction in depreciation expense account for the change in equipment expense for the three months ended March 31, 2017, compared to the same period in 2016.between periods.
Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the three months ended March 31, 20172018 and 2016.2017. The Company's net provision for income taxes was $664 thousand and $584$513 thousand for the three months ended March 31, 2017 and 2016, respectively.2018, compared to $664 thousand for the same period in 2017. The Company's effective tax rate was 15.7% and 25.6% for the three months ended March 31, 2018, and 2017, compared to anrespectively. The reduction in the effective tax rate was primarily due to a decrease in the corporate income tax rate from 34% to 21% as a result of 24.9% for the same period in 2016.2017 Tax Act.
Amortization expense related to limited partnership investments is included as a component of tax expense and amounted to $157$140 thousand and $118$157 thousand for the three months ended March 31, 20172018, and 2016,2017 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 $158 thousand and $129$148 thousand for the three months ended March 31, 20172018, and 2016, respectively.$158 thousand for the three months ended March 31, 2017.
FINANCIAL CONDITION
At March 31, 20172018, the Company had total consolidated assets of $676.5722.7 million, including gross loans and loans held for sale (total loans) of $540.4594.6 million, deposits of $582.1623.8 million and stockholders' equity of $57.259.2 million. The Company’s total assets at March 31, 20172018 decreased $14.923.1 million, or 2.2%3.1%, from $691.4745.8 million at December 31, 20162017, and increased $35.646.3 million, or 5.6%6.8%, compared to March 31, 20162017.
Net loans and loans held for sale decreased a total oftotaled $669 thousand, or 0.1%, to $535.8590.0 million, or 79.2%81.6% of total assets at March 31, 20172018, compared to $536.5589.9 million, or 77.6%79.1% of total assets at December 31, 20162017. (See Loans Held for Sale and Loan Portfolio below.)
Total deposits decreased $15.623.7 million, or 2.6%3.7%, to $582.1623.8 million at March 31, 20172018, from $597.7647.6 million at December 31, 20162017. There were decreases in interestInterest bearing deposits of $12.6decreased $26.6 million, or 3.3%6.4%, which was partially offset by increases in noninterest bearing deposits of $2.31.1 million, or 2.0%0.9%, and time deposits of $666 thousand1.7 million, or 0.6%1.7%. The decline in total deposits between periods is related to seasonal fluctuations in municipal deposit account balances. (See average balances and rates in the Yields Earned and Rates Paid tabletables on page 28.)
Total borrowed funds increaseddecreased $132316 thousand, or 0.4%1.0%, from $31.6 million at December 31, 20162017 to $31.731.3 million at March 31, 20172018 from an increase in customer. Customer overnight collateralized repurchase sweeps decreased $1.2 million, while FHLB advances increased $928 thousand between December 31, 20162017 and March 31, 20172018. (See Borrowings on page 36.)
Total stockholders’ equity increased $891$503 thousand to $57.259.2 million at March 31, 20172018 from $56.358.7 million at December 31, 20162017. (See Capital Resources on page 38.)
Loans Held for Sale and Loan Portfolio. Total loans (including loans held for sale) decreasedwas $594.6 million, unchanged from December 31, 2017, and represented $719 thousand, or 0.1%, to $540.4 million, representing 79.9%82.3% of assets at March 31, 20172018, from and $541.1 million, representing 78.3%79.7% of assets at December 31, 20162017. The total loan portfolio at March 31, 20172018 increased $21.1$54.2 million compared to the March 31, 20162017 level of $519.3540.4 million, representing 81.0%79.9% of assets. 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 $459.8488.9 million, or 85.1%82.2% of total loans at March 31, 20172018 and $463.8484.2 million, or 85.7%81.4% of total loans at December 31, 20162017. Although competition for good loans is strong, especially in the commercial sector, the Company has been able to originate loans to both current and
new customers while maintaining credit quality. The composition of the Company’s loan portfolio remained relatively unchanged from December 31, 2016 and there2017. There was no material change in the Company’s lending programs or terms during the three months ended March 31, 2017.2018.
The composition of the Company's loan portfolio as of March 31, 20172018 and December 31, 20162017 was as follows:
| | | March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 |
Loan Class | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
| (Dollars in thousands) | (Dollars in thousands) |
Residential real estate | $ | 172,440 |
| 31.9 | $ | 172,727 |
| 31.9 | $ | 181,850 |
| 30.6 | $ | 178,999 |
| 30.1 |
Construction real estate | 37,437 |
| 6.9 | 34,189 |
| 6.3 | 43,379 |
| 7.3 | 42,935 |
| 7.2 |
Commercial real estate | 247,087 |
| 45.7 | 249,063 |
| 46.0 | 260,695 |
| 43.8 | 254,291 |
| 42.8 |
Commercial | 43,868 |
| 8.1 | 41,999 |
| 7.8 | 46,885 |
| 7.9 | 50,719 |
| 8.5 |
Consumer | 3,574 |
| 0.7 | 3,962 |
| 0.7 | 3,525 |
| 0.6 | 3,894 |
| 0.7 |
Municipal | 33,121 |
| 6.2 | 31,350 |
| 5.8 | 55,326 |
| 9.3 | 55,777 |
| 9.4 |
Loans held for sale | 2,847 |
| 0.5 | 7,803 |
| 1.5 | 2,938 |
| 0.5 | 7,947 |
| 1.3 |
Total loans | 540,374 |
| 100.0 | 541,093 |
| 100.0 | 594,598 |
| 100.0 | 594,562 |
| 100.0 |
Allowance for loan losses | (5,192 | ) | | (5,247 | ) | | (5,405 | ) | | (5,408 | ) | |
Unamortized net loan costs | 644 |
| | 649 |
| | 797 |
| | 795 |
| |
Net loans and loans held for sale | $ | 535,826 |
| | $ | 536,495 |
| | $ | 589,990 |
| | $ | 589,949 |
| |
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.Mac, generally with servicing rights retained. At March 31, 20172018, the Company serviced a $624.5675.6 million residential real estate mortgage portfolio, of which $2.82.9 million was held for sale and approximately $449.3490.8 million was serviced for unaffiliated third parties.
