3.31.12 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: March 31, 2012
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 May 1, 2012:
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| | | | |
| Common Stock, $2 par value | | 4,456,504 shares | |
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Consolidated Statements of Comprehensive Income | |
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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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| March 31, 2012 | December 31, 2011 |
Assets | (Dollars in thousands) |
Cash and due from banks | $ | 5,050 |
| $ | 5,871 |
|
Federal funds sold and overnight deposits | 14,443 |
| 18,510 |
|
Cash and cash equivalents | 19,493 |
| 24,381 |
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Interest bearing deposits in banks | 23,482 |
| 24,020 |
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Investment securities available-for-sale | 43,198 |
| 42,954 |
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Investment securities held-to-maturity (fair value $3.0 million and $4.0 million at March 31, 2012 and December 31, 2011, respectively) | 3,000 |
| 4,000 |
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Loans held for sale | 12,084 |
| 4,888 |
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Loans | 425,489 |
| 424,319 |
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Allowance for loan losses | (4,406 | ) | (4,226 | ) |
Net deferred loan costs | 151 |
| 177 |
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Net loans | 421,234 |
| 420,270 |
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Accrued interest receivable | 1,886 |
| 1,810 |
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Premises and equipment, net | 10,368 |
| 9,163 |
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Core deposit intangible | 1,566 |
| 1,608 |
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Goodwill | 2,223 |
| 2,223 |
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Investment in real estate limited partnerships | 4,316 |
| 4,473 |
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Company-owned life insurance | 3,706 |
| 3,676 |
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Other assets | 8,846 |
| 9,285 |
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Total assets | $ | 555,402 |
| $ | 552,751 |
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Liabilities and Stockholders’ Equity | | |
Liabilities | | |
Deposits | | |
Noninterest bearing | $ | 75,511 |
| $ | 76,656 |
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Interest bearing | 249,312 |
| 239,058 |
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Time | 153,187 |
| 157,725 |
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Total deposits | 478,010 |
| 473,439 |
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Borrowed funds | 27,281 |
| 29,015 |
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Liability for defined benefit pension plan | 5,891 |
| 5,679 |
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Accrued interest and other liabilities | 3,726 |
| 4,279 |
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Total liabilities | 514,908 |
| 512,412 |
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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 March 31, 2012 and December 31, 2011 | 9,847 |
| 9,847 |
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Additional paid-in capital | 280 |
| 276 |
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Retained earnings | 38,498 |
| 38,385 |
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Treasury stock at cost; 466,782 shares at March 31, 2012 and 466,082 shares at December 31, 2011 | (3,836 | ) | (3,823 | ) |
Accumulated other comprehensive loss | (4,295 | ) | (4,346 | ) |
Total stockholders' equity | 40,494 |
| 40,339 |
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Total liabilities and stockholders' equity | $ | 555,402 |
| $ | 552,751 |
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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 March 31, |
| 2012 | 2011 |
| (Dollars in thousands except per share data) |
Interest and dividend income | | |
Interest and fees on loans | $ | 5,810 |
| $ | 5,196 |
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Interest on debt securities: | |
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Taxable | 199 |
| 143 |
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Tax exempt | 88 |
| 73 |
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Dividends | 18 |
| 4 |
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Interest on federal funds sold and overnight deposits | 4 |
| 6 |
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Interest on interest bearing deposits in banks | 77 |
| 76 |
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Total interest and dividend income | 6,196 |
| 5,498 |
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Interest expense | |
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Interest on deposits | 660 |
| 673 |
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Interest on borrowed funds | 250 |
| 288 |
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Total interest expense | 910 |
| 961 |
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Net interest income | 5,286 |
| 4,537 |
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Provision for loan losses | 180 |
| 150 |
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Net interest income after provision for loan losses | 5,106 |
| 4,387 |
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Noninterest income | |
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Trust income | 147 |
| 132 |
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Service fees | 1,175 |
| 1,006 |
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Net gains on sales of investment securities available-for-sale | 42 |
| — |
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Net gains on sales of loans held for sale | 473 |
| 168 |
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Other income | 66 |
| 95 |
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Total noninterest income | 1,903 |
| 1,401 |
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Noninterest expenses | |
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Salaries and wages | 2,234 |
| 1,730 |
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Pension and employee benefits | 1,058 |
| 817 |
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Occupancy expense, net | 344 |
| 290 |
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Equipment expense | 345 |
| 296 |
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Other expenses | 1,560 |
| 1,447 |
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Total noninterest expenses | 5,541 |
| 4,580 |
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Income before provision for income taxes | 1,468 |
| 1,208 |
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Provision for income taxes | 241 |
| 180 |
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Net income | $ | 1,227 |
| $ | 1,028 |
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Earnings per common share | $ | 0.28 |
| $ | 0.23 |
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Weighted average number of common shares outstanding | 4,457,081 |
| 4,455,737 |
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Dividends per common share | $ | 0.25 |
| $ | 0.25 |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 2
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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| Three Months Ended March 31, |
| 2012 | 2011 |
| (Dollars in thousands) |
Net income | $ | 1,227 |
| $ | 1,028 |
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Other comprehensive income, net of tax: | | |
Investment securities available-for-sale: | | |
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale | (38 | ) | 85 |
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Reclassification adjustments for net gains on investment securities available-for-sale realized in net income | (28 | ) | — |
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Total | (66 | ) | 85 |
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Defined benefit pension plan: |
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Net actuarial loss arising during period | 26 |
| — |
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Reclassification adjustment for amortization of net actuarial loss realized in net income | 90 |
| 31 |
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Reclassification adjustment for amortization of prior service cost realized in net income | 1 |
| — |
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Total | 117 |
| 31 |
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Total other comprehensive income | 51 |
| 116 |
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Total comprehensive income | $ | 1,278 |
| $ | 1,144 |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2012 and 2011 (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, 2011 | 4,457,204 |
| $ | 9,847 |
| $ | 276 |
| $ | 38,385 |
| $ | (3,823 | ) | $ | (4,346 | ) | $ | 40,339 |
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Net income | — |
| — |
| — |
| 1,227 |
| — |
| — |
| 1,227 |
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Other comprehensive income | — |
| — |
| — |
| — |
| — |
| 51 |
| 51 |
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Cash dividends declared ($0.25 per share) | — |
| — |
| — |
| (1,114 | ) | — |
| — |
| (1,114 | ) |
Stock based compensation expense | — |
| — |
| 4 |
| — |
| — |
| — |
| 4 |
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Purchase of treasury stock | (700 | ) | — |
| — |
| — |
| (13 | ) | — |
| (13 | ) |
Balances, March 31, 2012 | 4,456,504 |
| $ | 9,847 |
| $ | 280 |
| $ | 38,498 |
| $ | (3,836 | ) | $ | (4,295 | ) | $ | 40,494 |
