9.30.11 UNB 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2011
Commission file number: 001-15985
UNION BANKSHARES, INC.
P.O. BOX 667
20 LOWER MAIN STREET
MORRISVILLE, VT 05661
Registrant’s telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last report: Not applicable
Securities registered pursuant to section 12(b) of the Act:
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Common Stock, $2.00 par value | | Nasdaq Stock Market |
(Title of class) | | (Exchanges registered on) |
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.
Yes [X] No [ ]
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).
Yes [X] No [ ]
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):
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Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ X ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 1, 2011:
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| | | |
| Common Stock, $2 par value | | 4,457,204 shares |
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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PART II OTHER INFORMATION | |
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
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| | | | | | |
| September 30, 2011 | December 31, 2010 |
Assets | (Dollars in thousands) |
Cash and due from banks | $ | 5,133 |
| $ | 5,447 |
|
Federal funds sold and overnight deposits | 25,425 |
| 8,845 |
|
Cash and cash equivalents | 30,558 |
| 14,292 |
|
Interest bearing deposits in banks | 20,194 |
| 14,041 |
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Investment securities available-for-sale | 36,266 |
| 23,780 |
|
Investment securities held-to-maturity (fair value $5.0 million and $502 thousand at September 30, 2011 and December 31, 2010, respectively) | 5,000 |
| 500 |
|
Loans held for sale | 4,242 |
| 5,611 |
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Loans | 424,610 |
| 376,272 |
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Allowance for loan losses | (4,186 | ) | (3,755 | ) |
Net deferred loan costs | 212 |
| 188 |
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Net loans | 420,636 |
| 372,705 |
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Accrued interest receivable | 1,628 |
| 1,560 |
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Premises and equipment, net | 8,952 |
| 7,842 |
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Core deposit intangible | 1,651 |
| — |
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Goodwill | 2,223 |
| — |
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Other assets | 14,440 |
| 12,664 |
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Total assets | $ | 545,790 |
| $ | 452,995 |
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Liabilities and Stockholders’ Equity | | |
Liabilities | | |
Deposits | | |
Noninterest bearing | $ | 75,528 |
| $ | 64,526 |
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Interest bearing | 239,296 |
| 180,386 |
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Time | 156,701 |
| 131,748 |
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Total deposits | 471,525 |
| 376,660 |
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Borrowed funds | 26,017 |
| 28,986 |
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Accrued interest and other liabilities | 5,653 |
| 5,624 |
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Total liabilities | 503,195 |
| 411,270 |
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Commitments and Contingencies |
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Stockholders’ Equity | | |
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,923,286 shares issued at September 30, 2011 and 4,921,786 shares issued at December 31, 2010 | 9,847 |
| 9,844 |
|
Additional-paid-in capital | 272 |
| 244 |
|
Retained earnings | 37,766 |
| 37,623 |
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Treasury stock at cost; 466,082 shares at September 30, 2011 and December 31, 2010 | (3,823 | ) | (3,823 | ) |
Accumulated other comprehensive loss | (1,467 | ) | (2,163 | ) |
Total stockholders' equity | 42,595 |
| 41,725 |
|
Total liabilities and stockholders' equity | $ | 545,790 |
| $ | 452,995 |
|
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 1
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2011 | 2010 | 2011 | 2010 |
| (Dollars in thousands except per share data) |
Interest income | | | | |
Interest and fees on loans | $ | 5,751 |
| $ | 5,375 |
| $ | 16,336 |
| $ | 15,973 |
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Interest on debt securities: | |
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Taxable | 193 |
| 176 |
| 513 |
| 556 |
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Tax exempt | 85 |
| 74 |
| 239 |
| 221 |
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Dividends | 2 |
| 1 |
| 7 |
| 1 |
|
Interest on federal funds sold and overnight deposits | 9 |
| 7 |
| 25 |
| 15 |
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Interest on interest bearing deposits in banks | 78 |
| 95 |
| 230 |
| 327 |
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Total interest income | 6,118 |
| 5,728 |
| 17,350 |
| 17,093 |
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Interest expense | |
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Interest on deposits | 754 |
| 740 |
| 2,139 |
| 2,269 |
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Interest on borrowed funds | 262 |
| 290 |
| 840 |
| 853 |
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Total interest expense | 1,016 |
| 1,030 |
| 2,979 |
| 3,122 |
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Net interest income | 5,102 |
| 4,698 |
| 14,371 |
| 13,971 |
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Provision for loan losses | 150 |
| 200 |
| 450 |
| 380 |
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Net interest income after provision for loan losses | 4,952 |
| 4,498 |
| 13,921 |
| 13,591 |
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Noninterest income | |
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Trust income | 132 |
| 126 |
| 403 |
| 343 |
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Service fees | 1,153 |
| 1,020 |
| 3,206 |
| 3,004 |
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Net gains on sales of investment securities available-for-sale | 173 |
| — |
| 183 |
| — |
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Net gains on sales of loans held for sale | 483 |
| 334 |
| 990 |
| 601 |
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Other income | 71 |
| 76 |
| 278 |
| 248 |
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Total noninterest income | 2,012 |
| 1,556 |
| 5,060 |
| 4,196 |
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Noninterest expenses | |
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Salaries and wages | 2,100 |
| 1,682 |
| 5,722 |
| 4,839 |
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Pension and employee benefits | 790 |
| 699 |
| 2,386 |
| 2,133 |
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Occupancy expense, net | 276 |
| 225 |
| 827 |
| 701 |
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Equipment expense | 319 |
| 279 |
| 882 |
| 771 |
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Branch acquisition expenses | 62 |
| — |
| 407 |
| — |
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Other expenses | 1,598 |
| 1,252 |
| 4,510 |
| 3,847 |
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Total noninterest expenses | 5,145 |
| 4,137 |
| 14,734 |
| 12,291 |
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Income before provision for income taxes | 1,819 |
| 1,917 |
| 4,247 |
| 5,496 |
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Provision for income taxes | 392 |
| 457 |
| 761 |
| 1,291 |
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Net income | $ | 1,427 |
| $ | 1,460 |
| $ | 3,486 |
| $ | 4,205 |
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Earnings per common share | $ | 0.32 |
| $ | 0.33 |
| $ | 0.78 |
| $ | 0.94 |
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Weighted average number of common shares outstanding | 4,457,204 |
| 4,456,281 |
| 4,456,720 |
| 4,459,020 |
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Dividends per common share | $ | 0.25 |
| $ | 0.25 |
| $ | 0.75 |
| $ | 0.75 |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2011 and 2010 (Unaudited)
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| Common Stock | | | | | |
| Shares, net of treasury | Amount | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | Total stockholders’ equity |
| (Dollars in thousands) |
Balances, December 31, 2010 | 4,455,704 |
| $ | 9,844 |
| $ | 244 |
| $ | 37,623 |
| $ | (3,823 | ) | $ | (2,163 | ) | $ | 41,725 |
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Comprehensive income: | | | | | | | |
Net income | — |
| — |
| — |
| 3,486 |
| — |
| — |
| 3,486 |
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Other comprehensive income, net of tax: | | | | | | | |
Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects | — |
| — |
| — |
| — |
| — |
| 601 |
| 601 |
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Change in net unrealized loss on unfunded defined benefit plan liability, net of reclassification adjustment and tax effects | — |
| — |
| — |
| — |
| — |
| 95 |
| 95 |
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Total other comprehensive income | | | | | | 696 |
| |
Total comprehensive income | | | | — |
| — |
| — |
| 4,182 |
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Issuance of common stock | 1,500 |
| 3 |
| 23 |
| — |
| — |
| — |
| 26 |
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Cash dividends declared ($0.75 per share) | — |
| — |
| — |
| (3,343 | ) | — |
| — |
| (3,343 | ) |
Stock based compensation expense | — |
| — |
| 5 |
| — |
| — |
| — |
| 5 |
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Balances, September 30, 2011 | 4,457,204 |
| $ | 9,847 |
| $ | 272 |
| $ | 37,766 |
| $ | (3,823 | ) | $ | (1,467 | ) | $ | 42,595 |
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Balances, December 31, 2009 | 4,461,208 |
| $ | 9,844 |
| $ | 219 |
| $ | 36,494 |
| $ | (3,724 | ) | $ | (1,653 | ) | $ | 41,180 |
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Comprehensive income: | | | | | | | |
Net income | — |
| — |
| — |
| 4,205 |
| — |
| — |
| 4,205 |
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Other comprehensive income, net of tax: | | | | | | | |
Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects | — |
| — |
| — |
| — |
| — |
| 458 |
| 458 |
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Change in net unrealized loss on unfunded defined benefit pension plan liability, net of reclassification adjustment and tax effects | — |
| — |
| — |
| — |
| — |
| 73 |
| 73 |
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Total other comprehensive income | | | | | | 531 |
| |
Total comprehensive income | | | | | | | 4,736 |
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Cash dividends declared ($0.75 per share) | — |
| — |
| — |
| (3,344 | ) | — |
| — |
| (3,344 | ) |
Stock based compensation expense | — |
| — |
| 19 |
| — |
| — |
| — |
| 19 |
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Purchase of treasury stock | (5,390 | ) | — |
| — |
| — |
| (97 | ) | — |
| (97 | ) |
Balances, September 30, 2010 | 4,455,818 |
| $ | 9,844 |
| $ | 238 |
| $ | 37,355 |
| $ | (3,821 | ) | $ | (1,122 | ) | $ | 42,494 |
|