The Company sold $28.5$23.1 million of qualified residential real estate loans primarily originated during the first three months of 20172018 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of $22.9$28.5 million during the first three months of 20162017. The Company generally retains the servicing rights on sold residential mortgage loans. 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 VA and FHA 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 we serve, including low and moderate income borrowers, while the government guaranty mitigates our exposure to credit risk.
The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs whichthat provide a government agency guaranty for a portion of the loan amount. There was $5.34.3 million guaranteed under these various programs at March 31, 20172018 on an aggregate balance of $6.65.5 million in subject loans. The Company occasionally sells the guaranteed portion of the loan to other financial concerns and retains servicing rights, which generates fee income. There were no commercial loans sold in the first three months of 2018 and $27 thousand of commercial loans sold in the first three months of 2017 and no commercial loans sold in the first three months of 2016.2017. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur.
The Company serviced $17.213.9 million of commercial and commercial real estate loans for unaffiliated third parties as of March 31, 20172018. This includes $13.811.6 million of commercial or commercial real estate loans the Company has participated out to other financial institutions, in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
As of March 31, 20172018, there were $1.1 billion in total loans serviced, had grownan increase of $5.6 million compared to $1.0 billion, which includesDecember 31, 2017. Total loans serviced at March 31, 2018 included total loans on the balance sheet of $540.4$594.6 million as well as total loans sold with servicing retained of $466.5$504.8 million compared to total loans serviced of $993.1 million as of December 31, 2016..
The Company capitalizes servicing rightsMSRs 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 servicing rightsMSRs on loans sold with servicing retained was $1.61.7 million at March 31, 20172018, with an estimated market value in excess of the carrying value as of such date. Management periodically evaluates and measures the servicing assets for impairment.
There were no loans pledged to secure municipal deposits above the FDIC insurance coverage level as of March 31, 2017. QualifiedQualifying residential first mortgage loans and certain commercial real estate loans held by Union are eligible to bewith a carrying value of $165.0 million were pledged as collateral for borrowings from the FHLB under a blanket lien.lien at March 31, 2018.
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. Renewed market volatility, high unemployment rates or weakness in the general economic condition of the country or our market area, may have a negative effect on our customers’ ability to make their loan payments on a timely basis and/or on underlying collateral values. Management closely monitors the Company’s loan and investment portfolios, OREO and OAO for potential problems and reports to the Company’s and Union’s Board at regularly scheduled meetings. Repossessed assets and loans or investments that are 90 days or more past due are considered to be nonperforming assets. 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.
TheRepossessed assets and loans or investments that are 90 days or more past due are considered to be nonperforming assets.The following table shows the composition of nonperforming assets at the dates indicated and trends ofin certain ratios monitored by the Company's management in reviewing asset quality:
| | | As of or for the three months ended | As of or for the year ended | As of or for the three months ended | As of or for the three months ended | As of or for the year ended | As of or for the three months ended |
| March 31, 2017 | December 31, 2016 | March 31, 2016 | March 31, 2018 | December 31, 2017 | March 31, 2017 |
| (Dollars in thousands) | (Dollars in thousands) |
Nonaccrual loans | $ | 3,083 |
| $ | 3,545 |
| $ | 2,427 |
| $ | 1,400 |
| $ | 1,191 |
| $ | 3,083 |
|
Accruing loans 90+ days delinquent | 257 |
| 840 |
| 657 |
| 294 |
| 494 |
| 257 |
|
Total nonperforming loans (1) | | 1,694 |
| 1,685 |
| 3,340 |
|
OREO | | — |
| 36 |
| — |
|
Total nonperforming assets (1) | $ | 3,340 |
| $ | 4,385 |
| $ | 3,084 |
| $ | 1,694 |
| $ | 1,721 |
| $ | 3,340 |
|
Allowance for loan losses to loans not held for sale | 0.97 | % | 0.98 | % | 1.00 | % | |
Allowance for loan losses to nonperforming loans | 155.45 | % | 119.66 | % | 166.18 | % | |
ALL to loans not held for sale | | 0.91 | % | 0.92 | % | 0.97 | % |
ALL to nonperforming loans | | 319.07 | % | 320.95 | % | 155.45 | % |
Nonperforming loans to total loans | 0.62 | % | 0.81 | % | 0.59 | % | 0.28 | % | 0.28 | % | 0.62 | % |
Nonperforming assets to total assets | 0.49 | % | 0.63 | % | 0.48 | % | 0.23 | % | 0.23 | % | 0.49 | % |
Delinquent loans (30 days to nonaccruing) to total loans | 1.64 | % | 1.55 | % | 1.48 | % | 1.22 | % | 1.05 | % | 1.64 | % |
Net charge-offs (annualized) to average loans not held for sale | 0.04 | % | 0.02 | % | 0.12 | % | — | % | 0.01 | % | 0.04 | % |
____________________
| |
(1) | The Company had guarantees of U.S. or state government agencies on the above nonperforming loans totaling $129 thousand at March 31, 2018, $131 thousand at December 31, 2017, and $333 thousand at March 31, 2017, $599 thousand at December 31, 2016, and $444 thousand at March 31, 2016. |
The level of nonaccrual loans decreasedincreased $462209 thousand, or 13.0%17.5%, since December 31, 20162017, and accruing loans delinquent 90 days or more decreased $583200 thousand, or 69.4%40.5%, during the same time period. The percentage of nonperforming loans to total loans decreased from 0.81% to 0.62%. There was one residential real estate loan totaling $11$131 thousand in process of foreclosure at March 31, 20172018. The aggregate interest income not recognized on nonaccrual loans amounted to approximately $1.2 million and $1.3 million as of March 31, 2018 and 2017, respectively, and $1.2 million as of March 31, 2017 and 2016, respectively and $1.3 million as of December 31, 2016.2017.