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Balances, December 31, 2010 | 4,455,704 |
| $ | 9,844 |
| $ | 244 |
| $ | 37,623 |
| $ | (3,823 | ) | $ | (2,163 | ) | $ | 41,725 |
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Net income | — |
| — |
| — |
| 1,028 |
| — |
| — |
| 1,028 |
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Other comprehensive income | — |
| — |
| — |
| — |
| — |
| 116 |
| 116 |
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Issuance of common stock | 1,500 |
| 3 |
| 23 |
| — |
| — |
| — |
| 26 |
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Cash dividends declared ($0.25 per share) | — |
| — |
| — |
| (1,114 | ) | — |
| — |
| (1,114 | ) |
Balances, March 31, 2011 | 4,457,204 |
| $ | 9,847 |
| $ | 267 |
| $ | 37,537 |
| $ | (3,823 | ) | $ | (2,047 | ) | $ | 41,781 |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 4
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| Three Months Ended March 31, |
| 2012 | 2011 |
| (Dollars in thousands) |
Cash Flows From Operating Activities | | |
Net income | $ | 1,227 |
| $ | 1,028 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation | 200 |
| 177 |
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Provision for loan losses | 180 |
| 150 |
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Deferred income tax (benefit) provision | (156 | ) | 98 |
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Net amortization of investment securities | 26 |
| 14 |
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Equity in losses of limited partnerships | 158 |
| 106 |
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Stock based compensation expense | 4 |
| — |
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Net increase (decrease) in unamortized loan costs | 26 |
| (15 | ) |
Proceeds from sales of loans held for sale | 22,865 |
| 16,912 |
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Origination of loans held for sale | (29,588 | ) | (13,747 | ) |
Net gains on sales of loans held for sale | (473 | ) | (168 | ) |
Net losses on disposals of premises and equipment | 1 |
| — |
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Net gains on sales of investment securities available-for-sale | (42 | ) | — |
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Write-downs of impaired assets | 11 |
| 42 |
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Net losses (gains) on sales of other real estate owned | 6 |
| (18 | ) |
Increase in accrued interest receivable | (76 | ) | (90 | ) |
Amortization of core deposit intangible | 43 |
| — |
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Decrease in other assets | 366 |
| 91 |
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Increase in other liabilities | 322 |
| 431 |
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Net cash (used in) provided by operating activities | (4,900 | ) | 5,011 |
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Cash Flows From Investing Activities |
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Interest bearing deposits in banks |
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Proceeds from maturities and redemptions | 1,836 |
| 1,969 |
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Purchases | (1,298 | ) | (993 | ) |
Investment securities held-to-maturity | | |
Proceeds from maturities, calls and paydowns | 1,000 |
| — |
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Investment securities available-for-sale | | |
Proceeds from sales | 789 |
| — |
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Proceeds from maturities, calls and paydowns | 2,718 |
| 685 |
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Purchases | (3,834 | ) | (2,277 | ) |
Redemption of nonmarketable stock | 121 |
| — |
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Net (increase) decrease in loans | (1,180 | ) | 7,169 |
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Recoveries of loans charged off | 10 |
| 19 |
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Purchases of premises and equipment | (1,406 | ) | (231 | ) |
Investments in limited partnerships | (486 | ) | — |
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Proceeds from sales of other real estate owned | 32 |
| 175 |
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Net cash (used in) provided by investing activities | (1,698 | ) | 6,516 |
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Union Bankshares, Inc. Page 5
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Cash Flows From Financing Activities |
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Repayment of long-term debt | (483 | ) | (247 | ) |
Net decrease in short-term borrowings outstanding | (1,251 | ) | (1,847 | ) |
Net decrease in noninterest bearing deposits | (1,145 | ) | (3,164 | ) |
Net increase in interest bearing deposits | 10,254 |
| 14,750 |
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Net decrease in time deposits | (4,538 | ) | (4,227 | ) |
Issuance of common stock | — |
| 26 |
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Purchase of treasury stock | (13 | ) | — |
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Dividends paid | (1,114 | ) | (1,114 | ) |
Net cash provided by financing activities | 1,710 |
| 4,177 |
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Net (decrease) increase in cash and cash equivalents | (4,888 | ) | 15,704 |
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Cash and cash equivalents |
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Beginning of period | 24,381 |
| 14,292 |
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End of period | $ | 19,493 |
| $ | 29,996 |
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Supplemental Disclosures of Cash Flow Information |
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Interest paid | $ | 818 |
| $ | 864 |
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Income taxes paid | $ | 75 |
| $ | 50 |
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Supplemental Schedule of Noncash Investing and Financing Activities |
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Investment in limited partnerships acquired by capital contributions payable | $ | — |
| $ | 953 |
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See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 6
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 March 31, 2012, and for the three months ended March 31, 2012 and 2011, 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, 2011. In the opinion of the 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 2011 Annual Report to Shareholders and 2011 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, 2012, or any other interim period.
Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.
Note 2. Legal Contingencies
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Note 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 April 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (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 ASU 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 adopted the ASU, which did not 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 (IFRS). 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. Management has adopted the ASU, which did not have a material effect on the Company's consolidated financial statements. (See Note 11.)
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 GAAP and IFRS. 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
Union Bankshares, Inc. Page 7
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 except for the presentation requirements of reclassifications of items out of accumulated other comprehensive income which have been delayed indefinitely by an ASU issued by FASB in December 2011. Management has adopted the ASU and has opted to present two separate statements. (See Consolidated Statements of Comprehensive Income and Note 10.)
In December 2011, the FASB issued an ASU, Disclosures about Offsetting Assets and Liabilities, to enhance disclosures required to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Topic 210-20-45 (Balance Sheet Offsets) or Topic 815-10-45 (Derivatives & Hedging) or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Topic 210-20-45 or Topic 815-10-45. The amendments in the ASU are to be applied retrospectively for all comparative periods presented and are effective for annual and interim periods beginning on or after January 1, 2013. Management is currently reviewing the ASU but does not believe that it will have a material effect on the Company's consolidated financial statements.
Note 5. Goodwill and Other Intangible Assets
As a result of the acquisition of three New Hampshire branches in May 2011, the Company recorded goodwill amounting to $2.2 million. The goodwill is not amortizable and is not deductible for tax purposes. Goodwill is evaluated for impairment when conditions warrant, as recommended by current authoritative guidance.
The Company also recorded $1.7 million of acquired identifiable intangible assets in connection with the branch acquisition, representing the core deposit intangible which is subject to straight-line amortization over the estimated 10 year average life of the core deposit base, absent any future impairment. 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 March 31, 2012. As of March 31, 2012, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
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| (Dollars in thousands) |
2012 | $ | 128 |
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2013 | 171 |
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2014 | 171 |
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2015 | 171 |
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2016 | 171 |
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Thereafter | 754 |
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Total | $ | 1,566 |
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Management will evaluate the core deposit intangible for impairment if conditions warrant.