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| Nine Months Ended September 30, |
| 2011 | 2010 |
| (Dollars in thousands) |
Cash Flows From Operating Activities | | |
Net income | $ | 3,486 |
| $ | 4,205 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation | 506 |
| 485 |
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Provision for loan losses | 450 |
| 380 |
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Deferred income tax provision | 277 |
| 162 |
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Net amortization of investment securities | 39 |
| 11 |
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Equity in losses of limited partnerships | 367 |
| 319 |
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Stock based compensation expense | 5 |
| 19 |
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Net increase in unamortized loan costs | (24 | ) | (130 | ) |
Proceeds from sales of loans held for sale | 51,257 |
| 40,164 |
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Origination of loans held for sale | (48,898 | ) | (33,954 | ) |
Net gains on sales of loans held for sale | (990 | ) | (601 | ) |
Net losses on disposals of premises and equipment | 1 |
| 6 |
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Net gains on sale of investment securities available-for-sale | (183 | ) | — |
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Net gains on sales of repossessed property | (4 | ) | (2 | ) |
Write-downs of impaired assets | 163 |
| 9 |
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Net gains on sales of other real estate owned | (107 | ) | (9 | ) |
Decrease in accrued interest receivable | 129 |
| 184 |
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Amortization of core deposit intangible | 57 |
| — |
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(Increase) decrease in other assets | (2,166 | ) | 910 |
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Contribution to defined benefit pension plan | (1,250 | ) | (454 | ) |
Increase in other liabilities | 869 |
| 608 |
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Net cash provided by operating activities | 3,984 |
| 12,312 |
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Cash Flows From Investing Activities |
| |
Interest bearing deposits in banks |
| |
Proceeds from maturities and redemptions | 6,191 |
| 15,859 |
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Purchases | (12,344 | ) | (8,056 | ) |
Investment securities held-to-maturity | | |
Proceeds from maturities, calls and paydowns | 1,000 |
| 500 |
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Purchases | (5,500 | ) | (2,000 | ) |
Investment securities available-for-sale |
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Proceeds from sales | 2,325 |
| — |
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Proceeds from maturities, calls and paydowns | 5,848 |
| 10,222 |
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Purchases | (19,604 | ) | (6,304 | ) |
Net increase in loans | (15,027 | ) | (14,320 | ) |
Recoveries of loans charged off | 37 |
| 43 |
|
Purchases of premises and equipment | (1,100 | ) | (702 | ) |
Investments in limited partnerships | (1,157 | ) | (179 | ) |
Proceeds from sales of other real estate owned | 438 |
| 394 |
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Proceeds from sales of repossessed property | 4 |
| 20 |
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Cash acquired, net of cash paid, in branch acquisitions | 29,607 |
| — |
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Net cash used by investing activities | (9,282 | ) | (4,523 | ) |
| | |
Union Bankshares, Inc. Page 4
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Cash Flows From Financing Activities |
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Repayment of long-term debt | (4,423 | ) | (980 | ) |
Net decrease in short-term borrowings outstanding | (1,770 | ) | (5,119 | ) |
Net increase (decrease) in noninterest bearing deposits | 7,443 |
| (3,024 | ) |
Net increase in interest bearing deposits | 25,398 |
| 16,924 |
|
Net decrease in time deposits | (1,767 | ) | (5,727 | ) |
Issuance of common stock | 26 |
| — |
|
Purchase of treasury stock | — |
| (97 | ) |
Dividends paid | (3,343 | ) | (3,344 | ) |
Net cash provided (used) by financing activities | 21,564 |
| (1,367 | ) |
Net increase in cash and cash equivalents | 16,266 |
| 6,422 |
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Cash and cash equivalents |
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|
Beginning of period | 14,292 |
| 22,132 |
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End of period | $ | 30,558 |
| $ | 28,554 |
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Supplemental Disclosures of Cash Flow Information |
| |
Interest paid | $ | 3,087 |
| $ | 3,352 |
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Income taxes paid | $ | 650 |
| $ | 1,305 |
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Supplemental Schedule of Noncash Investing and Financing Activities |
| |
Other real estate acquired in settlement of loans | $ | 57 |
| $ | 914 |
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Other assets acquired in settlement of loans | $ | — |
| $ | 19 |
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Loans originated to finance the sale of other real estate owned | $ | 497 |
| $ | 320 |
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Investment in limited partnerships acquired by capital contributions payable | $ | 407 |
| $ | — |
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Assets acquired and liabilities assumed in branch acquisitions (Note 5): |
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Loans and other non-cash assets, excluding goodwill and core deposit intangible | $ | 33,624 |
| $ | — |
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Deposits and other liabilities | $ | 67,162 |
| $ | — |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 5
UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Note 1. | Basis of Presentation |
The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (the Company) as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of Company’s management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of the information contained herein, have been made. This information should be read in conjunction with the Company’s 2010 Annual Report to Shareholders and 2010 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2011, or any other interim period.
Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.
Intangible assets, included in the Company's unaudited interim consolidated financial statements, include the excess of the purchase price over the fair value of net assets acquired, goodwill, in the acquisition of three New Hampshire branch offices, as well as a core deposit intangible related to the deposits acquired (see Note 5). The core deposit intangible is amortized on a straight line basis over the estimated average life of the core deposit base of 10 years. The Company evaluates the valuation and amortization of the core deposit intangible asset if events occur that could result in possible impairment. Goodwill is evaluated for impairment at least annually, or more frequently as events or circumstances warrant.
Note 2. Commitments and 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 3. Per Share Information
Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The assumed conversion of available outstanding stock options does not result in material dilution and is not included in the calculation.
Note 4. Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, to amend the disclosure requirements and clarify existing requirements related to recurring and nonrecurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. The guidance requires new disclosures regarding transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a rollforward of activities, separately reporting purchases, sales, issuance, and settlements, for assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The new disclosure requirements apply to interim and annual reporting periods beginning after December 15, 2009, except for the new rules regarding purchases, sales, issuances and settlements associated with Level 3 measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Other than requiring additional disclosures, adoption of this accounting standard did not have a material effect on the Company’s consolidated financial statements. See Note 11.
In January 2011, the FASB issued an ASU, Deferral of the Effective Date of Disclosures about Troubled Debt Restructuring, for public-entity creditors to temporarily delay the effective date of the disclosures about troubled debt restructurings to allow time for FASB to complete its deliberations of what constitutes a troubled debt restructuring. The Company adopted the required portions of the accounting standard as of December 31, 2010 with no material impact on the Company's consolidated financial statements. In April 2011, the FASB issued an ASU, A Creditor's
Union Bankshares, Inc. Page 6
Determination of Whether a Restructuring is a Troubled Debt Restructuring, which provides companies new criteria for determining whether a particular loan modification represents a troubled debt restructuring for accounting purposes and it signals when a company should also record an impairment loss associated with the same loan. This new guidance was effective for quarterly and annual reports for periods beginning on or after June 15, 2011. The adoption of the standard did not have a material impact on the Company's consolidated financial statements.
In April 2011, the FASB issued an ASU, Reconsideration of Effective Controls for Repurchase Agreements, to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The update removes the transferor's ability criterion from the consideration of effective control for repurchase or other agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial statements.
In May 2011, the FASB issued an ASU, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRSs). The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. Management is currently reviewing the ASU but does not believe that it will have a material effect on the Company's consolidated financial statements.
In June 2011, the FASB issued an ASU, Presentation of Comprehensive Income, to improve the comparability, consistency and transparency of financial reporting,to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRSs. The ASU eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both formats, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and other comprehensive income are presented. The amendments in the ASU are to be applied retrospectively and are effective for annual and interim periods beginning after December 15, 2011. Management is currently reviewing the ASU to determine which of the two remaining formats will be used in the Company's future consolidated financial statements.
In September 2011, the FASB issued an ASU, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment, to address concerns about the cost and complexity of the required test to determine if goodwill is impaired, or inflated on the balance sheet and in need of a writedown. The ASU amends Topic 350 to permit an entity the option to first assess qualitative factors to determine whether it is more likely than not (50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim periods have not yet been issued. Management has decided to adopt the ASU as of September 30, 2011. (See Note 5.)
