Item 1. Description of Business
Certain Definitions: Capitalized terms used in the following discussion and not otherwise defined below have the meanings assigned to them in Note 1 to the Company's audited consolidated financial statements contained in Part II, item 8, page 48 of this Annual Report.
General: Union Bankshares, Inc. (“Company”) is a one-bank holding company whose subsidiary is Union Bank (“Union”). It was incorporated in the State of Vermont in 1982. The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "UNB". Union Bank was organized and chartered as a State bank in 1891 and became a wholly owned subsidiary of the Company in 1982 upon its formation. Both Union Bankshares, Inc. and Union Bank are headquartered in Morrisville, Vermont.
The Company's business is that of a community bank in the financial services industry. The Company has one definable business segment, Union Bank, which provides full retail, commercial, municipal banking, and asset management and trust services throughout its 17 banking offices, two loan centers, and several ATMs covering northern Vermont and New Hampshire. Also, many of Union's services are provided via the telephone, mobile devices, and through its website, www.ublocal.com. Union seeks to make a profit for the Company while providing quality retail banking services to individuals and commercial banking services to small and medium sized corporations, partnerships, and sole proprietorships, as well as nonprofit organizations, local municipalities and school districts within its market area.
The Company's income is derived principally from interest and fees on loans and earnings on other investments. Its primary expenses arise from interest paid on deposits and borrowings, salaries and wages, health insurance and other employee benefits and other general overhead expenses. Our profitability depends primarily on net interest income, which is the difference between interest and dividend income on interest-earning assets and interest expense on interest-bearing liabilities. Interest-earning assets include loans, investment securities, and interest-earning deposits in banks. Interest-bearing liabilities primarily include customer deposit accounts and borrowings. Net interest income is dependent upon the level of interest rates and the extent to which such rates change, as well as changes in the volume of various categories of assets and liabilities. Our profitability is also dependent on the level of noninterest income (primarily gains on sale of real estate loans and service fees), provision for loan losses, noninterest expenses and income taxes. Our operations and profitability are subject to changes in interest rates, applicable statutes and regulations, general economic conditions, the competitive environment, as well as other factors beyond our control.
Employees: The Company itself does not have any paid employees. As of December 31, 2014, Union employed 186 full time equivalent employees. Union employees are not represented by any collective bargaining group. Union maintains comprehensive employee benefit programs for its employees, including medical and dental insurance, long-term and short-term disability insurance, life insurance, and a 401(k) plan. Management considers its employee relations to be good.
Description of Services: Services or products offered to our customers include, but are not limited to, the following:
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Commercial loans for business purposes to business owners and investors for plant and equipment, working capital, real estate renovation and other sound business purposes;
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Commercial real estate loans on income producing properties, including commercial construction loans;
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SBA guaranteed loans;
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Residential construction and mortgage loans;
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Online cash management services, including account reconciliation, credit card depository, Automated Clearing House origination, wire transfers and night depository;
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Merchant credit card services for the deposit and immediate credit of sales drafts,
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Remote deposit capture for merchants;
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Online mortgage applications;
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Business checking accounts;
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Standby letters of credit, bank checks or money orders, and safe deposit boxes;
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ATM services;
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Debit MasterCard and ATM cards;
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Telephone, Internet, and mobile banking services, including bill pay;
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Home improvement loans and overdraft checking privileges against preauthorized lines of credit;
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Retail depository services including personal checking accounts, NOW accounts, savings accounts, money market accounts, certificates of deposit, IRA/SEP/KEOGH accounts and Health Savings accounts;
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Customer repurchase agreement sweeps; and
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Asset management and trust services to individuals and organizations.
Consistent with the objective of the Company to serve the needs of individuals, businesses and others within the communities served, the Company seeks to concentrate its assets in loans. For the year ended December 31, 2014, the Company's rate of average loans to average deposits was 91.3%. To be consistent with the requirements of prudent banking practices, adequate levels of assets are invested in high-grade securities, FDIC insured certificates of deposits, or other prudent investment alternatives such as company-owned life insurance or investments in real estate limited partnerships for affordable housing. Deposits are the primary source of funds for use in lending, investing and for other general operating purposes. In addition we obtain funds from principal repayments, sales and prepayments of loans, securities and FDIC insured certificates of deposit. Other funding sources may include brokered deposits purchased through CDARS or other brokerage accounts, borrowings from the FHLB, correspondent banks or the Federal Reserve discount window or utilization of a repurchase agreement line with a brokerage firm.