At March 31, 20172018, the Company had loans rated substandard that were on a performing status totaling $1.93.2 million, compared to $1.8$3.0 million at December 31, 2016.2017. In management's view, substandard loans represent a higher degree of risk of becoming nonperforming loans in the future. 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. In contrastThe past two winter seasons have brought cold temperatures and snowfall to the lack of snow in the prior year winter seasonarea, which put some strain on the local tourism industry, this past winter season brought cold and snow to the area. The impact of the difficult 2015/2016 winter season appears to have been repaired withimproved the good tourism seasons that have followed for this industry.related business' financial performance. Improvement in local economic indicators have also been identified over the past year.two years. The unemployment rate has stabilized in Vermont and was 2.8% for March 2018 compared to 3.0% for March 2017 compared to 3.3% for March 2016.2017. The New Hampshire unemployment rate was 2.8%2.6% for March 20172018 compared to 2.6%2.8% for March 2016.2017. These rates compare favorably with the nationwide unemployment rate of 4.5%4.1% and 5.0%4.5% for the comparable periods. Management will continue to monitor the national, regional and local economic environment 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 the 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 for the three months ended March 31, 2017,2018, or March 31, 2016.2017. The Company evaluates each OREO property at least quarterly for
changes in the fair value. The Company had no properties classified as OREO at March 31, 20172018 or March 31, 2017 and one residential real estate property valued at $36 thousand classified as OREO at December 31, 20162017.
Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ALL to absorb such losses. The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the evaluation date; however, actual loan losses may vary from current estimates. The Company's policy and methodologies for establishing the ALL, described in the Company's 2017 Annual Report on Form 10-K for the year ended December 31, 2016, did not change during the first three months of 20172018.
Impaired loans including $3.3 million of TDR loans, were $4.33.3 million at March 31, 20172018, with government guaranties of $623533 thousand and a specific reserve amount allocated of $8250 thousand. Impaired loans including $3.4 million of TDR loans, at December 31, 20162017 were $5.33.3 million, with government guaranties of $637550 thousand and a specific reserve amount allocated of $103$48 thousand. All of the impaired loans were also TDR loans at March 31, 2018 and December 31, 2017. Based on management's evaluation of the Company's historical loss experience on substandard commercial loans, commercial loans with balances greater than $500 thousand was established as the threshold for individual impairment evaluation with a specific reserve allocated when warranted. Commercial loans with balances under this threshold are collectively evaluated for impairment as a homogeneous pool of loans, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. The specific reserve amount allocated to individually identified impaired loans decreasedincreased $212 thousand as a result of the March 31, 20172018 impairment evaluation.
The following table reflects activity in the ALL for the three months ended March 31, 20172018 and 20162017:
| | | For The Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2017 | 2016 | 2018 | 2017 |
| (Dollars in thousands) | (Dollars in thousands) |
Balance at beginning of period | $ | 5,247 |
| $ | 5,201 |
| $ | 5,408 |
| $ | 5,247 |
|
Charge-offs | (61 | ) | (156 | ) | (6 | ) | (61 | ) |
Recoveries | 6 |
| 5 |
| 3 |
| 6 |
|
Net charge-offs | (55 | ) | (151 | ) | (3 | ) | (55 | ) |
Provision for loan losses | — |
| 75 |
| — |
| — |
|
Balance at end of period | $ | 5,192 |
| $ | 5,125 |
| $ | 5,405 |
| $ | 5,192 |
|
The following table (net of loans held for sale) shows the internal breakdown by risk component of the Company's ALL and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated:
| | | March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 |
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
| (Dollars in thousands) | (Dollars in thousands) |
Residential real estate | $ | 1,372 |
| 32.1 | $ | 1,399 |
| 32.4 | $ | 1,375 |
| 30.7 | $ | 1,375 |
| 30.5 |
Construction real estate | 442 |
| 7.0 | 391 |
| 6.4 | 494 |
| 7.3 | 494 |
| 7.3 |
Commercial real estate | 2,661 |
| 46.0 | 2,687 |
| 46.7 | 2,773 |
| 44.1 | 2,773 |
| 43.4 |
Commercial | 346 |
| 8.2 | 342 |
| 7.9 | 367 |
| 7.9 | 367 |
| 8.6 |
Consumer | 24 |
| 0.6 | 26 |
| 0.7 | 25 |
| 0.6 | 25 |
| 0.7 |
Municipal | 42 |
| 6.1 | 40 |
| 5.9 | 63 |
| 9.4 | 63 |
| 9.5 |
Unallocated | 305 |
| — | 362 |
| — | 308 |
| — | 308 |
| — |
Total | $ | 5,192 |
| 100.0 | $ | 5,247 |
| 100.0 | $ | 5,405 |
| 100.0 | $ | 5,405 |
| 100.0 |
Notwithstanding the categories shown in the table above or any specific allocation under the Company's ALL methodology, all funds in the ALL are available to absorb loan losses in the portfolio, regardless of loan category or specific allocation.