Note 5. Branch Acquisitions
On May 27,2011, the Company's wholly-owned subsidiary, Union Bank ("Union") acquired three New Hampshire branch offices of Northway Bank ("Northway"). In the transaction, Union assumed deposit relationships, and acquired performing loans, branch cash, two banking facilities, and other assets as illustrated below, including one leased branch location. Union paid a 6% premium on assumed deposits, loans were acquired at par, and the banking facilities were purchased at the most recent tax assessed value. The acquisition allows Union to expand its New Hampshire community banking franchise into western Coos County and to expand its presence in northern Grafton County. The transaction was accounted for as a business combination under current regulatory guidelines.
Union Bankshares, Inc. Page 7
The May 27, 2011 acquisition-date estimated fair values of assets acquired and liabilities assumed were as follows:
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| | | |
Assets: | (Dollars in thousands) |
Cash | $ | 29,607 |
|
Loans | 32,910 |
|
Bank premises and equipment | 517 |
|
Accrued interest receivable | 197 |
|
Identified intangible asset | 1,708 |
|
Goodwill | 2,223 |
|
Liabilities: | |
Deposits | (67,015 | ) |
Accrued interest and other liabilities | (147 | ) |
The purchase premium of $4.2 million was allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The fair value of the deposit accounts assumed was compared to the carrying amounts received and the difference of $1.7 million was recorded as core deposit intangible. The excess of the purchase premium over the fair value of the assets acquired, liabilities assumed, and the amount allocated for core deposit intangible was recorded as goodwill.
The loans acquired were recorded at fair value at the time of acquisition. The fair value of the loans acquired resulted in a loan premium of $545 thousand which is included in the loan balances above, less a non-accretable credit risk component of $318 thousand. The loan premium will be amortized as an adjustment to the related loan yield over the estimated average life of the loans.
Acquisition expenses incurred by the Company were approximately $62 thousand for the three months ended September 30, 2011 and $407 thousand for the nine months ended September 30, 2011. These expenses are included on the consolidated statements of income under the caption "Branch acquisition expenses." Management believes that substantially all of the acquisition expenses have been incurred and any additional expenses will not be material to the Company's results of operations.
The Company recorded goodwill of $2.2 million. The goodwill is not amortizable but is deductible for tax purposes. As discussed in the last paragraph of Note 4, management assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the company is less than its carrying amount. Management is not aware of any such events or circumstances that would cause it to conclude that the fair value of the company is less than its carrying amount.
The acquired identified intangible asset in the table above is the core deposit intangible which is subject to amortization over the estimated 10 year average life of the core deposit base. The amortization expense is included in other noninterest expense on the consolidated statement of income and is deductible for tax purposes.
Amortization expense for the core deposit intangible was $43 thousand for the three months ended September 30, 2011 and $57 thousand from the acquisition date to September 30, 2011. As of September 30, 2011, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
|
| | | |
| (Dollars in thousands) |
2011 | $ | 43 |
|
2012 | 171 |
|
2013 | 171 |
|
2014 | 171 |
|
2015 | 171 |
|
Thereafter | 924 |
|
Total | $ | 1,651 |
|
Management will evaluate the core deposit intangible for impairment if conditions warrant.
Union Bankshares, Inc. Page 8
The amounts of revenue and expenses related to the acquired branches since the May 27, 2011 acquisition date are included in the unaudited interim consolidated statement of income of the Company for the three and nine month periods ended September 30, 2011 as follows:
|
| | | | | | |
| For The Three Months Ended September 30, 2011 | For The Nine Months Ended September 30, 2011 |
| (Dollars in thousands) |
Interest and fees on loans | $ | 428 |
| $ | 596 |
|
Interest on deposits and borrowed funds | 146 |
| 199 |
|
Net interest income | 282 |
| 397 |
|
Provision for loan losses | — |
| — |
|
Net interest income after provision for loan losses | 282 |
| 397 |
|
Noninterest income | 35 |
| 52 |
|
Noninterest expenses | 348 |
| 757 |
|
Loss before income tax benefit | (31 | ) | (308 | ) |
Income tax benefit | (11 | ) | (105 | ) |
Net loss | $ | (20 | ) | $ | (203 | ) |
Disclosure of the proforma revenue and earnings of the combined entity for the current and prior reporting periods as though the acquisition had occurred at the beginning of the prior annual reporting period is not considered practicable. Retrospective application to January 1, 2011 and January 1, 2010 requires assumptions about management's intent in prior periods that cannot be independently substantiated. It is impossible to objectively distinguish information about significant estimates of amounts that provide evidence of circumstances that existed on the dates at which those amounts would be recognized, measured, or disclosed under retrospective application and would have been available when the financial statements for that prior period were issued. The Company is unable to obtain certain information from the seller regarding transfer of deposits among branches and deposit activity since January 1, 2010. It is impracticable to estimate historical information.
Note 6. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
|
| | | | | | | | | | | | |
September 30, 2011 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 14,551 |
| $ | 91 |
| $ | (6 | ) | $ | 14,636 |
|
Mortgage-backed | 3,637 |
| 77 |
| (1 | ) | 3,713 |
|
State and political subdivisions | 11,502 |
| 916 |
| (2 | ) | 12,416 |
|
Corporate | 4,536 |
| 147 |
| (1 | ) | 4,682 |
|
Total debt securities | 34,226 |
| 1,231 |
| (10 | ) | 35,447 |
|
Marketable equity securities | 746 |
| 8 |
| (54 | ) | 700 |
|
Mutual funds | 119 |
| — |
| — |
| 119 |
|
Total | $ | 35,091 |
| $ | 1,239 |
| $ | (64 | ) | $ | 36,266 |
|
Held-to-maturity | | | | |
U.S. Government-sponsored enterprises | $ | 5,000 |
| $ | 12 |
| $ | (6 | ) | $ | 5,006 |
|
Union Bankshares, Inc. Page 9
|
| | | | | | | | | | | | |
December 31, 2010 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 4,521 |
| $ | 1 |
| $ | (63 | ) | $ | 4,459 |
|
Mortgage-backed | 4,735 |
| 87 |
| (11 | ) | 4,811 |
|
State and political subdivisions | 9,373 |
| 175 |
| (155 | ) | 9,393 |
|
Corporate | 4,737 |
| 274 |
| (39 | ) | 4,972 |
|
Total debt securities | 23,366 |
| 537 |
| (268 | ) | 23,635 |
|
Marketable equity securities | 50 |
| 1 |
| (6 | ) | 45 |
|
Mutual funds | 100 |
| — |
| — |
| 100 |
|
Total | $ | 23,516 |
| $ | 538 |
| $ | (274 | ) | $ | 23,780 |
|
Held-to-maturity | | | | |
U.S. Government-sponsored enterprises | $ | 500 |
| $ | 2 |
| $ | — |
| $ | 502 |
|
Proceeds from the sale of securities available-for-sale were $1.7 million and $2.3 million for the three and nine months ended September 30, 2011, respectively. Gross realized gains from the sale of securities available-for-sale were $173 thousand and $184 thousand for the three and nine months ended September 30, 2011, respectively. Gross realized losses were zero and $1 thousand for the three and nine months ended September 30, 2011 There were no sales of securities available-for-sale for the nine months ended September 30, 2010. The specific identification method is used to determine realized gains and losses on sales of available-for-sale securities.
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of September 30, 2011 were as follows:
|
| | | | | | |
| Amortized Cost | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | |
Due in one year or less | $ | 1,251 |
| $ | 1,262 |
|
Due from one to five years | 10,629 |
| 10,813 |
|
Due from five to ten years | 9,932 |
| 10,297 |
|
Due after ten years | 8,777 |
| 9,362 |
|
| 30,589 |
| 31,734 |
|
Mortgage-backed securities | 3,637 |
| 3,713 |
|
Total debt securities available-for-sale | $ | 34,226 |
| $ | 35,447 |
|
Held-to-maturity | | |
Due from one to five years | $ | 1,000 |
| $ | 1,006 |
|
Due from five to ten years | 2,500 |
| 2,502 |
|
Due after ten years | 1,500 |
| 1,498 |
|
Total debt securities held-to-maturity | $ | 5,000 |
| $ | 5,006 |
|
Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these mortgage-backed securities are shown separately and not included in the contractual maturity categories in the above maturity summary.