Competition: The Company and Union face substantial competition for loans and deposits in northern Vermont and northwestern New Hampshire from local and regional commercial banks, savings banks, tax exempt credit unions, mortgage brokers, and financial services affiliates of bank holding companies, as well as from national financial service providers such as mutual funds, brokerage houses, insurance companies, consumer finance companies and internet banks. Within the Company's market area are branches of several commercial and savings banks that are substantially larger than Union. Union focuses on its community banking niche and on providing convenient locations, hours and modes of delivery to provide superior customer service. We have seen over the last few years, a trend by customers to turn to local community banks to fulfill their financial needs with organizations and people they know and trust. We are hopeful that this trend will continue. The Company seeks to capitalize upon the extensive business and personal contacts and relationships of its directors, Advisory Board members and officers to continue to develop the Company's customer base, as well as relying on director and Advisory Board referrals, officer-originated calling programs and customer and shareholder referrals.
In order to compete with the larger financial institutions in its service area, Union capitalizes on the flexibility and local autonomy which is accorded by its independent status. This includes an emphasis on personal service, timely decision making, local promotional activity, and personal contacts and community service by Union's officers, directors and employees. The Company strives to inform the public about the strength of the Company, the variety and flexibility of services offered, as well as the strength of the local economy relative to the national economy and global problems in the real estate market and provides information on financial topics of interest. The Company also strives to educate future generations by helping them to cultivate sound personal financial habits through its "Save for Success" program for children.
The Company competes for deposit accounts by offering customers competitive products and rates, personal service, local area expertise, convenient locations and access, and an array of financial services and products. Higher interest rates and deposit “specials” offered by competitors as well as the variety of nonbanking investment avenues open to our customers and the public make deposit growth challenging.
The competition in originating real estate and other loans comes principally from commercial banks, savings banks, mortgage banking companies and tax exempt credit unions. The Company competes for loan originations primarily through the interest rates and loan fees it charges, the types of loans it offers, and the efficiency and quality of services it provides. In addition to residential mortgage lending and municipal loans, the Company also emphasizes commercial real estate, construction, and both conventional and SBA guaranteed commercial lending. Factors that affect the Company's ability to compete for loans include general and local economic conditions, prevailing interest rates including the “prime” rate, and pricing volatility of the secondary loan markets. The Company promotes an increased level of personal service and expertise within the community to position itself as a lender to small to middle market business and residential customers, which tend to be under-served by larger institutions.
The Company, through Union's Asset Management Group division, competes for personal and institutional asset management and trust business with trust companies, commercial banks having trust departments, investment advisory firms, brokerage firms, mutual funds and insurance companies.
Regulation and Supervision
General
As a bank holding company registered under the BHCA, the Company is subject to regulation and supervision by the Board of Governors of the FRB. As a state chartered commercial bank, Union Bank is subject to the regulation and supervision by the FDIC and the DFR. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole, and not for the protection of security holders. This regulation and supervision establishes a comprehensive framework of activities in which a bank holding company or a bank can engage. The prior approval of the FDIC and DFR is required, among other things, for Union to establish or relocate a branch office, assume deposits or engage in any merger, consolidation, purchase or sale of all or substantially all of the assets of any bank. This regulatory structure also gives
the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to classification of assets and establishment of adequate credit loss reserves for regulatory purposes. To the extent that this information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions.
The Company is also under the jurisdiction of the SEC for matters relating to the offer and sale of its securities as well as investor reporting requirements. The Company is subject to restrictions, reporting requirements, and review procedures under federal securities laws and regulations. The Company's common stock is listed on NASDAQ under the trading symbol “UNB” and accordingly, the Company is subject to the rules of NASDAQ for listed companies.
Financial Regulatory Reform Legislation
The Dodd-Frank Act. The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. Among other things, the Dodd-Frank Act:
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granted the FRB increased supervisory authority and codified the source of strength doctrine,
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provided new capital standards applicable to the Company,
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modified the scope and costs associated with deposit insurance coverage
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permitted well capitalized and well managed banks to acquire other banks in any state subject to certain deposit concentration limits and other conditions,
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permitted the payment of interest on business demand deposit accounts
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established the CFPB,
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established new minimum mortgage underwriting standards for residential mortgages,
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barred banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, and
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established the Financial Stability Oversight Council to designate certain activities as posing a risk to the United States financial systems and recommended new or heightened standards and safeguards for financial institutions engaging in such activities.