There were no changes to the reserve factors assigned to any of the loan portfolios based on the qualitative factor reviews performed during the first three months of 20172018. Management of the Company believes, in its best estimate, that the ALL at March 31, 20172018
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 March 31, 20172018. 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 maycould require increased provisions to replenish the ALL, which could negatively affect earnings. While the Company recognizes that economic slowdowns or financial and credit market turmoil may adversely impact its borrowers' financial performance and ultimately their ability to repay their loans, managementManagement continues to be cautiously optimistic about the collectability of the Company's loan portfolio.
Investment Activities. At March 31, 20172018, investment securities classified as AFS totaled $67.668.4 million and securities classified as HTM totaled $999 thousand, or $68.6 million combined, comprising 10.1%9.5% of total assets.assets, compared to $65.4 million, or 8.8% of total assets at December 31, 2017 . Total investment securities increaseddecreased $2.12.0 million, or 3.1%3.0%, from $66.666.4 million, or 9.6%8.9% of total assets at December 31, 20162017. Net unrealized losses for the Company’s AFS investment securities portfolio were $665 thousand1.6 million as of March 31, 20172018, compared to net unrealized losses of $1.0 million381 thousand as of December 31, 20162017. Net unrealized losses of $439 thousand1.3 million, net of income tax effect, were reflected in the Company’s accumulated OCI component of stockholders’ equity at March 31, 20172018. There was $1 thousandwere no securities classified as HTM at March 31, 2018 and $1.0 million in net unrealized losses in the Company's HTM investment securities portfolio at March 31, 2017 and no unrealized gain or lossclassified as HTM at December 31, 20162017. No declines in value were deemed by management to be OTT at March 31, 20172018. Deterioration in credit quality and/or imbalances in liquidity that may exist in the financial marketplace might adversely affect the fair values of the Company’s investment portfolio and the amount of gains or losses ultimately realized on the sale of such securities, and may also increase the potential that certain resulting unrealized losses will be designated as OTT in future periods, resulting in write-downs and charges to earnings. There was $14.2$2.7 million of investment securities pledged to secure various public deposits or customer repurchase agreements as of March 31, 2017,2018, compared to $8.4$4.6 million at December 31, 2016.2017.
Deposits. The following table shows information concerning the Company's average deposits by account type and weighted average nominal rates at which interest was paid on such deposits for the three months ended March 31, 20172018 and year ended December 31, 20162017:
| | | Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 |
| Average Amount | Percent of Total Deposits | Average Rate | Average Amount | Percent of Total Deposits | Average Rate | Average Amount | Percent of Total Deposits | Average Rate | Average Amount | Percent of Total Deposits | Average Rate |
| (Dollars in thousands) | (Dollars in thousands) |
Nontime deposits: | | | | | | | | | | | | |
Noninterest bearing deposits | $ | 106,794 |
| 18.4 | — |
| $ | 105,596 |
| 18.7 | — |
| $ | 124,875 |
| 19.8 | — |
| $ | 106,794 |
| 18.4 | — |
|
Interest bearing checking accounts | 140,253 |
| 24.1 | 0.11 | % | 128,977 |
| 22.8 | 0.09 | % | 145,091 |
| 23.0 | 0.13 | % | 140,253 |
| 24.1 | 0.11 | % |
Money market accounts | 132,652 |
| 22.8 | 0.53 | % | 110,938 |
| 19.6 | 0.35 | % | 154,704 |
| 24.6 | 0.68 | % | 132,652 |
| 22.8 | 0.53 | % |
Savings accounts | 98,283 |
| 16.9 | 0.15 | % | 93,118 |
| 16.5 | 0.15 | % | 103,362 |
| 16.4 | 0.15 | % | 98,283 |
| 16.9 | 0.15 | % |
Total nontime deposits | 477,982 |
| 82.2 | 0.21 | % | 438,629 |
| 77.6 | 0.15 | % | 528,032 |
| 83.8 | 0.26 | % | 477,982 |
| 82.2 | 0.21 | % |
Time deposits: | | | | | | | | | | | | |
Less than $100,000 | 62,330 |
| 10.7 | 0.66 | % | 63,720 |
| 11.3 | 0.66 | % | 60,009 |
| 9.5 | 0.67 | % | 62,330 |
| 10.7 | 0.66 | % |
$100,000 and over | 41,393 |
| 7.1 | 0.69 | % | 62,528 |
| 11.1 | 0.90 | % | 41,784 |
| 6.7 | 0.86 | % | 41,393 |
| 7.1 | 0.69 | % |
Total time deposits | 103,723 |
| 17.8 | 0.67 | % | 126,248 |
| 22.4 | 0.77 | % | 101,793 |
| 16.2 | 0.75 | % | 103,723 |
| 17.8 | 0.67 | % |
Total deposits | $ | 581,705 |
| 100.0 | 0.29 | % | $ | 564,877 |
| 100.0 | 0.29 | % | $ | 629,825 |
| 100.0 | 0.34 | % | $ | 581,705 |
| 100.0 | 0.29 | % |
During the first three months of 2018, average total deposits grew $48.1 million, or 8.3%, compared to the three months ended March 31, 2017, with growth in all categories except time deposits.
The Company participates in CDARS, which permits the Company to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. CDARS also provides the Company with an additional source of funding and liquidity through the purchase of deposits. There were $9.9$12.3 million of time deposits of $250,000 or less on the balance sheet at March 31, 20172018 and $10.9$11.5 million at December 31, 2016,2017, which were exchanged with other CDARS participants and are therefore considered for certain regulatory purposes to be “brokered” deposits. There were no purchased CDARS deposits at March 31, 20172018 or December 31, 2016.2017.