Union Bankshares, Inc. Page 10
Information pertaining to 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:
|
| | | | | | | | | | | | | | | | | | |
September 30, 2011 | Less Than 12 Months | Over 12 Months | Total |
| Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss |
| (Dollars in thousands) |
Debt securities: | | | | | | |
U.S. Government-sponsored enterprises | $ | 5,489 |
| $ | (12 | ) | $ | — |
| $ | — |
| $ | 5,489 |
| $ | (12 | ) |
Mortgage-backed | 386 |
| (1 | ) | — |
| — |
| 386 |
| (1 | ) |
State and political subdivisions | 292 |
| (2 | ) | — |
| — |
| 292 |
| (2 | ) |
Corporate | 504 |
| (1 | ) | — |
| — |
| 504 |
| (1 | ) |
Total debt securities | 6,671 |
| (16 | ) | — |
| — |
| 6,671 |
| (16 | ) |
Marketable equity securities | 572 |
| (50 | ) | 10 |
| (4 | ) | 582 |
| (54 | ) |
Total | $ | 7,243 |
| $ | (66 | ) | $ | 10 |
| $ | (4 | ) | $ | 7,253 |
| $ | (70 | ) |
|
| | | | | | | | | | | | | | | | | | |
December 31, 2010 | Less Than 12 Months | Over 12 Months | Total |
| Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss |
| (Dollars in thousands) |
Debt securities: | | | | | | |
U.S. Government-sponsored enterprises | $ | 3,937 |
| $ | (63 | ) | $ | — |
| $ | — |
| $ | 3,937 |
| $ | (63 | ) |
Mortgage-backed | 862 |
| (11 | ) | — |
| — |
| 862 |
| (11 | ) |
State and political subdivisions | 4,314 |
| (155 | ) | — |
| — |
| 4,314 |
| (155 | ) |
Corporate | 202 |
| (39 | ) | — |
| — |
| 202 |
| (39 | ) |
Total debt securities | 9,315 |
| (268 | ) | — |
| — |
| 9,315 |
| (268 | ) |
Marketable equity securities | — |
| — |
| 8 |
| (6 | ) | 8 |
| (6 | ) |
Total | $ | 9,315 |
| $ | (268 | ) | $ | 8 |
| $ | (6 | ) | $ | 9,323 |
| $ | (274 | ) |
The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if an other-than-temporary impairment exists. A debt security is considered impaired if the fair value is lower than its amortized cost basis at the report date. If impaired, management then assesses whether the unrealized loss is other-than-temporary.
An unrealized loss on a debt security is generally deemed to be other-than temporary 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 an other-than-temporary impairment write-down is recorded, net of tax effect, through net income as a component of net other-than-temporary impairment losses in the consolidated statement of income, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), 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.
Management considers the following factors in determining whether an other-than-temporary impairment exists and the period over which the debt 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 historical and implied volatility of the fair value of the security; |
| |
• | The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future; |
Union Bankshares, Inc. Page 11
| |
• | Failure of the issuer of the security to make scheduled interest or principal payments; |
| |
• | Any changes to the rating of the security by a rating agency; |
| |
• | 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. |
At September 30, 2011, held-to-maturity and available-for-sale securities, consisting of eight U.S. Government-sponsored enterprises, one agency collateralized mortgage obligation, one tax-exempt municipal security, one corporate bond and eight marketable equity securities had aggregate unrealized losses of $70 thousand. Only one marketable equity security has had an unrealized loss of greater than twelve months and the Company has the ability to hold such security for the foreseeable future. No declines were deemed by management to be other-than-temporary at September 30, 2011.
Investment securities with a carrying amount of $6.0 million and $1.5 million at September 30, 2011 and December 31, 2010, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.
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 allowance for loan losses, 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 accrual of interest is 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. Normally, any unpaid interest previously accrued on those loans is reversed against 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 placed back in 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.
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.
The loans acquired in the May 27, 2011 branch acquisition (see Note 5) were recorded at fair value at the time of acquisition. The net carrying amount of the acquired loans included in the September 30, 2011 loan balances below total $30.0 million. The fair value adjustment is being amortized as an adjustment to the related loan yield over the estimated average life of the loans.
Union Bankshares, Inc. Page 12
The composition of Net loans as of the balance sheet dates was as follows:
|
| | | | | | |
| September 30, 2011 | December 31, 2010 |
| (Dollars in thousands) |
Residential real estate | $ | 143,304 |
| $ | 132,533 |
|
Construction real estate | 30,006 |
| 18,578 |
|
Commercial real estate | 182,368 |
| 167,056 |
|
Commercial | 22,806 |
| 20,604 |
|
Consumer | 6,129 |
| 6,046 |
|
Municipal loans | 39,997 |
| 31,455 |
|
Gross loans | 424,610 |
| 376,272 |
|
Allowance for loan losses | (4,186 | ) | (3,755 | ) |
Net deferred loan costs | 212 |
| 188 |
|
Net loans | $ | 420,636 |
| $ | 372,705 |
|
Residential real estate loans aggregating $12.9 million and $9.6 million at September 30, 2011 and December 31, 2010, respectively, were pledged as collateral on deposits of municipalities. Qualified first mortgages held by Union may also be pledged as collateral for borrowings from the Federal Home Loan Bank (FHLB) of Boston under a blanket lien.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
|
| | | | | | | | | | | | | | | |
September 30, 2011 | Current | 30-89 Days | Over 90 Days and accruing | Nonaccrual | Total |
| (Dollars in thousands) |
Residential real estate | $ | 138,260 |
| $ | 1,574 |
| $ | 435 |
| $ | 3,035 |
| $ | 143,304 |
|
Construction real estate | 29,598 |
| 315 |
| — |
| 93 |
| 30,006 |
|
Commercial real estate | 179,427 |
| 718 |
| 591 |
| 1,632 |
| 182,368 |
|
Commercial | 22,488 |
| 176 |
| 32 |
| 110 |
| 22,806 |
|
Consumer | 5,974 |
| 83 |
| — |
| 72 |
| 6,129 |
|
Municipal | 39,997 |
| — |
| — |
| — |
| 39,997 |
|
Total | $ | 415,744 |
| $ | 2,866 |
| $ | 1,058 |
| $ | 4,942 |
| $ | 424,610 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2010 | Current | 30-89 Days | Over 90 Days and accruing | Nonaccrual | Total |
| (Dollars in thousands) |
Residential real estate | $ | 123,573 |
| $ | 6,446 |
| $ | 587 |
| $ | 1,927 |
| $ | 132,533 |
|
Construction real estate | 18,369 |
| 116 |
| 45 |
| 48 |
| 18,578 |
|
Commercial real estate | 163,524 |
| 2,729 |
| 173 |
| 630 |
| 167,056 |
|
Commercial | 20,295 |
| 161 |
| — |
| 148 |
| 20,604 |
|
Consumer | 5,953 |
| 53 |
| 1 |
| 39 |
| 6,046 |
|
Municipal | 31,455 |
| — |
| — |
| — |
| 31,455 |
|
Total | $ | 363,169 |
| $ | 9,505 |
| $ | 806 |
| $ | 2,792 |
| $ | 376,272 |
|
Aggregate interest on nonaccrual loans not recognized was $909 thousand and $727 thousand as of September 30, 2011 and 2010, respectively, and $677 thousand as of December 31, 2010.
Union Bankshares, Inc. Page 13
Note 8. Allowance for Loan Losses and Credit Quality
The allowance for loan losses is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the allowance is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions or other relevant factors.
In addition, various regulatory agencies, as an integral part of their examination process, regularly review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
The allowance consists of specific, general and unallocated components. The specific component relates to the loans that are classified as either monitor, substandard or special mention. For such loans, the level of allowance allocable to those loans is determined through estimating probable loss for each individual credit based on its specific risk attributes. Loans are also 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 also include troubled loans that are restructured. A troubled debt restructuring 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. Troubled debt restructuring may include 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 or procedures, reduction of face amount of loan, reduction of accrued interest, and reduction or deferment of cash payments in the near future), or a combination of both. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, residential or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. A specific reserve amount is allocated to the allowance for individual loans that have been classified as impaired on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The general component represents the level of allowance allocable to each loan portfolio category with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance 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 Allowance for loan losses is general in nature and is available to absorb losses from any loan type.
As described in Note 5, the $32.9 million of loans purchased in the branch acquisitions on May 27, 2011 were recorded at their estimated fair value as of such date and, consequently, there was no related adjustment to the allowance for loan losses with respect to the acquired loans at September 30, 2011.