While this legislation is focused principally on changes to the financial regulatory system, several corporate governance, disclosure and compensation provisions of the Dodd-Frank Act target public companies. The corporate governance, disclosure and compensation provisions include:
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A requirement that public companies solicit an advisory vote on executive compensation ("Say-on-Pay"), an advisory vote on the frequency of Say-on-Pay votes and, in the event of a merger or other extraordinary transaction, an advisory vote on certain "golden parachute" payments. This provision became applicable for Union Bankshares in 2013. At the 2013 annual meeting, the shareholders approved an advisory vote on the Company’s executive compensation and a three year frequency for future advisory votes,
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Requirements that the SEC adopt rules directing the securities exchanges to adopt listing standards with respect to compensation committee independence and the use of consultants,
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Provisions calling for the SEC to adopt expanded disclosure in the annual proxy statement and other filings, particularly in the area of executive compensation, such as disclosure of pay versus performance, the ratio of CEO pay to the pay of a median employee and policies with regard to hedging transactions conducted by employees and directors,
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Provisions that will require the adoption or revision of certain other policies, such as compensation recovery policies providing for the recovery of executive compensation in the event of a financial restatement,
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A provision clarifying the SEC's authority to adopt rules requiring issuers to include in the proxy solicitations shareholder nominations for directors.
Bank Holding Company Regulation
Source of Strength. Under long-standing FRB policy and now codified in the Dodd-Frank Act, bank holding companies, such as Union Bankshares, are required to act as a source of financial and management strength to their subsidiary banks, such as Union, and to commit resources to support them. This support may be called for at times when a bank holding company may not have the required resources to do so.
Acquisitions and Activities. Under the BHCA, the activities of bank holding companies, such as Union Bankshares Inc., and those of companies that they control, such as Union, or in which they hold more than 5% of the voting stock, are limited to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries, or certain activities that the FRB has determined to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. Satisfactory capital ratios, CRA ratings and anti-money laundering policies are generally prerequisites to obtaining Federal regulatory approval to make acquisitions. Union Bankshares Inc. has not elected to become a financial holding company.
Enforcement Powers. The FRB has the authority to issue cease and desist orders against bank holding companies to prevent or terminate unsafe or unsound banking practices, violations of law and regulations, or conditions imposed by, or violations of agreements with, or commitments to, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of nonbanking activities of nonbanking subsidiaries of bank holding companies, and to order termination of ownership and control of a nonbanking subsidiary by a bank holding company. There are no enforcement actions currently in place against the Company.
The FRB has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and rate of earnings retention that is consistent with the company's capital needs, asset quality and overall financial condition.
Regulation of Union Bank
Deposit Insurance. As a member of the FDIC, the deposits of Union are permanently insured under the Deposit Insurance Fund (“DIF”) maintained by the FDIC up to $250,000 per ownership category. Under applicable federal laws and regulations, deposit insurance premium assessments to the DIF are based on a supervisory risk rating system, with the most favorably rated institutions paying the lowest premiums. Under this assessment system, risk is defined and measured using an institution's supervisory ratings, combined with certain other risk measures, including certain financial ratios and long-term debt issuer ratings.
For the year ended December 31, 2014, the Bank's total FDIC insurance assessment expense was $348 thousand compared to $306 thousand for the year ended December 31, 2013. The increase in expense was attributable to growth in net assets for the franchise.
Brokered Deposits. The FDICIA restricts the ability of an FDIC insured bank to accept brokered deposits unless it is a well capitalized institution under FDICIA's prompt corrective action guidelines. Union accepts brokered time and money market deposits through its membership with the Promontory Interfinancial Network in CDARS and ICS, respectively.