Union Bankshares, Inc. Page 8
Note 6. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
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March 31, 2012 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 18,491 |
| $ | 82 |
| $ | (44 | ) | $ | 18,529 |
|
Agency mortgage-backed | 2,818 |
| 54 |
| (3 | ) | 2,869 |
|
State and political subdivisions | 12,626 |
| 961 |
| (19 | ) | 13,568 |
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Corporate | 7,113 |
| 176 |
| (1 | ) | 7,288 |
|
Total debt securities | 41,048 |
| 1,273 |
| (67 | ) | 42,254 |
|
Marketable equity securities | 746 |
| 57 |
| (11 | ) | 792 |
|
Mutual funds | 152 |
| — |
| — |
| 152 |
|
Total | $ | 41,946 |
| $ | 1,330 |
| $ | (78 | ) | $ | 43,198 |
|
Held-to-maturity | | | | |
U.S. Government-sponsored enterprises | $ | 3,000 |
| $ | 3 |
| $ | — |
| $ | 3,003 |
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December 31, 2011 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 17,456 |
| $ | 99 |
| $ | (18 | ) | $ | 17,537 |
|
Agency mortgage-backed | 3,326 |
| 61 |
| (1 | ) | 3,386 |
|
State and political subdivisions | 11,813 |
| 1,018 |
| (1 | ) | 12,830 |
|
Corporate | 8,127 |
| 179 |
| (13 | ) | 8,293 |
|
Total debt securities | 40,722 |
| 1,357 |
| (33 | ) | 42,046 |
|
Marketable equity securities | 746 |
| 39 |
| (12 | ) | 773 |
|
Mutual funds | 135 |
| — |
| — |
| 135 |
|
Total | $ | 41,603 |
| $ | 1,396 |
| $ | (45 | ) | $ | 42,954 |
|
Held-to-maturity | | | | |
U.S. Government-sponsored enterprises | $ | 4,000 |
| $ | 1 |
| $ | (3 | ) | $ | 3,998 |
|
Proceeds from the sale of securities available-for-sale were $789 thousand for the three months ended March 31, 2012. Gross realized gains from the sale of securities available-for-sale were $42 thousand for the three months ended March 31, 2012. Gross realized losses were $0 for the three months ended March 31, 2012. There were no sales of securities available-for-sale for the three months ended March 31, 2011. The specific identification method is used to determine realized gains and losses on sales of available-for-sale securities.
Union Bankshares, Inc. Page 9
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of March 31, 2012 were as follows:
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| | | | | | |
| Amortized Cost | Fair Value |
| (Dollars in thousands) |
Available-for-sale | | |
Due in one year or less | $ | 1,003 |
| $ | 1,016 |
|
Due from one to five years | 10,972 |
| 11,190 |
|
Due from five to ten years | 10,964 |
| 11,256 |
|
Due after ten years | 15,291 |
| 15,923 |
|
| 38,230 |
| 39,385 |
|
Agency mortgage-backed securities | 2,818 |
| 2,869 |
|
Total debt securities available-for-sale | $ | 41,048 |
| $ | 42,254 |
|
Held-to-maturity | | |
Due from one to five years | $ | 1,000 |
| $ | 1,001 |
|
Due from five to ten years | 2,000 |
| 2,002 |
|
Total debt securities held-to-maturity | $ | 3,000 |
| $ | 3,003 |
|
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 agency mortgage-backed securities because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency mortgage-backed securities are shown separately and not included in the contractual maturity categories in the above maturity summary.
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:
|
| | | | | | | | | | | | | | | | | | |
March 31, 2012 | 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 | $ | 5,454 |
| $ | (44 | ) | $ | — |
| $ | — |
| $ | 5,454 |
| $ | (44 | ) |
Agency mortgage-backed | — |
| — |
| 337 |
| (3 | ) | 337 |
| (3 | ) |
State and political subdivisions | 1,113 |
| (19 | ) | — |
| — |
| 1,113 |
| (19 | ) |
Corporate | 504 |
| (1 | ) | — |
| — |
| 504 |
| (1 | ) |
Total debt securities | 7,071 |
| (64 | ) | 337 |
| (3 | ) | 7,408 |
| (67 | ) |
Marketable equity securities | 155 |
| (7 | ) | 10 |
| (4 | ) | 165 |
| (11 | ) |
Total | $ | 7,226 |
| $ | (71 | ) | $ | 347 |
| $ | (7 | ) | $ | 7,573 |
| $ | (78 | ) |
Union Bankshares, Inc. Page 10
|
| | | | | | | | | | | | | | | | | | |
December 31, 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 | $ | 7,389 |
| $ | (21 | ) | $ | — |
| $ | — |
| $ | 7,389 |
| $ | (21 | ) |
Agency mortgage-backed | — |
| — |
| 361 |
| (1 | ) | 361 |
| (1 | ) |
State and political subdivisions | 347 |
| (1 | ) | — |
| — |
| 347 |
| (1 | ) |
Corporate | 3,075 |
| (13 | ) | — |
| — |
| 3,075 |
| (13 | ) |
Total debt securities | 10,811 |
| (35 | ) | 361 |
| (1 | ) | 11,172 |
| (36 | ) |
Marketable equity securities | 193 |
| (7 | ) | 10 |
| (5 | ) | 203 |
| (12 | ) |
Total | $ | 11,004 |
| $ | (42 | ) | $ | 371 |
| $ | (6 | ) | $ | 11,375 |
| $ | (48 | ) |
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; |
| |
• | 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 March 31, 2012, held-to-maturity and available-for-sale securities, consisting of eight U.S. Government-sponsored enterprises, one agency mortgage-backed obligation, two tax-exempt municipal securities, one taxable municipal bond, one corporate bond and four marketable equity securities, had aggregate unrealized losses of $78 thousand. One marketable equity security and the agency mortgage-backed obligation had continuous unrealized losses for longer than twelve months. The Company has the ability to hold such securities for the foreseeable future. No declines were deemed by management to be other-than-temporary at March 31, 2012.
Investment securities with a carrying amount of $7.5 million and $11.2 million at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.
Union Bankshares, Inc. Page 11
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 following accounting policies, related to accrual and nonaccrual loans, apply to all loan segments and classes. The Company considers its loan segments and loan classes to be the same. 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 current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is 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 for all loan segments and classes.
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 purchased in the May 2011 acquisition of branches were recorded at the estimated fair market value at the time of purchase and totaled $32.9 million. The estimated fair value contains both accretable and nonaccretable components. The accretable component is amortized as an adjustment to the related loan yield over the average life of the loan. The nonaccretable component represents probable loss due to credit risk and is reviewed by management periodically and adjusted as deemed necessary. The fair value of the loans acquired resulted in an accretable loan premium component of $545 thousand, less a nonaccretable credit risk component of $318 thousand at the acquisition date. Loan premium amortization of $23 thousand has been charged to Interest and fees on loans on the Company's statement of income for the three months ended March 31, 2012. The remaining accretable loan premium component balance was $468 thousand at March 31, 2012 and $491 thousand at December 31, 2011. There has been no change in the nonaccretable credit risk component balance of $318 thousand since acquisition. The net carrying amount of the acquired loans included in the March 31, 2012 loan balances below totals $27.1 million.
The composition of Net loans as of the balance sheet dates was as follows:
|
| | | | | | |
| March 31, 2012 | December 31, 2011 |
| (Dollars in thousands) |
Residential real estate | $ | 146,555 |
| $ | 147,426 |
|
Construction real estate | 27,972 |
| 28,077 |
|
Commercial real estate | 186,658 |
| 189,770 |
|
Commercial | 22,036 |
| 23,018 |
|
Consumer | 6,252 |
| 6,134 |
|
Tax exempt | 36,016 |
| 29,894 |
|
Gross loans | 425,489 |
| 424,319 |
|
Allowance for loan losses | (4,406 | ) | (4,226 | ) |
Net deferred loan costs | 151 |
| 177 |
|
Net loans | $ | 421,234 |
| $ | 420,270 |
|
Residential real estate loans aggregating $14.6 million and $9.9 million at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral on deposits of municipalities. Qualified residential first mortgages held by Union and up to $25 million in qualified small business loans may also be pledged as collateral for borrowings from the Federal Home Loan Bank (FHLB) of Boston under a blanket lien.