The Company also participates in the ICS program, a service through which Union can offer its customers a savings product 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 savings deposits through ICS provides a depositor with full deposit insurance coverage for the customer,of excess balances, thereby helping Union 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. During the third quarter of 2016,There were
Union began offering an ICS money market account to its municipal and commercial customers. Several municipal customers began utilizing this account and as monies in time deposits matured they were placed into these money market accounts. There were $34.4$45.5 million and $52.6$67.0 million in exchanged ICS money market deposits on the balance sheet at March 31, 20172018 and December 31, 2016,2017, respectively. As a result, an increase in the average balance and rate paid on total non-time deposit accounts occurred during the three months ended March 31, 2017 compared to the year ended December 31, 2016, with corresponding decreases in time deposits $100,000 and over. There were no purchased ICS deposits at March 31, 20172018 or December 31, 2016.2017.
At March 31, 2017,2018, there was $2.0 million$998 thousand in retail brokered deposits issued under a master certificatescertificate of deposit toprogram with a deposit broker.broker for the purpose of providing a supplemental source of funding and liquidity. These deposits will mature in $1.0 million increments in each of the next two years.February 2019. There were $3.0$2.0 million of retail brokered deposits at December 31, 2016.2017.
The following table provides a maturity distribution of the Company’s time deposits in amounts of $100,000 and over at March 31, 20172018 and December 31, 20162017:
|
| | | | | | |
| March 31, 2017 | December 31, 2016 |
| (Dollars in thousands) |
Within 3 months | $ | 9,953 |
| $ | 5,202 |
|
3 to 6 months | 8,004 |
| 9,927 |
|
6 to 12 months | 9,356 |
| 12,051 |
|
Over 12 months | 13,484 |
| 13,401 |
|
| $ | 40,797 |
| $ | 40,581 |
|
During the first three months of 2017, average total deposits grew $16.8 million, or 3.0%, compared to the year ended December 31, 2016, with growth in all categories except time deposits. In total, time deposits at March 31, 2017 decreased $666 thousand, or 0.6%, from December 31, 2016, with the average balance decreasing $22.5 million. The Company’s time deposits in amounts of $100 thousand and over increased $216 thousand, or 0.5%, between December 31, 2016 and March 31, 2017, while the average balance decreased from $62.5 million to $41.4 million. The decrease in the average time deposits is primarily the result of the third quarter 2016 shift in municipal deposit funds from time deposits to the fully insured ICS money market product.
|
| | | | | | |
| March 31, 2018 | December 31, 2017 |
| (Dollars in thousands) |
Within 3 months | $ | 9,363 |
| $ | 5,345 |
|
3 to 6 months | 9,410 |
| 9,752 |
|
6 to 12 months | 13,826 |
| 13,737 |
|
Over 12 months | 10,649 |
| 12,348 |
|
| $ | 43,248 |
| $ | 41,182 |
|
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. At March 31, 20172018, the Company had deposit accounts with less than $250 thousand totaling $438.7463.1 million, or 75.4%74.2% of its deposits, with FDIC insurance protection. An additional $12.62.5 million of municipal deposits were over the FDIC insurance coverage limit at March 31, 20172018 and were collateralized by Union under applicable state regulations by investment securities.
Borrowings. Total borrowed funds at March 31, 20172018 were $31.731.3 million compared to $31.6 million at December 31, 20162017, a net increasedecrease of $132316 thousand, or 0.4%1.0%. The FHLB option advance borrowings were $30.431.1 million at March 31, 2018, at a weighted average rate of 1.44%, and $30.2 million at December 31, 2017, at a weighted average rate of 1.42%, and $30.5 million at December 31, 2016, at a weighted average rate of 1.42%. The decreaseincrease in option advances reflectadvance borrowings reflects a $7.0 million five year option advance (callable after one year) at 0.77% taken for liquidity purposes, partially offset by the maturity of a $1.0 million option advance, a $5.0 million option advance called by FHLB and scheduled monthly payments of $70$72 thousand on long-term FHLB amortizing advances during the first quarterthree months of 2017.2018. In addition, the Company had overnight secured customer repurchase agreement sweeps at March 31, 20172018 of $1.3121 thousand, at a weighted average rate of 0.15%, compared to $1.4 million, at a weighted average rate of 0.23%, compared to $1.1 million, at a weighted average rate of 0.23%0.25% at December 31, 20162017, an increasea decrease of $202 thousand1.2 million, or 18.4%91.1%., primarily due to a customer converting their account to another deposit product during the quarter. The volume of the overnight secured customer repurchase agreement sweeps is volatile and is a function of the customer'sour customers' cash flow and cash management needs.
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 $33.3 million and $29.6 million were utilized as collateral for these deposits at March 31, 2018 and December 31, 2017, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $6 thousand for the three months ended March 31, 2018, with no fees paid for the three months ended March 31, 2017.
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 instruments.
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 the balance sheet dates:
| | | March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 |
| (Dollars in thousands) | (Dollars in thousands) |
Commitments to originate loans | $ | 22,347 |
| $ | 31,404 |
| $ | 28,361 |
| $ | 25,394 |
|
Unused lines of credit | 78,044 |
| 76,544 |
| 87,457 |
| 85,906 |
|
Standby and commercial letters of credit | 1,574 |
| 1,624 |
| 2,121 |
| 2,064 |
|
Credit card arrangements | 1,312 |
| 1,341 |
| 1,286 |
| 1,326 |
|
FHLB Mortgage Partnership Finance credit enhancement obligation, net | 611 |
| 610 |
| 643 |
| 640 |
|
Commitment to purchase investment in a real estate limited partnership | 841 |
| 980 |
| 1,470 |
| 1,470 |
|
Commitment to purchase FDIC insured certificates of deposit | 498 |
| — |
| |
Contract commitment for renovation projects | | 740 |
| 662 |
|
Total | $ | 105,227 |
| $ | 112,503 |
| $ | 122,078 |
| $ | 117,462 |
|
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. 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 and maple syrup products production.