Union Bankshares, Inc. Page 14
Changes in the Allowance for loan losses, by class of loans, for the three and nine months ended September 30, 2011 were as follows:
|
| | | | | | | | | | | | | | | | | | |
For The Three Months Ended September 30, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Balance, June 30, 2011 | $ | 1,135 |
| $ | 295 |
| $ | 2,238 |
| $ | 289 |
| $ | 103 |
| $ | 4,060 |
|
Provision (credit) for loan losses | 79 |
| 116 |
| (66 | ) | 1 |
| 20 |
| 150 |
|
Recoveries of amounts charged off | 2 |
| — |
| — |
| 5 |
| 2 |
| 9 |
|
| 1,216 |
| 411 |
| 2,172 |
| 295 |
| 125 |
| 4,219 |
|
Amounts charged off | (7 | ) | (17 | ) | — |
| (2 | ) | (7 | ) | (33 | ) |
Balance, September 30, 2011 | $ | 1,209 |
| $ | 394 |
| $ | 2,172 |
| $ | 293 |
| $ | 118 |
| $ | 4,186 |
|
|
| | | | | | | | | | | | | | | | | | |
For The Nine Months Ended September 30, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Balance, December 31, 2010 | $ | 1,033 |
| $ | 240 |
| $ | 2,117 |
| $ | 250 |
| $ | 115 |
| $ | 3,755 |
|
Provision for loan losses | 189 |
| 171 |
| 55 |
| 35 |
| — |
| 450 |
|
Recoveries of amounts charged off | 3 |
| — |
| — |
| 10 |
| 24 |
| 37 |
|
| 1,225 |
| 411 |
| 2,172 |
| 295 |
| 139 |
| 4,242 |
|
Amounts charged off | (16 | ) | (17 | ) | — |
| (2 | ) | (21 | ) | (56 | ) |
Balance, September 30, 2011 | $ | 1,209 |
| $ | 394 |
| $ | 2,172 |
| $ | 293 |
| $ | 118 |
| $ | 4,186 |
|
Changes in the Allowance for loan losses for the three and nine months ended September 30, 2010 were summarized as follows:
|
| | | | | | |
| For the Three Months Ended September 30, 2010 | For The Nine Months Ended September 30, 2010 |
| (Dollars in thousands) |
Balance at beginning of period | $ | 3,511 |
| $ | 3,493 |
|
Provision for loan losses | 200 |
| 380 |
|
Recoveries of amounts charged off | 10 |
| 43 |
|
| 3,721 |
| 3,916 |
|
Amounts charged off | (24 | ) | (219 | ) |
Balance, September 30, 2010 | $ | 3,697 |
| $ | 3,697 |
|
Union Bankshares, Inc. Page 15
The allocation of the Allowance for loan losses, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates was as follows:
|
| | | | | | | | | | | | | | | | | | |
September 30, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 320 |
| $ | 14 |
| $ | 348 |
| $ | 59 |
| $ | 11 |
| $ | 752 |
|
Collectively evaluated for impairment | 889 |
| 380 |
| 1,824 |
| 234 |
| 107 |
| 3,434 |
|
Total allocated | $ | 1,209 |
| $ | 394 |
| $ | 2,172 |
| $ | 293 |
| $ | 118 |
| $ | 4,186 |
|
|
| | | | | | | | | | | | | | | | | | |
December 31, 2010 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 199 |
| $ | 12 |
| $ | 295 |
| $ | 39 |
| $ | 20 |
| $ | 565 |
|
Collectively evaluated for impairment | 834 |
| 228 |
| 1,822 |
| 211 |
| 95 |
| 3,190 |
|
Total allocated | $ | 1,033 |
| $ | 240 |
| $ | 2,117 |
| $ | 250 |
| $ | 115 |
| $ | 3,755 |
|
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 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
September 30, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 2,758 |
| $ | 93 |
| $ | 7,322 |
| $ | 408 |
| $ | 53 |
| $ | — |
| $ | 10,634 |
|
Collectively evaluated for impairment | 126,878 |
| 29,899 |
| 160,720 |
| 21,548 |
| 5,611 |
| 39,363 |
| 384,019 |
|
| 129,636 |
| 29,992 |
| 168,042 |
| 21,956 |
| 5,664 |
| 39,363 |
| 394,653 |
|
Acquired loans | 13,668 |
| 14 |
| 14,326 |
| 850 |
| 465 |
| 634 |
| 29,957 |
|
Total | $ | 143,304 |
| $ | 30,006 |
| $ | 182,368 |
| $ | 22,806 |
| $ | 6,129 |
| $ | 39,997 |
| $ | 424,610 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 1,789 |
| $ | 48 |
| $ | 5,224 |
| $ | 146 |
| $ | 30 |
| $ | — |
| $ | 7,237 |
|
Collectively evaluated for impairment | 130,744 |
| 18,530 |
| 161,832 |
| 20,458 |
| 6,016 |
| 31,455 |
| 369,035 |
|
Total | $ | 132,533 |
| $ | 18,578 |
| $ | 167,056 |
| $ | 20,604 |
| $ | 6,046 |
| $ | 31,455 |
| $ | 376,272 |
|
Risk 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:
1-3 Rating - Pass
Risk-rating grades "1" through "3" comprise those loans ranging from 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 loans with marginal credit risk, defined as borrowers that while creditworthy,
Union Bankshares, Inc. Page 16
exhibit some characteristics which require special attention by the account officer.
4 Rating - Satisfactory/Monitor
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.
M Rating - Monitor
Loans in this category reflect an increased credit risk. Loans in this category do not presently expose the Bank to a sufficient degree of risk to warrant adverse classification but do possess credit deficiencies deserving management's close attention. These credits are maintained on the watch list.
5-8 Rating - Substandard
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:
|
| | | | | | | | | | | | | | | | | | | | | |
September 30, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total |
| (Dollars in thousands) |
Pass | $ | 122,303 |
| $ | 28,757 |
| $ | 136,255 |
| $ | 15,549 |
| $ | 5,580 |
| $ | 39,363 |
| $ | 347,807 |
|
Satisfactory/Monitor | 4,575 |
| 1,142 |
| 24,465 |
| 5,998 |
| 31 |
| — |
| 36,211 |
|
Monitor | 159 |
| — |
| 919 |
| — |
| — |
| — |
| 1,078 |
|
Substandard | 2,599 |
| 93 |
| 6,403 |
| 409 |
| 53 |
| — |
| 9,557 |
|
| 129,636 |
| 29,992 |
| 168,042 |
| 21,956 |
| 5,664 |
| 39,363 |
| 394,653 |
|
Acquired loans | 13,668 |
| 14 |
| 14,326 |
| 850 |
| 465 |
| 634 |
| 29,957 |
|
Total | $ | 143,304 |
| $ | 30,006 |
| $ | 182,368 |
| $ | 22,806 |
| $ | 6,129 |
| $ | 39,997 |
| $ | 424,610 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total |
| (Dollars in thousands) |
Pass | $ | 128,646 |
| $ | 17,999 |
| $ | 142,530 |
| $ | 19,640 |
| $ | 5,991 |
| $ | 31,455 |
| $ | 346,261 |
|
Satisfactory/Monitor | 2,098 |
| 531 |
| 19,302 |
| 818 |
| 25 |
| — |
| 22,774 |
|
Monitor | 267 |
| — |
| 1,873 |
| — |
| — |
| — |
| 2,140 |
|
Substandard | 1,522 |
| 48 |
| 3,351 |
| 146 |
| 30 |
| — |
| 5,097 |
|
Total | $ | 132,533 |
| $ | 18,578 |
| $ | 167,056 |
| $ | 20,604 |
| $ | 6,046 |
| $ | 31,455 |
| $ | 376,272 |
|
Acquired loans are risk rated, as appropriate, according to the Company's loan rating system, but such ratings are not a determining factor in the establishment of the allowance for loan losses. Rather, acquired loans are initially recorded at fair value, determined based upon an estimate of the amount and timing of both principal and interest cash flows expected to be collected and discounted using a market interest rate, which includes an estimate of future credit losses expected to be incurred over the life of the portfolio. The primary credit quality indicator for acquired loans is whether there has been a decrease in expected cash flows. Monitoring of this portfolio is ongoing to determine if there is evidence of deterioration in credit quality since acquisition. At September 30, 2011, there was no allowance for loan losses for acquired loans.
Union Bankshares, Inc. Page 17
The following table provides information with respect to impaired loans by class of loan as of and for the three and nine months ended September 30, 2011:
|
| | | | | | | | | | | | | | | | | | | | | |
| As Of September 30, 2011 | For The Three Months Ended September 30, 2011 | For The Nine Months Ended September 30, 2011 |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized |
| (Dollars in thousands) |
With an allowance recorded: | | | | | | | |
Residential real estate | $ | 425 |
| $ | 497 |
| $ | 65 |
| | | | |
Commercial real estate | 257 |
| 278 |
| 57 |
| | | | |
| 682 |
| 775 |
| 122 |
| | | | |
With no allowance recorded: | | | | | | | |
Commercial real estate | 2,127 |
| 2,182 |
| — |
| | | | |
| | | | | | | |
Total: | | | | | | | |
Residential real estate | 425 |
| 497 |
| 65 |
| $ | 429 |
| $ | — |
| $ | 364 |
| $ | 5 |
|
Commercial real estate | 2,384 |
| 2,460 |
| 57 |
| 2,281 |
| 21 |
| 2,268 |
| 63 |
|
Total | $ | 2,809 |
| $ | 2,957 |
| $ | 122 |
| $ | 2,710 |
| $ | 21 |
| $ | 2,632 |
| $ | 68 |
|
____________________
| |
(1) | Government guaranties on impaired loans as of September 30, 2011 were $110 thousand. |
The following table provides information with respect to impaired loans as of December 31, 2010:
|
| | | | | | | | | | | |
| December 31, 2010 | | |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | | |
| (Dollars in thousands) | | |
With an allowance recorded: | | | | | |
Residential real estate | $ | 301 |
| $ | 356 |
| $ | 43 |
| | |
Commercial real estate | 1,970 |
| 1,974 |
| 40 |
| | |
| 2,271 |
| 2,330 |
| 83 |
| | |
With no allowance recorded: | | | | | |
Commercial real estate | 346 |
| 399 |
| — |
| | |
| | | | | |
Total: | | | | | |
Residential real estate | 301 |
| 356 |
| 43 |
| | |
Commercial real estate | 2,316 |
| 2,373 |
| 40 |
| | |
Total | $ | 2,617 |
| $ | 2,729 |
| $ | 83 |
| | |
____________________
| |
(1) | Government guaranties on impaired loans as of December 31, 2010 were $110 thousand. |
Troubled debt restructured loans as of September 30, 2011 by class of loan include a commercial real estate loan that received a concession with the extension of a due date that was not considered a market transaction to the Company, and residential real estate loans that represent loan modifications in which a concession was provided to the borrower, such as due date or maturity date extensions, interest rate reductions, and the forgiveness of accrued interest. Troubled loans that are restructured are classified as impaired and a specific reserve amount is allocated to the allowance on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present
Union Bankshares, Inc. Page 18
value of anticipated future cash flows.