Union Bankshares, Inc. Page 12
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
|
| | | | | | | | | | | | | | | |
March 31, 2012 | Current | 30-89 Days | Over 90 Days and accruing | Nonaccrual | Total |
| (Dollars in thousands) |
Residential real estate | $ | 139,603 |
| $ | 3,609 |
| $ | 411 |
| $ | 2,932 |
| $ | 146,555 |
|
Construction real estate | 27,492 |
| 176 |
| 153 |
| 151 |
| 27,972 |
|
Commercial real estate | 180,990 |
| 2,835 |
| 912 |
| 1,921 |
| 186,658 |
|
Commercial | 21,757 |
| 143 |
| 12 |
| 124 |
| 22,036 |
|
Consumer | 6,142 |
| 61 |
| — |
| 49 |
| 6,252 |
|
Tax exempt | 36,016 |
| — |
| — |
| — |
| 36,016 |
|
Total | $ | 412,000 |
| $ | 6,824 |
| $ | 1,488 |
| $ | 5,177 |
| $ | 425,489 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2011 | Current | 30-89 Days | Over 90 Days and accruing | Nonaccrual | Total |
| (Dollars in thousands) |
Residential real estate | $ | 140,330 |
| $ | 3,819 |
| $ | 606 |
| $ | 2,671 |
| $ | 147,426 |
|
Construction real estate | 26,849 |
| 961 |
| 175 |
| 92 |
| 28,077 |
|
Commercial real estate | 182,122 |
| 5,165 |
| 1,104 |
| 1,379 |
| 189,770 |
|
Commercial | 22,519 |
| 376 |
| 12 |
| 111 |
| 23,018 |
|
Consumer | 6,045 |
| 34 |
| — |
| 55 |
| 6,134 |
|
Tax exempt | 29,894 |
| — |
| — |
| — |
| 29,894 |
|
Total | $ | 407,759 |
| $ | 10,355 |
| $ | 1,897 |
| $ | 4,308 |
| $ | 424,319 |
|
Aggregate interest on nonaccrual loans not recognized was $977 thousand and $755 thousand as of March 31, 2012 and 2011, respectively, and $903 thousand as of December 31, 2011.
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. For all loan classes, 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 substandard or doubtful. 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 may 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
Union Bankshares, Inc. Page 13
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. 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 Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship.
The general component represents the level of allowance allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:
| |
• | Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment. |
| |
• | Construction real estate - Loans in this segment include residential and commercial construction properties, land and land development loans. Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment. |
| |
• | Commercial real estate - Loans in this segment are primarily properties occupied by businesses or income-producing properties. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates which, in turn, could have an effect on the credit quality of this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans. |
| |
• | Commercial - Loans in this segment are made to businesses and are generally secured by nonreal estate assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer or business spending, could have an effect on credit quality of this segment. |
| |
• | Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment, could have an effect on the credit quality of this segment. |
| |
• | Municipal - Loans in this segment are made to municipalities located within the Company's service area. Repayment is primarily dependent on taxes or other funds collected annually by the municipalities. Management considers there to be minimal risk surrounding the credit quality of this segment. |
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.
Union Bankshares, Inc. Page 14
Changes in the Allowance for loan losses, by class of loans, for the three months ended March 31, 2012 and 2011 were as follows:
|
| | | | | | | | | | | | | | | | | | |
For The Three Months Ended March 31, 2012 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Balance, December 31, 2011 | $ | 1,250 |
| $ | 367 |
| $ | 2,278 |
| $ | 232 |
| $ | 99 |
| $ | 4,226 |
|
Provision for loan losses | 10 |
| 11 |
| 127 |
| 13 |
| 19 |
| 180 |
|
Recoveries of amounts charged off | — |
| 3 |
| — |
| 3 |
| 4 |
| 10 |
|
| 1,260 |
| 381 |
| 2,405 |
| 248 |
| 122 |
| 4,416 |
|
Amounts charged off | — |
| — |
| — |
| — |
| (10 | ) | (10 | ) |
Balance, March 31, 2012 | $ | 1,260 |
| $ | 381 |
| $ | 2,405 |
| $ | 248 |
| $ | 112 |
| $ | 4,406 |
|
|
| | | | | | | | | | | | | | | | | | |
For The Three Months Ended March 31, 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 (credit) for loan losses | 134 |
| — |
| 19 |
| 11 |
| (14 | ) | 150 |
|
Recoveries of amounts charged off | 1 |
| — |
| — |
| 3 |
| 15 |
| 19 |
|
| 1,168 |
| 240 |
| 2,136 |
| 264 |
| 116 |
| 3,924 |
|
Amounts charged off | (8 | ) | — |
| — |
| — |
| (8 | ) | (16 | ) |
Balance, March 31, 2011 | $ | 1,160 |
| $ | 240 |
| $ | 2,136 |
| $ | 264 |
| $ | 108 |
| $ | 3,908 |
|
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:
|
| | | | | | | | | | | | | | | | | | |
March 31, 2012 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 346 |
| $ | 26 |
| $ | 362 |
| $ | 86 |
| $ | 8 |
| $ | 828 |
|
Collectively evaluated for impairment | 914 |
| 355 |
| 2,043 |
| 162 |
| 104 |
| 3,578 |
|
Total allocated | $ | 1,260 |
| $ | 381 |
| $ | 2,405 |
| $ | 248 |
| $ | 112 |
| $ | 4,406 |
|
|
| | | | | | | | | | | | | | | | | | |
December 31, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer, Municipal and Unallocated | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 328 |
| $ | 12 |
| $ | 293 |
| $ | 41 |
| $ | 11 |
| $ | 685 |
|
Collectively evaluated for impairment | 922 |
| 355 |
| 1,985 |
| 191 |
| 88 |
| 3,541 |
|
Total allocated | $ | 1,250 |
| $ | 367 |
| $ | 2,278 |
| $ | 232 |
| $ | 99 |
| $ | 4,226 |
|
Union Bankshares, Inc. Page 15
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:
|
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2012 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Tax Exempt | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 3,495 |
| $ | 254 |
| $ | 5,862 |
| $ | 432 |
| $ | 31 |
| $ | — |
| $ | 10,074 |
|
Collectively evaluated for impairment | 131,359 |
| 27,709 |
| 167,067 |
| 20,816 |
| 5,887 |
| 35,466 |
| 388,304 |
|
| 134,854 |
| 27,963 |
| 172,929 |
| 21,248 |
| 5,918 |
| 35,466 |
| 398,378 |
|
Acquired loans | 11,701 |
| 9 |
| 13,729 |
| 788 |
| 334 |
| 550 |
| 27,111 |
|
Total | $ | 146,555 |
| $ | 27,972 |
| $ | 186,658 |
| $ | 22,036 |
| $ | 6,252 |
| $ | 36,016 |
| $ | 425,489 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Tax Exempt | Total |
| (Dollars in thousands) |
Individually evaluated for impairment | $ | 2,810 |
| $ | 92 |
| $ | 6,499 |
| $ | 355 |
| $ | 33 |
| $ | — |
| $ | 9,789 |
|
Collectively evaluated for impairment | 132,115 |
| 27,976 |
| 169,576 |
| 21,861 |
| 5,724 |
| 29,344 |
| 386,596 |
|
| 134,925 |
| 28,068 |
| 176,075 |
| 22,216 |
| 5,757 |
| 29,344 |
| 396,385 |
|
Acquired loans | 12,501 |
| 9 |
| 13,695 |
| 802 |
| 377 |
| 550 |
| 27,934 |
|
Total | $ | 147,426 |
| $ | 28,077 |
| $ | 189,770 |
| $ | 23,018 |
| $ | 6,134 |
| $ | 29,894 |
| $ | 424,319 |
|
Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:
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, exhibit some characteristics which require special attention by the account officer.