The Company did not hold any derivative or hedging instruments at March 31, 20172018 or December 31, 2016.2017.
The Company’s subsidiary bank is required (as are all banks) to maintain vault cash or a noninterest bearing reserve balance as established by FRB regulations. The Bank’s average total required reserve for the 14 day maintenance period including March 31, 20172018 was $844$994 thousand and for December 31, 20162017 was $891 thousand,$1.4 million, both of which were satisfied by vault cash.
Contractual Obligations. The Company and Union have various financial obligations, including contractual obligations that may require future cash payments. The following table presents, as of March 31, 2017,2018, significant fixed and determinable contractual obligations to third parties:
| | | March 31, 2017 | March 31, 2018 |
| (Dollars in thousands) | (Dollars in thousands) |
Operating lease commitments | $ | 352 |
| $ | 623 |
|
Contractual payments on borrowed funds (1) | 31,727 |
| 31,265 |
|
Deposits without stated maturity (1) (2) | 479,538 |
| 520,978 |
|
Certificates of deposit (1) (2) | 102,527 |
| 102,865 |
|
Deferred compensation payouts | 918 |
| 880 |
|
Total | $ | 615,062 |
| $ | 656,611 |
|
____________________
| |
(1) | The amounts exclude interest payable. |
| |
(2) | While Union has a contractual obligation to depositors should they wish to withdraw all or some of the funds on deposit, management believes, based on historical analysis as well as current conditions in the financial markets, that the majority of these deposits will remain on deposit for the foreseeable future. |
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; amortization, prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities and loans AFS; earnings; and funds provided from operations. Contractual principal repayments on loans are a relatively predictable source of funds,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.
As of March 31, 2017,2018, Union, as a member of FHLB, had access to unused lines of credit up to $62.4$35.0 million over and above the $30.4$65.3 million in combined outstanding term advances withborrowings 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 March 31, 2017.2018. 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 linesline of credit totaling $7.0$10.0 million with an upstream correspondent bank and one-way buy options with CDARS and ICS as well as access to the FRB discount window, which would require pledging of qualified assets. Core deposits are the lowest cost of funds the Company has access to but these deposits may not be sufficient to cover the on balance sheet liquidity needs which makes using these other funding sources necessary. In an attempt to control the cost of these other sources, an agreement was entered into with Promontory Interfinancial Network that locks in the cost of funds on purchased ICS deposits at 10 basis points over the federal funds rate for a period of one year. At March 31, 20172018 there were no purchased ICS deposits under this agreement, no purchased CDARS deposits, and no outstanding advances on the federal funds linesline or at 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. At March 31, 2018, there was $998 thousand in retail brokered deposits issued under a master certificate of deposit program with a deposit broker. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.
Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management’s internal assessment of economic capital, funds the Company’s business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments, maintain required regulatory capital levels and provide continued support for deposits. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions.
Stockholders’ equity increased from $56.3$58.7 million at December 31, 20162017 to $57.2$59.2 million at March 31, 2017,2018, reflecting net income of $1.9$2.7 million for the first three months of 2017,2018, an increase of $225$41 thousand in accumulated OCI, $34 thousand offrom stock based compensation, and a $5an $8 thousand increase due to the issuance of common stock under the DRIP. These increases were partially offset by cash dividends paid of $1.3 million, a decrease of $950 thousand in accumulated other comprehensive loss due to a decline in the fair market value of the Company's AFS securities, and stock repurchases of $9$3 thousand during the three months ended March 31, 2017.2018. The components of the other comprehensive loss are illustrated in Note 11 of the unaudited consolidated financial statements.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of March 31, 2017,2018, the Company had 4,936,6524,940,961 shares issued, of which 4,462,0274,465,657 were outstanding and 474,625475,304 were held in treasury.
In January 2017,2018, the Company's Board reauthorized the limited stock repurchase plan that was initially established in May of 2010 and has been reauthorized annually since that time. 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 (currently 3,0002,500 shares) in open market purchases or privately negotiated transactions, as management deems advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The quarterly repurchase authorization expires on December 31, 2017,2018, unless reauthorized. The Company repurchased 22560 shares during the first three months of 20172018 under this program at a total cost of $9$3 thousand.
During the first quarter of 2016 theThe Company adopted a Dividend Reinvestment and Stock Purchase Plan 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 March 31, 2017, 4322018, 1,460 shares of stock had been issued from treasury stock under the DRIP.
The Company (on a consolidated basis) and Union are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's and Union's financial statements. Under rules effective January 1, 2015, a bank holding company, such ascapital adequacy guidelines and the regulatory framework for prompt corrective action, the Company is considered “well capitalized” ifand Union must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and Union's capital amounts and classification are also subject to qualitative judgments by the bank holding company (i) hasregulators about components, risk weightings and other factors.
Under the current guidelines, banking organizations must have a minimum total risk basedrisk-based capital ratio of at least 10%8.0%, (ii) has a minimum Tier I risk-based capital ratio of at least 8%6.0%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. In addition, the FDIC has amended its prompt corrective action rules to reflect the revisions made by the new capital rules implementing Basel III. Under the FDIC’s revised rules, which became effective January
1, 2015, an FDIC supervised institution is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) aminimum common equity Tier I risk-based capital ratio of 8.0% or greater; (iii)4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a 2.5% capital conservation buffer consisting of common Tier I equity, ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order,a transition schedule with a full phase-in by 2019. Effective January 1, 2018, the Company and the Bank were required to establish a capital directive, or prompt corrective action directiveconservation buffer of 1.875%, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to meet andrisk-weighted assets they must maintain a specific capital level for any capital measure. The final rule also requires unrealized gains and lossesto avoid limits on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank elected to opt-out of this regulatory capital provision. By opting out of the provision, the bank retains what is known as the accumulated other comprehensive income filter. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.executive officers and similar employees.