Community Reinvestment Act ("CRA"). Union is subject to the federal CRA, which requires banks to demonstrate their commitment to serving the credit needs of low and moderate income residents of their communities. Union participates in a variety of direct and indirect lending programs and other investments for the benefit of low and moderate income residents in its local communities. The FDIC conducts examinations of insured banks' compliance with CRA requirements and rates institutions as "Outstanding," "Satisfactory," "Needs to Improve," and "Substantial NonCompliance." Failure of an institution to receive at least a "Satisfactory" CRA rating could adversely affect its ability to undertake certain activities, such as branching and acquisitions of other financial institutions, which require regulatory approval based, in part, on the institution's record of CRA compliance. In addition, failure of a bank subsidiary to receive at least a "Satisfactory" rating would disqualify a bank holding company from eligibility to become or remain a financial holding company under the GLBA. At its 2013 CRA compliance examination by the FDIC, Union again received a rating of “Outstanding.”
Federal Reserve Board Policies and Reserve Requirements. The monetary policies and regulations of the FRB have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. FRB policies affect the levels of bank earnings on loans and investments and the levels of interest paid on bank deposits and borrowings through the Federal Reserve System's open-market operations in United States government securities, regulation of the discount rate and terms on bank borrowings from Federal Reserve Banks and regulation of nonearning reserve requirements. Regulation D promulgated by the FRB requires all depository institutions to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfers to third parties) and nonpersonal nontime deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain types of time deposits), subject to certain exemptions. As of December 31, 2014, Union's reserve requirement was approximately $738 thousand which was satisfied by vault cash.
Enforcement Powers. The FDIC and the DFR have the authority to issue orders to banks under their supervision to cease and desist from unsafe or unsound banking practices, violations of law and regulation, or conditions imposed by, or violations of agreements with, or commitments to, the FDIC or DFR. The FDIC and the DFR are also empowered to assess civil money penalties against companies or individuals who violate banking laws, orders or regulations. There are no enforcement actions currently in place against Union.
Capital Adequacy and Safety and Soundness
Capital Adequacy Guidelines. The FRB, the FDIC and other federal banking regulators have issued substantially similar risk based and leverage capital guidelines for United States banking organizations. Those regulatory agencies are also authorized to require
that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The FRB's risk based capital guidelines, as in effect during 2014 and prior years, defined a three-tier capital framework and specify three relevant capital ratios: Tier 1 Capital Ratio, a Total Capital Ratio and a Leverage Ratio. Tier 1 Capital consists of common and qualifying preferred shareholders' equity, plus or minus goodwill, core deposit intangible and certain other intangibles and adjustments. Certain hybrid securities, such as trust preferred securities, issued after May 19, 2010, do not count as Tier 1 capital. The Company has not issued any trust preferred or other hybrid securities. The remainder (Tier 2 and Tier 3 Capital) consists of subordinate and other qualifying debt, preferred stock that does not qualify as Tier 1 Capital, and the allowance for credit losses up to 1.25% of risk weighted assets. The sum of Tier 1, Tier 2 and Tier 3 Capital, less investments in unconsolidated subsidiaries, represents qualifying “Total Capital,” at least 50% of which must consist of Tier 1 Capital. Risk based capital ratios are calculated by dividing Tier 1 Capital and Total Capital by risk weighted assets. Assets and off-balance-sheet exposures are assigned to one of four categories or risk weights, based primarily on relative credit risk. The minimum Tier 1 Capital Ratio is 4% and the minimum Total Capital Ratio is 8%. The Leverage Ratio is determined by dividing Tier 1 Capital by adjusted average total assets. Although the minimum Leverage Ratio is 3%, most banking organizations (including the Company) are required to maintain Leverage Ratios of at least 4%. The Dodd-Frank Act requires the FRB to establish minimum risk based capital requirements that may not be lower than those in effect on July 21, 2010. Please refer to Note 21(Regulatory Capital Requirements) to the Company's audited consolidated financial statements contained in Item 8 of this annual report on Form 10-K for the capital ratios for the Company and Union as of December 31, 2014 and December 31, 2013.
A financial institution's failure to meet minimum regulatory capital standards can lead to other penalties, including termination of deposit insurance or appointment of a conservator or receiver for the financial institution. Risk based capital ratios are the primary measure of regulatory capital presently applicable to bank holding companies. Risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure and to minimize disincentives for holding liquid assets.
Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other bank holding companies, as the agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization's risk based capital ratio. Neither the Company nor Union is currently subject to this special capital charge.