4/M 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. When warranted, these credits may be monitored 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.
Union Bankshares, Inc. Page 16
The following tables summarize the loan ratings applied to the Company's loans by class as of the balance sheet dates:
|
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2012 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Tax Exempt | Total |
| (Dollars in thousands) |
Pass | $ | 126,535 |
| $ | 26,446 |
| $ | 129,705 |
| $ | 19,441 |
| $ | 5,813 |
| $ | 35,466 |
| $ | 343,406 |
|
Satisfactory/Monitor | 4,824 |
| 1,263 |
| 37,362 |
| 1,375 |
| 74 |
| — |
| 44,898 |
|
Substandard | 3,495 |
| 254 |
| 5,862 |
| 432 |
| 31 |
| — |
| 10,074 |
|
| 134,854 |
| 27,963 |
| 172,929 |
| 21,248 |
| 5,918 |
| 35,466 |
| 398,378 |
|
Acquired loans | 11,701 |
| 9 |
| 13,729 |
| 788 |
| 334 |
| 550 |
| 27,111 |
|
Total | $ | 146,555 |
| $ | 27,972 |
| $ | 186,658 |
| $ | 22,036 |
| $ | 6,252 |
| $ | 36,016 |
| $ | 425,489 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2011 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Tax Exempt | Total |
| (Dollars in thousands) |
Pass | $ | 127,338 |
| $ | 26,928 |
| $ | 135,764 |
| $ | 19,069 |
| $ | 5,652 |
| $ | 29,344 |
| $ | 344,095 |
|
Satisfactory/Monitor | 4,777 |
| 1,048 |
| 33,812 |
| 2,792 |
| 72 |
| — |
| 42,501 |
|
Substandard | 2,810 |
| 92 |
| 6,499 |
| 355 |
| 33 |
| — |
| 9,789 |
|
Total | 134,925 |
| 28,068 |
| 176,075 |
| 22,216 |
| 5,757 |
| 29,344 |
| 396,385 |
|
Acquired loans | 12,501 |
| 9 |
| 13,695 |
| 802 |
| 377 |
| 550 |
| 27,934 |
|
Total | $ | 147,426 |
| $ | 28,077 |
| $ | 189,770 |
| $ | 23,018 |
| $ | 6,134 |
| $ | 29,894 |
| $ | 424,319 |
|
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. There was no related adjustment to the allowance for loan losses with respect to the acquired loans at March 31, 2012, except for one commercial loan that had deteriorated credit quality since acquisition and was assigned a specific reserve of $22 thousand included in the allowance for loan losses.
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 months ended March 31, 2012:
|
| | | | | | | | | | | | | | | |
| As Of March 31, 2012 | For The Three Months Ended March 31, 2012 |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | Average Recorded Investment | Interest Income Recognized |
| (Dollars in thousands) |
With an allowance recorded: | | | | | |
Residential real estate | $ | 238 |
| $ | 238 |
| $ | 22 |
| | |
Commercial real estate | 123 |
| 123 |
| 9 |
| | |
| 361 |
| 361 |
| 31 |
| | |
With no allowance recorded: | | | | | |
Residential real estate | 168 |
| 181 |
| — |
| | |
Commercial real estate | 1,968 |
| 2,183 |
| — |
| | |
| 2,136 |
| 2,364 |
| — |
| | |
Total: | | | | | |
Residential real estate | 406 |
| 419 |
| 22 |
| $ | 412 |
| $ | — |
|
Commercial real estate | 2,091 |
| 2,306 |
| 9 |
| 2,158 |
| 46 |
|
Total | $ | 2,497 |
| $ | 2,725 |
| $ | 31 |
| $ | 2,570 |
| $ | 46 |
|
____________________
| |
(1) | Does not reflect government guaranties on impaired loans as of March 31, 2012 totaling $88 thousand. |
The following table provides information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2011:
|
| | | | | | | | | | | | | | | |
| As Of March 31, 2011 | For The Three Months Ended March 31, 2011 |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | Average Recorded Investment | Interest Income Recognized |
| (Dollars in thousands) |
Total: | | | | | |
Residential real estate | $ | 296 |
| $ | 2,485 |
| $ | 37 |
| $ | 298 |
| $ | — |
|
Commercial real estate | 2,415 |
| 355 |
| 56 |
| 2,365 |
| 21 |
|
Total | $ | 2,711 |
| $ | 2,840 |
| $ | 93 |
| $ | 2,663 |
| $ | 21 |
|
____________________
| |
(1) | Does not reflect government guaranties on impaired loans as of March 31, 2011 totaling $110 thousand. |
Union Bankshares, Inc. Page 18
The following table provides information with respect to impaired loans as of December 31, 2011:
|
| | | | | | | | | | | |
| December 31, 2011 | | |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | | |
| (Dollars in thousands) | | |
With an allowance recorded: | | | | | |
Residential real estate | $ | 241 |
| $ | 243 |
| $ | 55 |
| | |
Commercial real estate | 1,907 |
| 1,930 |
| 21 |
| | |
| 2,148 |
| 2,173 |
| 76 |
| | |
With no allowance recorded: | | | | | |
Residential real estate | 177 |
| 252 |
| — |
| | |
Commercial real estate | 318 |
| 374 |
| — |
| | |
| 495 |
| 626 |
| — |
| | |
| | | | | |
Total: | | | | | |
Residential real estate | 418 |
| 495 |
| 55 |
| | |
Commercial real estate | 2,225 |
| 2,304 |
| 21 |
| | |
Total | $ | 2,643 |
| $ | 2,799 |
| $ | 76 |
| | |
____________________
| |
(1) | Does not reflect government guaranties on impaired loans as of December 31, 2011 totaling $88 thousand. |
Troubled debt restructured loans as of March 31, 2012 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 and meet established thresholds, 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 value of anticipated future cash flows.
There was no new troubled debt restructuring activity for the three months ended March 31, 2012. There were no troubled debt restructured loans modified within the previous twelve months that had subsequently defaulted during the three month period ended March 31, 2012. Troubled debt restructured loans are considered defaulted at 90 days past due.
At March 31, 2012 and December 31, 2011, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.