The following table provides new troubled debt restructure activity by loan type for the nine months ended September 30, 2011:
|
| | | | | | | | |
| New Troubled Debt Restructurings During the |
| Nine Months Ended September 30, 2011 |
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
| | (Dollars in thousands) |
Residential Real Estate: | | | |
Interest rate reduction, forgiveness of accrued interest, protective advance for delinquent taxes, and extension of due date | 1 |
| $ | 238 |
| $ | 246 |
|
There was no new troubled debt restructure activity for the three months ended September 30, 2011. There were no troubled debt restructured loans modified within the previous twelve months that had subsequently redefaulted during the three and nine month periods ended September 30, 2011. Troubled debt restructured loans are considered redefaulted at 90 days past due.
At September 30, 2011 and December 31, 2010, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.
Note 9. Defined Benefit Pension Plan
Union Bank, the Company’s sole subsidiary, sponsors a noncontributory defined benefit pension plan covering all eligible employees. The plan provides defined benefits based on years of service and final average salary.
Net periodic pension benefit cost for the three and nine months ended September 30 consisted of the following components:
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2011 | 2010 | 2011 | 2010 |
| (Dollars in thousands) |
Service cost | $ | 170 |
| $ | 144 |
| $ | 510 |
| $ | 433 |
|
Interest cost on projected benefit obligation | 210 |
| 193 |
| 628 |
| 579 |
|
Expected return on plan assets | (219 | ) | (182 | ) | (657 | ) | (547 | ) |
Amortization of prior service cost | 1 |
| 1 |
| 5 |
| 4 |
|
Amortization of net loss | 47 |
| 36 |
| 139 |
| 107 |
|
Net periodic benefit cost | $ | 209 |
| $ | 192 |
| $ | 625 |
| $ | 576 |
|
Note 10. 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 available-for-sale that are not other than temporarily impaired, are not reflected on the consolidated statement of income. The cumulative effect of such items is reflected as a separate component of the equity section of the balance sheet (accumulated other comprehensive income or loss). Other comprehensive income or loss, along with net income, comprises the Company's total comprehensive income or loss. As of the balance sheet dates, the components of accumulated other comprehensive loss, net of tax, were:
Union Bankshares, Inc. Page 19
|
| | | | | | |
| September 30, 2011 | December 31, 2010 |
| (Dollars in thousands) |
Net unrealized gain on investment securities available-for-sale | $ | 775 |
| $ | 174 |
|
Defined benefit pension plan: | | |
Net unrealized actuarial loss | (2,235 | ) | (2,327 | ) |
Net unrealized prior service cost | (7 | ) | (10 | ) |
Total | $ | (1,467 | ) | $ | (2,163 | ) |
The following comprised total comprehensive income for the three and nine months ended September 30:
|
| | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| 2011 | 2010 | 2011 | 2010 |
| (Dollars in thousands) |
Net income | $ | 1,427 |
| $ | 1,460 |
| $ | 3,486 |
| $ | 4,205 |
|
Investment securities available-for-sale: | | |
| |
Net unrealized holding gains arising during the period on investment securities available-for-sale, net of tax | 511 |
| 236 |
| 722 |
| 458 |
|
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income, net of tax | (114 | ) | — |
| (121 | ) | — |
|
Total | 397 |
| 236 |
| 601 |
| 458 |
|
Defined benefit pension plan: | | |
| |
Reclassification adjustment for amortization of net actuarial loss realized in net income, net of tax | 31 |
| 23 |
| 93 |
| 70 |
|
Reclassification adjustment for amortization of prior service cost realized in net income, net of tax | 1 |
| 1 |
| 2 |
| 3 |
|
Total | 32 |
| 24 |
| 95 |
| 73 |
|
Total other comprehensive income | 429 |
| 260 |
| 696 |
| 531 |
|
Total comprehensive income | $ | 1,856 |
| $ | 1,720 |
| $ | 4,182 |
| $ | 4,736 |
|
Note 11. Fair Value Measurements and Disclosures
The Company utilizes FASB Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, 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 financial assets that are measured on a recurring basis at estimated fair value:
Union Bankshares, Inc. Page 20
Investment securities available-for-sale: Certain corporate debt securities, 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 the Company’s investment securities available-for-sale 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.
Assets measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010, segregated by fair value hierarchy level, are summarized below:
|
| | | | | | | | | | | | |
| 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) |
| (Dollars in thousands) |
September 30, 2011: | | | | |
Investment securities available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 14,636 |
| $ | — |
| $ | 14,636 |
| $ | — |
|
Mortgage-backed | 3,713 |
| — |
| 3,713 |
| — |
|
State and political subdivisions | 12,416 |
| — |
| 12,416 |
| — |
|
Corporate | 4,682 |
| 3,666 |
| 1,016 |
| — |
|
Total debt securities | 35,447 |
| 3,666 |
| 31,781 |
| — |
|
Marketable equity securities | 700 |
| 38 |
| 662 |
| — |
|
Mutual funds | 119 |
| 119 |
| — |
| — |
|
Total | $ | 36,266 |
| $ | 3,823 |
| $ | 32,443 |
| $ | — |
|
| | | | |
December 31, 2010: | | | | |
Investment securities available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 4,459 |
| $ | — |
| $ | 4,459 |
| $ | — |
|
Mortgage-backed | 4,811 |
| — |
| 4,811 |
| — |
|
State and political subdivisions | 9,393 |
| — |
| 9,393 |
| — |
|
Corporate | 4,972 |
| 2,105 |
| 2,867 |
| — |
|
Total debt securities | 23,635 |
| 2,105 |
| 21,530 |
| — |
|
Marketable equity securities | 45 |
| 45 |
| — |
| — |
|
Mutual funds | 100 |
| 100 |
| — |
| — |
|
Total | $ | 23,780 |
| $ | 2,250 |
| $ | 21,530 |
| $ | — |
|
There were no significant transfers in or out of Levels 1 and 2 for the nine months ended September 30, 2011. 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 impaired loans and other real estate owned, were not significant at September 30, 2011 or December 31, 2010. 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.
Union Bankshares, Inc. Page 21
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 its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows.
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.
Loans and loans held for sale: Fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan type. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed-rate residential, commercial real estate, 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. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their estimated fair values. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values.
Federal Home Loan Bank (FHLB) of Boston stock: The carrying amount approximates its fair value.
Deposits: The fair values disclosed for demand deposits or nonmaturity deposits (for example, checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate time deposits approximate their estimated fair values at the reporting date. The fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities on such time deposits.
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. The fair values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet.
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
Union Bankshares, Inc. Page 22
on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments is 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:
|
| | | | | | | | | | | | |
| September 30, 2011 | December 31, 2010 |
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value |
Financial assets | (Dollars in thousands) |
Cash and cash equivalents | $ | 30,558 |
| $ | 30,558 |
| $ | 14,292 |
| $ | 14,292 |
|
Interest bearing deposits in banks | 20,194 |
| 20,505 |
| 14,041 |
| 14,292 |
|
Investment securities | 41,266 |
| 41,272 |
| 24,280 |
| 24,282 |
|
Loans and loans held for sale, net | 424,878 |
| 415,669 |
| 378,316 |
| 373,718 |
|
Accrued interest receivable | 1,628 |
| 1,628 |
| 1,560 |
| 1,560 |
|
FHLB of Boston stock | 1,922 |
| 1,922 |
| 1,922 |
| 1,922 |
|
Financial liabilities | | | | |
Deposits | $ | 471,525 |
| $ | 472,808 |
| $ | 376,660 |
| $ | 376,729 |
|
Borrowed funds | 26,017 |
| 30,874 |
| 28,986 |
| 30,780 |
|
Accrued interest payable | 280 |
| 280 |
| 389 |
| 389 |
|
The carrying amounts in the preceding table are included in the balance sheet under the applicable captions.