FRB policy provides that banking organizations generally, and, in particular, those that are experiencing rapid internal growth or actively making acquisitions, will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets, such as goodwill. Furthermore, the capital guidelines indicate that the FRB will continue to consider a “Tangible Tier 1 Leverage Ratio” in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is calculated by dividing a banking organization's Tier 1 Capital less all intangible assets by its total consolidated quarterly average assets less all intangible assets. The FRB's capital adequacy guidelines generally provide that bank holding companies with a ratio of intangible assets to tangible Tier 1 Capital in excess of 25% will be subject to close scrutiny for certain purposes, including the FRB's evaluation of acquisition proposals.
Effective January 1, 2015, the FDIC and other federal bank regulatory agencies have revised the leverage and risk-based capital requirements applicable to the Company and Union and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new Common equity Tier 1 capital ratio with a minimum requirement of 4.5%, increases the minimum Tier 1 risk based ratio from 4.0% to 6.0%, and assigns a higher risk weight of 150% to exposures that are more than 90 days past due or in nonaccrual status as well as certain commercial real estate loans that finance the acquisition, development or construction of real property. The final rule also requires accumulated OCI be included for purposes of calculating regulatory capital unless a one time opt-out election is made, which the Company and the Bank intends to elect. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" of 2.5% above the minimum capital ratio requirements. The 2.5% capital conservation buffer requirement will be phased in over a four-year period beginning January 1, 2016 and ending January 1, 2019.
Prompt Corrective Action. FDICIA, among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal banking agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a
capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various federal banking agencies to prescribe certain noncapital standards for safety and soundness related generally to operations and management, asset quality and executive compensation, and permits regulatory action against a financial institution that does not meet such standards.
The various federal banking agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the Tier 1 Capital, Total Capital and Leverage Ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations as in effect during 2014 and prior periods, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Effective January 1, 2015, the FDIC adopted conforming changes to its prompt corrective action regulations to conform to the Basel III capital requirements. These changes include a new common equity Tier 1 ratio requirement, with a required minimum ratio of 6.5% for well-capitalized status. The new regulations also increase the minimum ratio of Tier 1 capital to risk weighted assets for well-capitalized status to 8.0%, from the current 6.0%.
At December 31, 2014, the Company's consolidated Tier I and Total Risk Based Capital Ratios were 12.4% and 13.6% respectively, and its Leverage Capital Ratio was 8.1%, and it is considered well capitalized under applicable regulatory guidelines in effect as of such date. As of December 31, 2014, our capital ratios were more than sufficient to satisfy those anticipated increases resulting from the proposed Basel III Capital Framework. However, an increase in the amount of capital that the Company or Union must maintain in order to support a given level of assets would reduce the amount of leverage that our capital could support and increased volatility could be problematic. Our ability to increase our level of interest earning assets or to allocate those assets in the best manner to generate interest income may be adversely affected.
Safety and Soundness Standard. FDICIA, as amended, directs each Federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing Federal banking regulators to publish guidelines rather than regulations concerning safety and soundness.
FDICIA also contains a variety of other provisions that may affect Union's operations, including reporting requirements, regulatory guidelines for real estate lending, “truth in savings” disclosure provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch. Beginning in 2012, Union has been subject to §112 of FDICIA, which requires an additional annual reporting to the FDIC, FRB, and DFR regarding preparation of the annual financial statements, the maintenance of an internal control structure for financial reporting and compliance with certain designated banking laws, as well as imposition of increased responsibilities on the Company's external auditor and audit committee.
Dividend Restrictions
As a bank holding company, the Company's ability to pay dividends to its stockholders is largely dependent on the ability of its subsidiary to pay dividends to it. Payment of dividends by Vermont-chartered banks, such as Union, is subject to applicable state and federal laws. Under Vermont banking laws, a Vermont-chartered bank may not authorize dividends or other distributions which would reduce the bank's capital below the amount of capital required in the bank's Certificate of General Good or under any capital or surplus standards established by the Commissioner of the DFR. Union does not have any capital restrictions in its Certificate of General Good and, to date, the Commissioner of the DFR has not adopted capital or surplus standards. Nevertheless, the capital standards established by the FDIC, described above under "Prompt Corrective Action" apply to Union, and the capital standards of the FRB apply to the Company on a consolidated basis. In addition, the FRB, the FDIC and the Commissioner of the DFR are authorized under applicable federal and state laws to prohibit payment of dividends that are determined to be an unsafe or unsound practice. Payment of dividends that significantly deplete the capital of a bank or a bank holding company, or render it illiquid, could be found to be an unsafe or unsound practice.