Union Bankshares, Inc. Page 19
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 months ended March 31 consisted of the following components:
|
| | | | | | |
| Three Months Ended March 31, |
| 2012 | 2011 |
| (Dollars in thousands) |
Service cost | $ | 256 |
| $ | 170 |
|
Interest cost on projected benefit obligation | 222 |
| 209 |
|
Expected return on plan assets | (237 | ) | (219 | ) |
Amortization of prior service cost | 2 |
| 2 |
|
Amortization of net loss | 147 |
| 46 |
|
Net periodic benefit cost | $ | 390 |
| $ | 208 |
|
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:
|
| | | | | | |
| March 31, 2012 | December 31, 2011 |
| (Dollars in thousands) |
Net unrealized gain on investment securities available-for-sale | $ | 826 |
| $ | 892 |
|
Defined benefit pension plan: | | |
Net unrealized actuarial loss | (5,116 | ) | (5,231 | ) |
Net unrealized prior service cost | (5 | ) | (7 | ) |
Total | $ | (4,295 | ) | $ | (4,346 | ) |
Union Bankshares, Inc. Page 20
The following table discloses the tax effects allocated to each component of other comprehensive income for the three months ended March 31:
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| March 31, 2012 | March 31, 2011 |
| Before-Tax Amount | Tax (Expense) or Benefit | Net-of-Tax Amount | Before-Tax Amount | Tax (Expense) or Benefit | Net-of-Tax Amount |
|
| (Dollars in thousands) |
| Investment securities available-for-sale: | | | | | | |
| Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale | $ | (57 | ) | $ | 19 |
| $ | (38 | ) | $ | 129 |
| $ | (44 | ) | $ | 85 |
|
| Reclassification adjustment for net gains on investment securities available-for-sale realized in net income | (42 | ) | 14 |
| (28 | ) | — |
| — |
| — |
|
| Total | (99 | ) | 33 |
| (66 | ) | 129 |
| (44 | ) | 85 |
|
| Defined benefit pension plan: | | | | | | |
| Net gain arising during the period | 39 |
| (13 | ) | 26 |
| — |
| — |
| — |
|
| Reclassification adjustment for amortization of net actuarial loss realized in net income | 136 |
| (46 | ) | 90 |
| 47 |
| (16 | ) | 31 |
|
| Reclassification adjustment for amortization of prior service cost realized in net income | 2 |
| (1 | ) | 1 |
| — |
| — |
| — |
|
| Total | 177 |
| (60 | ) | 117 |
| 47 |
| (16 | ) | 31 |
|
| Total other comprehensive income | $ | 78 |
| $ | (27 | ) | $ | 51 |
| $ | 176 |
| $ | (60 | ) | $ | 116 |
|
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:
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.
Union Bankshares, Inc. Page 21
Assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, 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) |
March 31, 2012: | | | | |
Investment securities available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 18,529 |
| $ | — |
| $ | 18,529 |
| $ | — |
|
Agency mortgage-backed | 2,869 |
| — |
| 2,869 |
| — |
|
State and political subdivisions | 13,568 |
| — |
| 13,568 |
| — |
|
Corporate | 7,288 |
| 6,780 |
| 508 |
| — |
|
Total debt securities | 42,254 |
| 6,780 |
| 35,474 |
| — |
|
Marketable equity securities | 792 |
| 792 |
| — |
| — |
|
Mutual funds | 152 |
| 152 |
| — |
| — |
|
Total | $ | 43,198 |
| $ | 7,724 |
| $ | 35,474 |
| $ | — |
|
| | | | |
December 31, 2011: | | | | |
Investment securities available-for-sale | | | | |
Debt securities: | | | | |
U.S. Government-sponsored enterprises | $ | 17,537 |
| $ | — |
| $ | 17,537 |
| $ | — |
|
Agency mortgage-backed | 3,386 |
| — |
| 3,386 |
| — |
|
State and political subdivisions | 12,830 |
| — |
| 12,830 |
| — |
|
Corporate | 8,293 |
| 6,229 |
| 2,064 |
| — |
|
Total debt securities | 42,046 |
| 6,229 |
| 35,817 |
| — |
|
Marketable equity securities | 773 |
| 773 |
| — |
| — |
|
Mutual funds | 135 |
| 135 |
| — |
| — |
|
Total | $ | 42,954 |
| $ | 7,137 |
| $ | 35,817 |
| $ | — |
|
There were no significant transfers in or out of Levels 1 and 2 for the quarter ended March 31, 2012. 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 March 31, 2012 or December 31, 2011. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.
FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.
Union Bankshares, Inc. Page 22
Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments required to be measured on a nonrecurring basis:Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values and are classified as Level 1.
Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows and are classified as Level 2.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. Investment securities are classified as Level 1 or Level 2 depending on availability of recent trade information.
Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party vendors, resulting in a Level 2 classification.
Loans: Fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The fair values for other loans (for example, fixed-rate residential, commercial real estate, 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. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that provide observable assumptions as defined by current accounting standards are classified as Level 2. Those methods that do not provide observable assumptions are classified as Level 3.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1 or 2.
Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB of Boston stock, due to restrictions placed on their transferability.
Deposits: The fair values disclosed for noninterest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time deposits and other interest bearing nontime deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected maturities on such deposits, resulting in a Level 2 classification.
Borrowed funds: The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments, resulting in a Level 2 classification. The fair values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet, also resulting in a Level 2 classification.
Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.
Union Bankshares, Inc. Page 23
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
|
| | | | | | | | | | | | | | | |
| March 31, 2012 |
| Fair Value Measurements |
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) |
Financial assets | | | | | |
Cash and cash equivalents | $ | 19,493 |
| $ | 19,493 |
| $ | 19,493 |
| $ | — |
| $ | — |
|
Interest bearing deposits in banks | 23,482 |
| 23,706 |
| — |
| 23,706 |
| — |
|
Investment securities | 46,198 |
| 46,201 |
| 7,724 |
| 38,477 |
| — |
|
Loans held for sale | 12,084 |
| 12,250 |
| — |
| 12,250 |
| — |
|
Loans | | | | | |
Real estate | 361,185 |
| 358,173 |
| — |
| — |
| 358,173 |
|
Commercial | 22,036 |
| 20,402 |
| — |
| 20,402 |
| — |
|
Consumer | 6,252 |
| 6,401 |
| — |
| 6,401 |
| — |
|
Tax exempt | 36,016 |
| 38,277 |
| — |
| 38,277 |
| — |
|
Accrued interest receivable | 1,886 |
| 1,886 |
| 53 |
| 1,833 |
| — |
|
Nonmarketable equity securities | 1,855 |
| N/A |
| N/A |
| N/A |
| N/A |
|
Financial liabilities | | | | | |
Deposits | | | | | |
Noninterest bearing | $ | 75,511 |
| $ | 75,511 |
| $ | 75,511 |
| $ | — |
| $ | — |
|
Interest bearing | 249,312 |
| 249,310 |
| — |
| 249,310 |
| — |
|
Time | 153,187 |
| 153,850 |
| — |
| 153,850 |
| — |
|
Borrowed funds | | | | | |
Short-term | 9,943 |
| 9,943 |
| — |
| 9,943 |
| — |
|
Long-term | 17,338 |
| 19,784 |
| — |
| 19,784 |
| — |
|
Accrued interest payable | 280 |
| 280 |
| — |
| 280 |
| — |
|
|
| | | | | | | | |
| | December 31, 2011 |
| | | Carrying Amount | Estimated Fair Value |
Financial assets | |
Cash and cash equivalents | | | $ | 24,381 |
| $ | 24,381 |
|
Interest bearing deposits in banks | | | 24,020 |
| 24,324 |
|
Investment securities | | | 46,954 |
| 46,952 |
|
Loans and loans held for sale, net | | | 425,158 |
| 415,823 |
|
Accrued interest receivable | | | 1,810 |
| 1,810 |
|
Nonmarketable equity securities | | | 1,976 |
| 1,976 |
|
Financial liabilities | | | | |
Deposits | | | $ | 473,439 |
| $ | 474,509 |
|
Borrowed funds | | | 29,015 |
| 33,696 |
|
Accrued interest payable | | | 356 |
| 356 |
|
The carrying amounts in the preceding tables are included in the balance sheet under the applicable captions.