As of March 31, 2017,2018, both the Company and Union met all capital adequacy requirements to which they are subject. There were no conditions or events between March 31, 20172018 and the date of this report that management believes have changed either Company’s regulatory capital category.
| | | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions |
As of March 31, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of March 31, 2018 | | Amount | Ratio | Amount | Ratio | Amount | Ratio |
| (Dollars in thousands) | (Dollars in thousands) |
Company: | | | | | | | | | | | | |
Total capital to risk weighted assets | $ | 62,622 |
| 13.40 | % | $ | 37,386 |
| 8.00 | % | N/A |
| N/A |
| $ | 67,850 |
| 13.96 | % | $ | 38,883 |
| 8.00 | % | N/A |
| N/A |
|
Tier I capital to risk weighted assets | 57,430 |
| 12.29 | % | 28,037 |
| 6.00 | % | N/A |
| N/A |
| 62,445 |
| 12.85 | % | 29,157 |
| 6.00 | % | N/A |
| N/A |
|
Common Equity Tier 1 to risk weighted assets | 57,430 |
| 12.29 | % | 21,028 |
| 4.50 | % | N/A |
| N/A |
| 62,445 |
| 12.85 | % | 21,868 |
| 4.50 | % | N/A |
| N/A |
|
Tier I capital to average assets | 57,430 |
| 8.55 | % | 26,868 |
| 4.00 | % | N/A |
| N/A |
| 62,445 |
| 8.63 | % | 28,943 |
| 4.00 | % | N/A |
| N/A |
|
| | | | | | | | | | | | |
Union: | | | | | | | | | | | | |
Total capital to risk weighted assets | $ | 62,371 |
| 13.38 | % | $ | 37,292 |
| 8.00 | % | $ | 46,615 |
| 10.00 | % | $ | 67,379 |
| 13.89 | % | $ | 38,807 |
| 8.00 | % | $ | 48,509 |
| 10.00 | % |
Tier I capital to risk weighted assets | 57,179 |
| 12.26 | % | 27,983 |
| 6.00 | % | 37,311 |
| 8.00 | % | 61,974 |
| 12.78 | % | 29,096 |
| 6.00 | % | 38,794 |
| 8.00 | % |
Common Equity Tier 1 to risk weighted assets | 57,179 |
| 12.26 | % | 20,987 |
| 4.50 | % | 30,315 |
| 6.50 | % | 61,974 |
| 12.78 | % | 21,822 |
| 4.50 | % | 31,520 |
| 6.50 | % |
Tier I capital to average assets | 57,179 |
| 8.51 | % | 26,876 |
| 4.00 | % | 33,595 |
| 5.00 | % | 61,974 |
| 8.56 | % | 28,960 |
| 4.00 | % | 36,200 |
| 5.00 | % |
TheDividends paid by Union are the primary source of funds available to the Company remains focused on achievingfor payment of dividends to its goalsstockholders. Union is subject to certain requirements imposed by federal banking laws and regulations, which among other things, establish minimum levels of long-term growthcapital and an above-average shareholder return, while maintaining a strong capital position. Management is awarerestrict the amount of dividends that may be distributed by Union to the particular importance in today’s uncertain economic environmentCompany.
Quarterly cash dividends of maintaining strong capital reserves and planning for future capital needs, including those required by the Basel III capital standards through the final phase in period ending on January 1, 2019.
A quarterly cash dividend of $0.29$0.30 per share waswere paid during the first quarter of 2018 and declared for the second quarter, payable on May 10, 2018 to stockholders of record on April 29,30, 2018.The dividend rate of $0.30 per share represents an increase of $0.01 per share in the quarterly cash dividends paid in 2017 payable May 10, 2017. The dividend for the previous quarter was $0.29 per share..
Regulatory Matters. The Company and Union are subject to periodic examinations by the various regulatory agencies. These examinations include, but are not limited to, procedures designed to review lending practices, risk management, credit quality, liquidity, compliance and capital adequacy. In May of 2017, the FDIC performed its regular, periodic safety and soundness examination of Union. In February of 2017, the FDIC performed its regular periodic compliance examination of Union. In JanuarySeptember of 2016,2017, the FRB performed its regular, periodic examination of the Company. During 2015, the Vermont Department of Financial Regulation performed a regular safety and soundness examination of Union. During 2014, the FDIC performed its regular, periodic regulatory examination of Union. No comments were received that would have a material adverse effect on the Company’s or Union’s liquidity, financial position, capital resources, or results of operations.
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Interest Rate Risk. Market risk is the potential of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices, and equity prices. As of March 31, 20172018, the Company did not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing, deposit taking and borrowing activities. Management of interest rate risk is an important component of our asset and liability management process, which is governed by established policies that are reviewed and approved annually. Our investment policy details the types of securities that may be purchased, and establishes portfolio limits and maturity limits for the various sectors. Our investment policy also establishes specific investment quality
limits. The ALCO develops guidelines and strategies impacting our asset and liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Members of the ALCO also manage the investment portfolio to maximize net interest income while mitigating market and interest rate risk.