Note 12. 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 U.S. GAAP. Events occurring subsequent to September 30, 2011 have been evaluated as to their potential impact to the consolidated financial statements.
On October 19, 2011, Union Bankshares, Inc. declared a $0.25 per share regular quarterly cash dividend payable November 10, 2011, to stockholders of record on October 29, 2011.
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 by management focuses on those factors that, in management's view, had a material effect on the financial position of Union Bankshares, Inc. (the Company) as of September 30, 2011 and December 31, 2010, and its results of operations for the three and nine months ended September 30, 2011 and 2010. 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 Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of the Company's management, the interim unaudited data reflects 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 September 30, 2011 which would materially affect the information presented.
Union Bankshares, Inc. Page 23
CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS
The Company 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 Securities and Exchange Commission (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,” “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. This could cause results or performance to differ materially from those expressed in forward-looking statements. The possible events or factors that might affect the forward-looking statements include, but are not limited to, the listing in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 and the items added below in this report on Form 10-Q:
| |
• | loans and investments may be called or prepaid prior to their contractual maturity or become other than temporarily impaired; |
| |
• | loans and deposits acquired with the acquisition of three branches on May 27, 2011 could perform differently than management anticipates in its forecasts; |
| |
• | assumptions made regarding interest rate movement, yield curve and sensitivity could vary substantially if actual experience differs from historical experience, which could affect the Company's projected results of operations; |
| |
• | excess liquidity due to weaker loan demand, lower draws on unused lines of credit or stronger deposit growth than anticipated may be difficult to maintain historical yields on due to the continuing low interest rate environment for investment options; |
| |
• | regulatory limitations placed on income producing methods including the limiting of debit and credit card interchange fees, limiting the assessment of overdraft fees and restricting of asset sales; |
| |
• | disruptions in U.S. and global financial and credit markets, including the downgrading of U.S. and U.S. Government sponsored debt by one or more credit rating agency; |
| |
• | continuing economic instability, including high unemployment rates, higher taxation, governmental budget issues and resolution of entitlement programs; and |
| |
• | the effect of federal and state health care reform efforts, including the federal Patient Protection and Affordable Care Act and Vermont's recently enacted single-payer universal health care law. |
When evaluating forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties, including the events and circumstances discussed under “Recent Developments” below, and are reminded not to place undue reliance on such statements and should not consider any such 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.
RECENT DEVELOPMENTS
Economic data suggests a slow but positive trend towards economic recovery in our market as well as nationally but Federal Reserve Chairman Ben Bernanke has stated that monetary policy alone cannot cure all the economy's ailments. He has called on Congress to adopt a plan for paying down the federal debt and to address loopholes in the tax code as ways to help the recovery and stability of the economy. The Federal Reserve and the Chairman expect improvements in the health of the economy but that there remains significant risk of a second recession unless actions are taken to increase growth. The global outlook has deteriorated which will likely have an impact on international corporations which is not a significant factor in our service area, yet any resulting negative impact on tourism could affect customers in our service area.
Vermont and New Hampshire's unemployment rates have risen slightly over the last couple of months and are 5.8% and 5.4%, respectively, as of September 30, 2011. These rates compare favorably with the national unemployment
Union Bankshares, Inc. Page 24
rate of 9.1% for the same period. The Federal Open Market Committee (FOMC) expects some pickup in the pace of recovery but anticipates only gradual improvement in the unemployment rates.
Interest rates remain near historic lows, which has allowed many consumers and commercial customers to reduce their monthly debt payments by refinancing their loans. At the September 2011 meeting the FOMC kept the target range for federal funds rate at 0-25 basis points in order to promote the ongoing economic recovery. The FOMC currently anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The FOMC also stated its intention to purchase longer-term Treasury Securities and to sell an equal amount of shorter-term Treasury Securities, putting downward pressure on longer-term interest rates and helping to make broader financial conditions more accommodative.
Vermont and New Hampshire continue to have some of the lowest residential foreclosure and delinquency rates in the country. Also, as northern New England had not experienced the dramatic run up in housing prices, likewise, we have not seen the values drop as far as other parts of the country. Demand for construction and purchase mortgage loans was stronger over the summer months of 2011 than it has have been in recent years. The portions of Vermont and New Hampshire served by our branch network did not, with a few exceptions, experience the devastation from Hurricane Irene as did other parts of the two states.
In response to the earlier financial crisis affecting the banking and financial markets, the resulting recession and the changing political environment, many new laws, regulations and programs have been adopted. We will not attempt to discuss them all within this quarterly report but will update the ones that have been issued or modified since our annual report and which may have a financial impact on the Company.
The following positive developments will/may impact the Company in the future:
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• | The second quarter 2011 change in the FDIC insurance assessment base from total deposits to net assets has and will continue to reduce the Company's future assessment costs and put community banks, which generally rely more heavily on deposits as a funding source, on a more level playing field with national and regional financial institutions. Unfortunately, continuing bank failures (80 year-to-date through October 14, 2011 but none in Vermont or New Hampshire) continue to weigh on the industry and will keep FDIC assessment rates high for all banks. |
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• | The decision of the U.S. Small Business Administration ("SBA") in February 2011 to waive the 90 day recourse period upon the sale of SBA guaranteed loans to the secondary market makes that a more attractive alternative for community banks and the continuing development of loan programs for small business customers is always a benefit to a community bank. |
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• | The FASB, citing outreach activities in which "almost all" constituents believe that amortized cost is significantly more relevant for purposes of measuring most loans, agreed to consider amortized cost as a primary attribute (in addition to fair value) for measuring financial instruments. Therefore loans and debt securities that are held as part of the "customer financing activities of a bank" may continue to be recorded at amortized cost, which will reduce volatility in a company's financial statements while providing its readers with the most current information. |
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• | Starting July 21, 2011, banks were permitted to pay interest on business checking accounts. Although it may increase our overall cost of funds, this change allows us to compete with nonbanks for business customer funds. Union has developed an interest-bearing deposit product available to business customers. |
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• | The growing recognition by the banking regulators that a one size fits all approach to regulations may not be in the industry's best interest or be adequate to address the attendant risks in each company's business model may bring some regulatory relief to community banks, as evidenced by the new Basel III capital standards and recent risk monitoring and mitigation guidance issued earlier in 2011 by the federal banking regulators. |
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• | The increased information reporting requirements and the requirement to provide health insurance vouchers to low income employees who may be participating in government sponsored insurance programs under the 2010 Health-Care Reform Act have been repealed and reporting of merchant services information has been delayed. |
There have been new laws, regulations and actions enacted that may be problematic for the Company in terms of future earnings and/or efficiency. The following are the most relevant:
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• | The Dodd-Frank Act represents the biggest revision of financial regulations in decades and bankers continue to be faced with assessing the rules applicable to them, how to implement the rules, training of staff and informing customers, as well as assessing the financial impact to their companies. There are still numerous provisions of the Dodd-Frank Act that originally had an effective date of July 21, 2011 for which final regulations or guidance have not yet been issued. |
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• | By March 15, 2012, all existing ATM's must meet the new Americans with Disabilities Act accessibility standards |
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which will require the replacement of deployed nonconforming ATM's over the next twelve months. An assessment of the Company's existing machines has been completed and a plan has been developed to become compliant by the effective date.
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• | The establishment of the new Consumer Financial Protection Bureau created by the Dodd-Frank Act may lead to conflicting regulatory guidance for community banks and increase regulatory costs and burdens. |
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• | State and national health care reform initiatives may increase employer costs to provide employer sponsored group health care plans to eligible employees. On May 27, 2011, the Governor of Vermont signed a bill into law to provide universal health care through a single payer system. The manner in which the Vermont universal health care mandate will be implemented remains unclear at this time. |
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• | The Durbin amendment, which required the Federal Reserve to set rates for debit card transaction interchange fees, became effective on October 1, 2011. The final rule's interchange fee standard has two components - a base fee cap of 21 cents plus 5 basis points of the transaction amount to cover fraud losses. Even though banks with assets of $10 billion or less are exempt from the interchange pricing provision, the pricing rules will impact the competitive environment for payment systems. |
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• | Among the new regulations imposed by the Dodd-Frank Act are new residential mortgage provisions that mandate more extensive disclosures, require lenders to offer terms that reasonably reflect the consumers' ability to repay a loan, prohibit mandatory arbitration provisions, add new customer protections for high-cost mortgages and set escrow account and appraisal standards. The relevant regulations promulgated to date regarding these provisions have been implemented by Union. |
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• | The Basel III Capital Framework published in December 2010 will increase minimum capital levels and add a new capital conservation buffer over the next nine years. The Company's ratios continue to be over those minimums. Basel III will also implement a leverage ratio starting in 2013, a liquidity coverage ratio in 2015 and a net stable funding ratio in 2018 but these ratios have yet to be defined. |
The cost of doing business as usual has increased dramatically in this regulatory environment as the number and extent of new regulations and the speed with which they must be implemented have put a strain on software providers and staff as well as customers. Also, the cost of mitigating long term interest rate risk by selling loans to the secondary market continues and it is anticipated that this cost will continue to grow as the government sponsored entities continue to work through their own financial problems.