Union Bankshares, Inc. Page 24
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 March 31, 2012 have been evaluated as to their potential impact to the consolidated financial statements.
On April 18, 2012, Union Bankshares, Inc. declared a $0.25 per share regular quarterly cash dividend payable May 9, 2012, to stockholders of record on April 28, 2012.
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 March 31, 2012 and December 31, 2011, and its results of operations for the three months ended March 31, 2012 and 2011. 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, 2011. 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 March 31, 2012 which would materially affect the information presented.
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, 2011 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 New Hampshire branches in May 2011 could perform differently than management anticipates in its forecasts and growth in the New Hampshire markets could be lower or slower than anticipated; |
| |
• | 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 make it difficult to maintain historical yields due to the continuing low interest rate environment and resulting adverse impact on investment returns; |
Union Bankshares, Inc. Page 25
| |
• | regulatory limitations placed on income producing methods including the limitations on debit and credit card interchange fees and overdraft fees and restrictions on 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 agencies; |
| |
• | continuing economic instability, including elevated unemployment rates, higher taxation, governmental budget issues, national and local election results and reform 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. Investors should not consider the foregoing list of factors to be a complete list of risks or uncertainties. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.
RECENT DEVELOPMENTS
Economic data continues to suggest a slow but positive trend towards economic recovery in our market as well as nationally. As discussed in the April 2012 Federal Open Market Committee (FOMC) press release, the economy is expanding at a moderate pace, labor market conditions have improved in recent months, and despite some improvement the housing sector remains depressed. Inflation has increased slightly reflecting the higher prices of crude oil and gasoline. The continued strains in the global financial markets pose significant downside risks to the economic outlook.
Interest rates will continue at historic lows as the FOMC appears likely to keep 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 target federal funds rate at least through 2014. The FOMC expects that the increase in oil and gasoline prices will affect inflation only temporarily.
Vermont and New Hampshire's unemployment rates have dropped slightly over the last couple of months and are 4.8% and 5.2%, respectively, as of March 31, 2012. These rates compare favorably with the national unemployment rate of 8.2% for the same period. The FOMC has indicated that labor conditions have improved but the unemployment rate, while declining, still remains elevated and the workforce participation rate is now at a thirty year low.
Vermont and New Hampshire continue to have lower residential foreclosure and delinquency rates than the national average. Union Bank (Union), the Company's subsidiary has earned a favorable reputation for residential lending programs and has recently been granted an Unconditional Direct Endorsement Approval from the Department of Housing and Urban Development (HUD) for the origination of Federal Housing Administration (FHA) loans. This direct endorsement will provide Union Bank the ability to more quickly and efficiently serve FHA-eligible home buyers. Demand for construction and purchase mortgage loans was stronger during the last months of 2011 and demand has continued through the first three months of 2012.
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 adopted, issued or modified since our 2011 annual report and which may have a financial impact on the Company.
There have been new laws, regulations and actions enacted that will or may impact the Company's future earnings and/or efficiency. The following are the most relevant:
| |
• | 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, but there are still additional regulations to be written. |
| |
• | As required by SEC regulations, the Company now files its financial statements both in EDGAR format and in eXtensible Business Reporting Language (XBRL), and posts such XBRL information on its website. As we approach the second year of mandated XBRL, compliance will require significant administrative resources and result in additional costs. |
Union Bankshares, Inc. Page 26
| |
• | The Basel III Capital Framework will increase minimum capital levels and add a new capital conservation buffer in the coming years. The Company's ratios continue to be over the proposed 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. |
| |
• | On December 31, 2012, the temporary unlimited insurance coverage for noninterest bearing transaction and IOLTA accounts by the FDIC is scheduled to expire. |
| |
• | On April 5, 2012, the Jumpstart Our Business Startups Act (Jobs Act) was signed into law by the President. The general provisions of the Jobs Act were aimed at increasing small businesses' ability to raise capital and this may be a benefit to the Company in the future. The Jobs Act also provides new deregistration thresholds which could allow the Company to consider deregistering its common stock and become exempt from complying with its current Securities and Exchange Act reporting requirements. The Company is evaluating these provisions and their potential impact. |
| |
• | Recently the Consumer Financial Protection Bureau outlined new rules that the Bureau intends to adopt that will impact mortgage servicing. These rules will implement revisions to the Truth in Lending Act and the Real Estate Settlement Procedures Act adopted as part of the Dodd-Frank Act. The proposed rules are expected to be published in July 2012, with final rules promulgated in January 2013. |
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 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 to increase and it is anticipated that this cost will continue to grow as the government sponsored entities continue to work through their own financial problems.
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.
Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 for a more in-depth discussion of the Company's critical accounting policies.
OVERVIEW
The Company's net income was $1.2 million for the quarter ended March 31, 2012 compared to $1.0 million for the quarter ended March 31, 2011, an increase of $199 thousand, or 19.4%. These results reflected the net effect of an increase in net interest income of $749 thousand, or 16.5%, an increase of $30 thousand, or 20.0%, in the provision for loan losses, an increase of $502 thousand, or 35.8%, in noninterest income, an increase in noninterest expenses of $961 thousand, or 21.0%, and a $61 thousand, or 33.9%, increase in the provision for income taxes. First quarter 2012 results reflect the impact of the Company's acquisition of three New Hampshire branches in May 2011.
The Company continues to face a challenging low interest rate environment as the prime rate has remained unchanged at 3.25% for over 39 months. Total interest income increased by $698 thousand, or 12.7%, to $6.2 million in the first quarter of 2012, versus $5.5 million in the first quarter of 2011. That increase was bolstered by the decrease in interest expense from $961 thousand in 2011 to $910 thousand in 2012, a decrease of $51 thousand, or 5.3%, between periods.
Union Bankshares, Inc. Page 27
The result of the changes in interest income and interest expense was that net interest income for the first quarter of 2012 was $5.3 million, up $749 thousand, or 16.5%, from the first quarter of 2011 of $4.5 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 funding costs. In addition, there is very little relative reduction that can be made in future periods from the 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 60 basis points.
The $502 thousand increase in noninterest income for the quarter was due to many factors including the increase of $305 thousand in net gains on sales of loans held for sale, from $168 thousand for the quarter ended March 31, 2011 to $473 thousand for the quarter ended March 31, 2012, with the volume of loans sold to the secondary market to mitigate long term interest rate risk increasing from $16.7 million in the first quarter of 2011 to $22.4 million in the first quarter of 2012. The continuing volume of sales was driven by the sustained low long-term mortgage rates, which created loan demand throughout the branches and the loan production office. The Company also retained $7.2 million of secondary market qualified residential real estate loans originated during the first quarter of 2012 to increase the loan portfolio and interest income as loan rates exceed investment alternatives. There was also an increase of $169 thousand, or 16.8%, in service fee income and a $42 thousand net gain on sales of investment securities available-for-sale for the quarter ended March 31, 2012. There were no security gains/losses in the 2011 comparison period.