Consumer Protection Regulation
We are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices, including the Equal Credit Opportunity Act, the Fair Housing Act, Home Ownership Protection Act, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), GLBA, the Truth in Lending Act, CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. Union is also subject to laws and regulations to protect consumers in connection with their
deposit or electronic transactions. These laws include the Truth in Savings Act, the Electronic Funds Transfer Act and the Expedited Funds Availability Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. The CFPB is charged with examining banks with assets in excess of $10 billion, while community banks continue to be examined by their primary regulator. This supervisory structure may lead to conflicting regulatory guidance for community banks versus larger banks and increase regulatory costs and burdens.Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties.
Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing credit life/disability insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement, and for negative amortization loans and hybrid adjustable rate mortgages.
Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, we must provide our customers with an annual disclosure that explains our policies and procedures regarding the disclosure of such nonpublic personal information or provide notice as to where our policies and procedures may be accessed. Except as otherwise required or permitted by law, we are prohibited from disclosing nonpublic personal information except as provided in such policies and procedures. The GLBA also requires that we develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under the GLBA), to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We are also required to send a notice to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” Most of the states, including the states where we operate, have enacted legislation concerning breaches of data security and our duties in response to a data breach. Congress continues to consider federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT Act, we have developed and implemented a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts.
Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.
Home Mortgage Disclosure Act (“HMDA”). HMDA makes information available to the public that helps to show whether financial institutions are serving the housing credit needs of their neighborhoods and communities. The Act requires institutions to gather and compile data about loan applications for home purchase, home improvement and refinances where both the old loan and new loan are secured by a dwelling. The Dodd-Frank Act requires additional information be gathered and compiled but new regulations have not yet been promulgated. The information must be compiled each calendar year on a Loan/Application Register, sent to the FDIC by March 1st of the following year and made available to the public no later than March 31st. The Federal Financial Institutions Examinations Council prepares a series of tables that comprise the disclosure statement for each reporting institution. HMDA applies to financial institutions that have their main office or any branch in a Metropolitan Statistical Area ("MSA"). Union is subject to HMDA as it has branch offices within the Burlington, Vermont MSA.
Regulation of Other Activities
Transactions with Related Parties. The Company's and Union's authority to extend credit, purchase or sell an asset from or to their directors, executive officers and 10% or more stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the Federal Reserve Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based in part, on the amount of the bank's capital. Under guidelines, any related party transaction, including a loan, must be reviewed by the Company's Audit Committee. In addition, under the federal SOX Act (discussed below), the Company, itself, may not extend or arrange for any
personal loans to its directors and executive officers. The Company has a Related Persons Transactions Approval Policy administered by the Company's Audit Committee which incorporates applicable regulatory guidelines and requirements.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorized an adequately capitalized and managed bank holding company to acquire banks based outside its home state, generally without regard to whether the state's law would permit the acquisition, and also authorized banks to merge across state lines thereby creating interstate branches. In addition, this Act authorized banks to acquire existing interstate branches (short of merger) or to establish new interstate branches. States were given the right, exercisable before June 1, 1997, to prohibit altogether or impose certain limitations on interstate mergers and the acquisition or establishment of interstate branches. The Dodd-Frank Act removed remaining state law impediments to de novo interstate branching. Although interstate banking and branching may result in increased competitive pressures in the markets in which the Company operates, interstate branching may also present competitive opportunities for locally-owned and managed banks, such as Union, that are familiar with the local markets and that emphasize personal service and prompt, local decision-making. The ability to branch interstate has also benefited Union, as it permitted the expansion of its banking operations into New Hampshire, with the conversion of its loan production office in Littleton to a full service branch in March of 2006, followed by the May 2011 acquisition of three additional New Hampshire branches.
Affiliate Restrictions. Bank holding companies and their affiliates are subject to certain restrictions under the Federal Reserve Act in their dealings with each other, such as in connection with extensions of credit, transfers of assets, and purchase of services among affiliated parties. The Dodd-Frank Act further tightened these restrictions. Generally, loans or extensions of credit, issuances of guarantees or letters of credit, investments or purchases of assets by a subsidiary bank from a bank holding company or its affiliates are limited to 10% of the bank's capital and surplus (as defined by federal regulations) with respect to each affiliate and to 20% in the aggregate for all affiliates, and borrowings are also subject to certain collateral requirements. These transactions, as well as other transactions between a subsidiary bank and its holding company or other affiliates must generally be on arms-length terms, that is, on terms comparable to those involving nonaffiliated companies. Further, under the Federal Reserve Act and FRB regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in-arrangements in connection with extensions of credit or lease or sale of property, furnishing of property or services to third parties. The Company and Union are subject to these restrictions in their intercompany transactions.