Interest rate risk arises naturally from imbalances in repricing, maturity and cash flow characteristics of our assets and liabilities. The ALCO takes into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their relation to possible changes in interest rates. The ALCO manages interest rate exposure primarily by using on-balance sheet strategies, generally accomplished through the management of the duration, rate sensitivity and average lives of our various investments, and by extending or shortening maturities of borrowed funds, as well as carefully managing and monitoring the maturities and pricing of loans and deposits.
An outside consultant is utilized to perform rate shocks ofto our balance sheet to assess our risk to earnings in different interest rate environments, and to perform a variety of other analyses. The consultant’s most recent completed analysis was as of March 31, 2017.2018. The base simulation assumed no changes in rates, as well as 200 and 300 basis point rising interest rate scenarios which assume a parallel shift of the yield curve over a one-year period, and no growth assumptions. Management is not aware of any significant changes in the Company's risk profile since the analysis was performed as of DecemberMarch 31, 2016.2018. A summary of the results is as follows:
Current/Flat Rates: If rates remain at current levels net interest income is projected to trend downwardsideways for the entire simulation as declining asset yields will continueare similarly offset by reductions to erode while funding costs provide little to no relief.costs.
Rising Rates: Higher rates indicate positive results under all scenarios. Under the rising rate scenarios if rates rise in a parallel fashion, net interest income is expected to trend close to the base case scenario over the near term as higher funding costs match increasing asset yields. Once funding cost increases stabilize, net interest income is projected to increase throughoutfor the duration of the simulation as asset yieldsassets reprice at higher rates and investment and loan cash flow continues to cycle into the elevated environment. The timing of recovery will reset independ on the higher rate environmentslope and funding cost increases will lag.shape of the yield curve as rates rise.
The net interest income simulation as of March 31, 20172018 showed that the change in net interest income for the next 12 months from our expected or “most likely” forecast was as follows:
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| | | | | | | |
| Rate Change | Percent Change in Net Interest Income Limit | Percent Change in Net Interest Income | |
| Up 300 basis points | (21.00 | )% | 3.9 | % | | |
| Up 200 basis points | (14.00 | )% | 2.8 | % | | |
|
| | | | | | | |
| Rate Change | Percent Change in Net Interest Income Limit | Percent Change in Net Interest Income | |
| Up 300 basis points | (21.00 | )% | 2.6 | % | | |
| Up 200 basis points | (14.00 | )% | 2.1 | % | | |
The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results. These estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit run-off rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
The model used to perform the base case balance sheet simulation assumes a parallel shift of the yield curve over twelve months and reprices every interest earning asset and interest bearing liability on our balance sheet, simultaneously. The use of pricing betas help simulate the expected pricing behavior regarding non-maturing deposits, limiting the rate increases that occur when market rates rise. A historic analysis of the bank's prepayment history was performed and the results were used as a basis for future prepayment expectations. Investment securities with call provisions are examined on an individual basis to estimate the likelihood of a call.
As market conditions vary from those assumed in the sensitivity analysis, actual results will likely differ due to: the varying impact of changes in the balances and mix of loans and deposits differing from those assumed, the impact of possible off balance sheet commitments, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect all actions that the ALCO might take in responding to or anticipating changes in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information called for by this item is incorporated byto Part I, Item 2, reference in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption OTHER FINANCIAL CONSIDERATIONS on page 39.39 of this report
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of the Disclosure Control Committee, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 20172018. Based on this
evaluation they concluded that those disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files with the Commission is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required information.
Changes in Internal Controls over Financial Reporting. There was no change in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There are no known pending legal proceedings to which the Company or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability is not expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiary.
Item 1A. Risk Factors
There have been no material changes in the risk factors discussed in Part I-Item 1A, "Risk Factors" in our 2017 Annual Report on Form 10-K for the fiscal year ended December 31, 2016, since the date of the filing of that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended March 31, 20172018, the Company did not issue any unregistered equity securities.
The following table summarizes repurchases of the Company's equity securities during the quarter ended March 31, 2017:2018:
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| | | | | | | | |
Issuer Purchases of Equity Securities |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Program (1) |
January 2017 | — |
| — |
| — |
| 3,000 |
|
February 2017 | 225 |
| $41.70 | 225 |
| 2,775 |
|
March 2017 | — |
| — |
| — |
| — |
|
|
| | | | | | | | |
Issuer Purchases of Equity Securities |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Program (1) |
January 2018 | 60 |
| $48.82 | 60 |
| 2,440 |
|
February 2018 | — |
| — |
| — |
| 2,440 |
|
March 2018 | — |
| — |
| — |
| — |
|
__________________
| |
(1) | All repurchases shown in the table were made pursuant to a discretionary stock repurchase program under which the Company may repurchase up to 2,500 shares of its common stock each calendar quarter, in open market or privately negotiated transactions. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The program was initially authorized in 2010 and was reauthorized most recently in January 2018. The program will expire on December 31, 2018, unless reauthorized. |
Item 6. Exhibits.
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| |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 20172018 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three months ended March 31, 20172018 and 2016,2017, (iii) the unaudited consolidated statements of comprehensive income for the three months ended March 31, 20172018 and 2016,2017, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes. |
____________________
| |
* | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | |
| | Union Bankshares, Inc. |
| | |
May 10, 20172018 | | /s/ David S. Silverman |
| | David S. Silverman |
| | Director, President and Chief Executive Officer |
| | |
| | |
May 10, 20172018 | | /s/ Karyn J. Hale |
| | Karyn J. Hale |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
EXHIBIT INDEX
|
| |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| |
| Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 20172018 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three months ended March 31, 20172018 and 2016,2017, (iii) the unaudited consolidated statements of comprehensive income for the three months ended March 31, 20172018 and 2016,2017, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes. |
____________________
| |
* | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
Union Bankshares, Inc. Page 42