Salaries and wages were higher by $504 thousand, or 29.1%, for the first quarter of 2012 compared to the same period last year, reflecting normal salary increases and additional staff in the acquired branches. Pension and employee benefits were up $241 thousand, or 29.5%, with the majority of the increase due to the cost of the defined benefit pension plan. Benefit expenses are generally highest in the first quarter of the year because of the front loading of expenses related to taxes and certain other employee benefits. Net occupancy and equipment expenses are both up due to the increased number of banking locations and the higher costs of operation in 2012.
All other noninterest expenses were up $113 thousand, or 7.8% for the three months ended March 31, 2012 which has numerous components. The largest changes were the $52 thousand increase in equity in losses of affordable housing investments in the first quarter of 2012 from the additional investments made during 2011, and the $43 thousand of core deposit intangible amortization during the first quarter of 2012 related to the May 2011 branch acquisitions.
The Company's effective tax rate increased to 16.4% for the three months ended March 31, 2012 from 14.9% for the same period in 2011, as income before provision for income taxes increased, with partially offsetting increases in both tax exempt income and tax credits from affordable housing partnership investments.
At March 31, 2012, the Company had total consolidated assets of $555.4 million, including gross loans and loans held for sale (total loans) of $437.6 million, deposits of $478.0 million, borrowed funds of $27.3 million and stockholders' equity of $40.5 million. The Company’s total assets increased $2.6 million, or 0.5%, to $555.4 million at March 31, 2012, from $552.8 million at December 31, 2011, and $95.8 million, or 20.8%, from $459.7 million at March 31, 2011. The growth between years was due in large part ($67.2 million) to the acquisition of three New Hampshire branches in May 2011 but also reflects organic growth of $28.6 million, or 6.2%.
Net loans and loans held for sale increased a total of $8.1 million, or 1.9%, to $433.3 million, or 78.0%, of total assets at March 31, 2012, compared to $425.2 million, or 76.9%, of total assets at December 31, 2011. Loans at March 31, 2011 totaled $371.7 million resulting in growth of $61.6 million year over year with only $27.1 million of the increase being related to the May 2011 acquisition of branches.
Deposits increased $4.6 million, or 1.0%, to $478.0 million at March 31, 2012, from $473.4 million at December 31, 2011 and $94.0 million from March 31, 2011 of which $62.3 million is in the acquired branches.
The Company's total capital increased from $40.3 million at December 31, 2011 to $40.5 million at March 31, 2012. While continuing to meet the regulatory guidelines for the well capitalized capital category, the total risk based capital ratio declined slightly from 12.17% at December 31, 2011 to 12.07% at March 31, 2012. The regulatory guideline for well capitalized is 10.0% and for minimum requirements is 8.0%.
Union Bankshares, Inc. Page 28
The following unaudited per share information and key ratios depict several measurements of performance or financial condition for the three months ended March 31, 2012 and 2011, respectively:
|
| | | | | | |
| Three Months Ended or At March 31, |
| 2012 | 2011 |
Return on average assets (ROA) (1) | 0.90 | % | 0.91 | % |
Return on average equity (ROE) (1) | 12.16 | % | 9.94 | % |
Net interest margin (1)(2) | 4.27 | % | 4.43 | % |
Efficiency ratio (3) | 76.02 | % | 75.54 | % |
Net interest spread (4) | 4.13 | % | 4.21 | % |
Loan to deposit ratio | 91.54 | % | 96.79 | % |
Net loan charge-offs to average loans not held for sale (1) | — | % | — | % |
Allowance for loan losses to loans not held for sale (5) | 1.04 | % | 1.06 | % |
Nonperforming assets to total assets (6) | 1.46 | % | 1.27 | % |
Equity to assets | 7.29 | % | 9.09 | % |
Total capital to risk weighted assets | 12.07 | % | 15.43 | % |
Book value per share | $ | 9.09 |
| $ | 9.37 |
|
Earnings per share | $ | 0.28 |
| $ | 0.23 |
|
Dividends paid per share | $ | 0.25 |
| $ | 0.25 |
|
Dividend payout ratio (7) | 89.29 | % | 108.70 | % |
____________________
| |
(2) | The ratio of tax equivalent net interest income to average earning assets. See page 30 for more information. |
| |
(3) | The ratio of noninterest expense ($5.5 million in 2012 and $4.6 million in 2011) to tax equivalent net interest income ($5.4 million in 2012 and $4.7 million in 2011) and noninterest income ($1.9 million in 2012 and $1.4 million in 2011) excluding securities gains ($42 thousand in 2012 and $0 in 2011) for the three months ended March 31, 2012 and 2011, respectively. |
| |
(4) | The difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. See page 30 for more information. |
| |
(5) | Calculation includes the net carrying amount of loans recorded at fair value from the branch acquisitions as of March 31, 2012 ($27.1 million). Excluding such loans, the allowance for loan losses to loans not purchased and not held for sale was 1.11% at March 31, 2012. |
| |
(6) | Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as other real estate or assets owned. |
| |
(7) | Cash dividends declared and paid per share divided by consolidated net income per share. |
RESULTS OF OPERATIONS
Net Interest Income. The largest component of the Company’s operating income is net interest income, which is the difference between interest and dividend income received from interest earning assets and the interest expense paid on interest bearing liabilities. The Company’s net interest income increased $749 thousand, or 16.5%, to $5.3 million for the three months ended March 31, 2012, from $4.5 million for the three months ended March 31, 2011. The net interest spread decreased 8 basis points to 4.13% for the three months ended March 31, 2012, from 4.21% for the three months ended March 31, 2011. The decrease in the net interest spread was primarily the result of the 35 basis point drop in average interest rates earned on interest earning assets from 5.34% for the quarter ended March 31, 2011 to 4.99% for the quarter ended March 31, 2012, while the average interest rate paid on interest bearing liabilities only dropped 27 basis points, from 1.13% for the three months ended March 31, 2011 to 0.86% for the three months ended March 31, 2012. The net interest margin for the first quarter of 2012 decreased 16 basis points to 4.27% from 4.43% for the 2011 comparison period despite the growth in the Company, reflecting the change in the composition of interest earning assets during 2012, mainly due to the effect of a decrease in average interest rates earned on interest earning assets, which was only partially offset by the decrease in the average interest paid on interest bearing liabilities.
Union Bankshares, Inc. Page 29
Yields Earned and Rates Paid. The following table shows for the periods indicated the total amount of income recorded from average interest earning assets, the related average tax equivalent yields, the interest expense associated with average interest bearing liabilities, the related average rates paid, and the resulting tax equivalent net interest spread and margin. Yield and rate information is average information for the period, and is calculated by dividing the annualized tax equivalent income or expense item for the period by the average balance of the appropriate balance sheet item during the period. Net interest margin is annualized tax equivalent net interest income divided by average earning assets. Nonaccrual loans or investments are included in asset balances for the appropriate periods, but recognition of interest on such loans or investments is discontinued and any remaining accrued interest receivable is reversed in conformity with federal regulations.
|
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2012 | 2011 |
| Average Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Paid | Average Yield/ Rate |
| (Dollars in thousands) |
Average Assets: | | | | | | |
Federal funds sold and overnight deposits | $ | 11,927 |
| $ | 4 |
| 0.13 | % | $ | 14,329 |
| $ | 6 |
| 0.16 | % |
Interest bearing deposits in banks | 23,580 |
| 77 |
| 1.32 | % | 13,320 |
| 76 |
| |