Bank Secrecy Act. Union is subject to federal laws establishing record keeping, customer identification and reporting requirements pertaining to large or suspicious cash transactions, purchases of other monetary instruments and the international transfer of cash or monetary instruments that may signify money laundering. Provisions designed to help combat international terrorism, were added to the Bank Secrecy Act by the 2001 USA Patriot Act. These provisions require banks to avoid establishing or maintaining correspondent accounts of foreign off-shore banks and banks in jurisdictions that have been found to fall significantly below international anti-money laundering standards. U.S. banks are also prohibited from opening correspondent accounts for off-shore shell banks, defined as banks that have no physical presence and that are not part of a regulated and recognized banking company. The USA Patriot Act requires all financial institutions to adopt an anti-money laundering program and to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-U.S. persons or their representatives.
The due diligence requirements issued by the Department of Treasury require minimum standards to verify customer identity and maintain accurate records, encourage information sharing cooperation among financial institutions, federal banking agencies and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts” and require all covered financial institutions to have in place an anti-money laundering compliance program. In addition, the USA Patriot Act amended certain provisions of the federal Right to Financial Privacy Act to facilitate the access of law enforcement to bank customer records in connection with investigating international terrorism.
The USA Patriot Act also amends the BHC Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering program when reviewing an application under these acts.
SOX Act. This far reaching federal legislation was generally intended to protect investors by strengthening corporate governance and improving the accuracy and reliability of corporate disclosures made pursuant to federal securities laws. The SOX Act includes provisions addressing, among other matters, the duties, functions and qualifications of audit committees for all public companies; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers, except (in the case of banking companies) loans in the normal course of business; expedited filing requirements for reports of beneficial ownership of company stock by insiders; disclosure of a code of ethics for senior officers, and of any change or waiver of such code; the formation of a public accounting oversight board; auditor independence; disclosure of fees paid to the company's auditors for non-audit services and limitations on the
provision of such services; attestation requirements for company management and external auditors, relating to internal controls and procedures; and various increased criminal penalties for violations of federal securities laws.
NASDAQ. In response to the SOX Act, the NASDAQ Exchange on which the Company's common stock is listed, implemented new corporate governance listing standards, including rules strengthening director independence requirements for boards and committees of the board, the director nomination process and shareholder communication avenues. These rules require the Company to annually certify to the NASDAQ, after each annual meeting, that the Company is in compliance and will continue to comply with the NASDAQ corporate governance requirements.
Taxing Authorities. The Company and Union are subject to income taxes at the Federal level and are individually subject to state taxation based on the laws of each state in which they operate. The Company and Union file a consolidated federal tax return with a calendar year end. The Company and Union have filed separate tax returns for each state jurisdiction affected for 2013 and will do the same for 2014. No tax return is currently being examined or audited by any taxing authority that the Company is aware of. The taxing authorities also regulate the information reporting requirements that Union is subject to which continue to increase and require resources to comply with.
Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that Union Bankshares, Inc. has filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Union Bankshares, that file electronically with the SEC. The public can obtain any documents that the Company has filed with the SEC at www.sec.gov.
Our Internet website address is www.ublocal.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d), proxy statements filed pursuant to Section 14(a) and reports filed pursuant to Section 16, 13(d) and 13(g) of the Exchange Act are available free of charge through the Investor Relations page of our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this report.
The Company will also provide copies of its Annual Report on Form 10-K, free of charge, upon written request to its Treasurer at the Company's main address, PO Box 667, Morrisville, VT 05661-0667. Shareholder meeting materials for our 2015 annual meeting will be made available in a downloadable, printable and searchable format, are available at www.materials.proxyvote.com/905400 no later that then date on which they are mailed to shareholders.
Item 1A.
Item 1A. Risk Factors
Not applicable as the Company is permitted to provide scaled disclosures for smaller reporting companies in this annual report.
Item 1B.
Item 1B. Unresolved Staff Comments
None
Item 2.