In addition, as required by SEC regulations, the Company must now file its financial statements both in EDGAR format and in eXtensible Business Reporting Language (XBRL), and to post such XBRL information on its website. Ongoing compliance with this mandate requires administrative resources and result in additional costs.
It is not completely clear at this time what impact current or future government sponsored programs, regulations or legislation will have on the Company, its customers or the U.S. and global financial markets but additional regulatory complexity and allocation of Company resources to deal with it are likely.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of U.S. Generally Accepted Accounting Principles (GAAP) in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company 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, the Company has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. 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, capital, or the results of operations of the Company.
In addition to the critical accounting policies included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, the following is included in the Company's critical accounting policies.
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Goodwill and Branch Acquisition. Assets acquired and liabilities assumed are based on fair value estimates. Intangible assets include the excess of the purchase price over the fair value of net assets acquired. The core deposit intangible is amortized on a straight line basis over the estimated average life of the core deposit base of 10 years. The Company evaluates the valuation and amortization of the core deposit intangible asset if events occur that could result in possible impairment. Goodwill is evaluated for impairment at least annually, or more frequently as events or circumstances warrant.
OVERVIEW
The Company's net income was $1.43 million for the quarter ended September 30, 2011 compared to $1.46 million for the quarter ended September 30, 2010, a decrease of $33 thousand, or 2.3%. These results reflected the net effect of an increase in net interest income of $404 thousand, or 8.6%, a decrease of $50 thousand, or 25.0%, in the provision for loan losses, an increase of $456 thousand, or 29.3%, in noninterest income, branch acquisition expenses of $62 thousand, an increase in other noninterest expenses of $946 thousand, or 22.9%, and a $65 thousand, or 14.2%, decrease in the provision for income taxes.
The Company's net income was $3.49 million for the nine months ended September 30, 2011 compared to $4.21 million for the nine months ended September 30, 2010, a decrease of $719 thousand, or 17.1%. These results reflected the net effect of an increase in net interest income of $400 thousand, or 2.9%, an increase of $70 thousand, or 18.4%, in the provision for loan losses, an increase of $864 thousand, or 20.6%, in noninterest income, the branch acquisition expenses of $407 thousand, an increase in other noninterest expenses of $2.0 million, or 16.6%, and a $530 thousand, or 41.1%, decrease in the provision for income taxes.
On May 27, 2011, Union Bank completed its acquisition of three New Hampshire branch offices. In the transaction, Union assumed deposit relationships, performing loans, branch cash, two banking facilities, and other assets, including one leased branch location. In accordance with the Agreement, Union paid a 6% premium on assumed deposits, loans were acquired at par, and the banking facilities were purchased at the most recent tax assessed value. The full earnings impact of the acquired assets and liabilities is fully reflected in the Results of Operations for the three months ended September 30, 2011 but not in the nine months ended results due to the timing of the purchase. The pre-tax branch acquisition expenses for the three months ended September 30, 2011 totaled $62 thousand and year to date totaled $407 thousand. The branch acquisition expenses for the three and nine months ended September 30, 2011 are mainly legal, professional and marketing fees expended to facilitate the purchase of the three New Hampshire branches. There were also expenses incurred to replace customer checkbooks and branch supplies. Management believes that substantially all of the acquisition expenses have been incurred as of September 30, 2011 and any additional expenses will not be material to the Company's results of operations. The branch acquisition included $29.6 million in cash that provided liquidity and has been subsequently invested in interest earning assets.
The Company continues to face a challenging low interest rate environment as the prime rate has remained unchanged at 3.25% for the last 33 months. Total interest income increased by $390 thousand, or 6.8%, to $6.12 million in the third quarter of 2011, versus total interest income of $5.73 million in the third quarter of 2010, and that increase was bolstered by the decrease in interest expense from $1.03 million in 2010 to $1.02 million in 2011, a decrease of $14 thousand, or 1.4%, between periods. The result of the changes in interest income and interest expense was that net interest income for the third quarter of 2011 was $5.10 million, up $404 thousand, or 8.6%, from the third quarter of 2010 of $4.70 million. The continued static low prime rate or further drops in the prime rate and/or increases in competitors' deposit or market borrowing rates could be problematic if loans were to refinance to a lower rate or individual variable rate loan and investment instruments reprice downward at a faster rate than the downward repricing of deposit products. In addition there is very little relative reduction that can be made in deposit rates currently paid as it appears customers are staying in short-term time deposits or nontime deposit accounts which are all currently paying an interest rate less than 1%.
The $456 thousand increase in noninterest income for the quarter was due to many factors including the increase of $149 thousand in net gains on sales of loans held for sale, from $334 thousand for the quarter ended September 30, 2010 to $483 thousand for the quarter ended September 30, 2011, with the volume of loans sold to the secondary market to mitigate long term interest rate risk increasing from $15.0 million in the third quarter of 2010 to $19.8 million in the third quarter of 2011. The continuing volume of sales was driven by the sustained low long term mortgage rates, which create loan demand throughout the branches, as well as by the strong origination from the loan production office in South Burlington, Vermont, which opened in August 2010. There was also an increase of $133 thousand, or 13.0%, in service fee income and an $173 thousand net gain on sales of investment securities available-for-sale for the three
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months ended September 30, 2011. The main reason for the sale was to offset the prepayment penalties on higher cost FHLB of Boston advances. There were no security gains/losses in the similar 2010 period.
Salaries and wages were higher by $418 thousand, or 24.9%, for the third quarter of 2011 compared to the same period last year. Pension and employee benefits were up $91 thousand, or 13.0%. Net occupancy and equipment expenses are both up due to the increased number of banking locations and the higher costs of operation in 2011.
All other noninterest expenses were up $346 thousand, or 27.6% for the three months ended September 30, 2011 which has numerous components, with the largest changes being the $177 thousand in penalties on the 2011 early payoffs of $2 million in long-term FHLB of Boston advances.
The Company's effective tax rate decreased to 21.6% for the three months ended September 30, 2011 from 23.8% for the same period in 2010, as both tax exempt income and tax credits from low income housing partnership investments increased.
At September 30, 2011, the Company had total consolidated assets of $545.8 million, including gross loans and loans held for sale (“total loans”) of $428.9 million, deposits of $471.5 million, borrowed funds of $26.0 million and stockholders' equity of $42.6 million. The Company’s total assets increased $92.8 million, or 20.5%, to $545.8 million at September 30, 2011, from $453.0 million at December 31, 2010. A large portion of the increase was due to the New Hampshire branch acquisitions which added $67.2 million in assets.
Net loans and loans held for sale increased a total of $46.6 million, or 12.3%, to $424.9 million, or 77.8%, of total assets at September 30, 2011, compared to $378.3 million, or 83.5%, of total assets at December 31, 2010, including $32.9 million in loans acquired with the branch acquisitions. Over and above the acquisition of the loans, there was a net increase in net loans and loans held for sale of $13.7 million.
Deposits increased $94.9 million, or 25.2%, to $471.5 million at September 30, 2011, from $376.7 million at December 31, 2010, reflecting the acquisition of $67.0 million in deposits, of which $3.2 million were in the form of deposits linked to overnight collateralized repurchase sweeps. The deposits at the acquired branches have increased $2.0 million since May 27, 2011 and all nontime deposit categories except time deposits have grown since December 31, 2010.
The Company's total capital increased from $41.7 million at December 31, 2010 to $42.6 million at September 30, 2011. Capital ratios, while continuing to meet the regulatory guidelines for well capitalized, all dropped as of September 30, 2011 due to the branch acquisitions. The total risk based capital ratio at December 31, 2010 was 15.12% and had dropped to 12.25% at September 30, 2011 . The regulatory guideline for well capitalized is 10.0% and for minimum requirements is 8.0%.
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The following unaudited per share information and key ratios depict several measurements of performance or financial condition for the three and nine months ended or at September 30, 2011 and 2010, respectively:
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| Three Months Ended or At September 30, | Nine Months Ended or At September 30, |
| 2011 | 2010 | 2011 | 2010 |
Return on average assets (ROA) (1) | 1.07 | % | 1.31 | % | 0.95 | % | 1.27 | % |
Return on average equity (ROE) (1) | 13.63 | % | 13.92 | % | 11.17 | % | 13.49 | % |
Net interest margin (1)(2) | 4.19 | % | 4.66 | % | 4.29 | % | 4.62 | % |
Efficiency ratio (3) | 72.67 | % | 65.18 | % | 75.02 | % | 66.74 | % |
Net interest spread (4) | 4.04 | % | 4.43 | % | 4.10 | % | 4.40 | % |
Loan to deposit ratio | 90.95 | % | 97.07 | % | 90.95 | % | 97.07 | % |
Net loan charge-offs to average loans not held for sale (1) | 0.02 | |