Item 2. Properties
As of December 31, 2014, Union operated 12 community banking locations in Lamoille, Caledonia and Franklin counties of Vermont, five in Grafton and Coos counties of New Hampshire and loan centers in Newport and South Burlington, Vermont. In addition as of such date, Union also operated several ATMs in northern Vermont and northwestern New Hampshire. Union owns, free of encumbrances, fifteen of its branch locations and its headquarters and leases two branch locations, both loan center locations and certain ATM premises from third parties under terms and conditions considered by management to be favorable to Union. Also, Union currently owns a parcel of real estate expected to be utilized for a future branch location. Union also owns or leases certain properties contiguous to its branch locations for staff and customer parking convenience.
Additional information relating to the Company's properties as of December 31, 2014, is set forth in Note 8 to the consolidated financial statements contained in Item 8 to this report.
Item 3.
Item 3. Legal Proceedings
There are no known pending legal proceedings to which the Company or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability will not have a material effect on the consolidated financial position or results of operations of the Company and its subsidiary.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock and Dividends
The common stock of the Company is traded on the NASDAQ Global Select Market under the trading symbol "UNB". The Company currently pays dividends on a quarterly basis. Quarterly stock prices and dividends per share paid for each quarterly period during the last two years were as follows:
High and low stock prices are based upon closing price quotations as reported by NASDAQ. Prices of transactions between private parties may vary from the ranges quoted above.
On March 2, 2015, there were 4,458,403 shares of common stock outstanding held by 575 stockholders of record. The number of stockholders does not reflect the number of beneficial owners, including persons or entities who may hold the stock in nominee or “street name.” On January 21, 2015, Union Bankshares, Inc. declared a $0.27 per share regular quarterly cash dividend payable February 9, 2015 to stockholders of record on January 31, 2015, representing an increase of $0.01, or 3.8%, over the quarterly cash dividend paid in each of the five previous fiscal quarters. Future dividends will depend upon the financial condition and earnings of the Company and its subsidiary, its need for funds and other factors, including government regulations.
The Company normally pays regular quarterly cash dividends in February, May, August and November of each year. The Company has occasionally declared a special cash or stock dividend. On January 21, 2015, the Company's Board voted to increase the regular quarterly dividend from $.26 per share to $.27, or a 3.8% increase for the quarter. The Company's Board will continue to manage dividends to be in line with long-term trends in earnings per share results and conservative earnings projections, while retaining sufficient profits to support capital strength, anticipated business growth, fund strategic investments and provide continued support for the Company's deposit taking and lending activities. Dividends paid by Union are the primary source of funds available to the Company for payment of dividends to its shareholders. Union is subject to certain requirements imposed by state and federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by Union to the Company. Future dividends are subject to the discretion of the Company's Board, cash needs, general business conditions, dividends from Union, and applicable governmental regulations and policies.
Repurchase of Common Stock
There were no repurchases of the Company's common stock during the fourth quarter of 2014.
Pursuant to a discretionary stock repurchase program adopted in 2010, and most recently reauthorized in January 2015, the Company may repurchase up to 2,500 shares of its common stock each quarter, with no carry over from quarter to quarter of the unused portion of the authorization. Purchases may be made in the open market or negotiated transactions. As of December 31, 2014 the Company had repurchased 9,788 shares under this program since its inception in 2010 for a total cost of $192 thousand.
Equity Compensation Plans
Effective May 21, 2014 upon approval by the stockholders, the Company adopted the 2014 Equity Incentive Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock (including approximately 25,000 unused shares from the 2008 Incentive Stock Option (ISO Plan) are available for equity awards of incentive stock options, nonqualified stock options, restricted stock and restricted stock units to eligible officers and (except for awards of incentive stock options) nonemployee directors.
The Company's 2008 ISO Plan was replaced by the 2014 Equity Plan. As of December 31, 2014, 7,500 options granted under the 2008 ISO Plan remained outstanding and exercisable, with the last of such options expiring in December 2020.
During the quarter ended December 31, 2014, no incentive stock options previously granted under the 2008 ISO Plan were exercised or lapsed. The exercise price of all options granted under the 2008 ISO Plan represents the fair market value of the shares on the date of grant. Shares issuable to 2008 ISO Plan participants upon exercise of incentive stock options have not been registered with the SEC. Such shares are restricted securities, issued under statutory exemptions available under the Securities Act of 1933, including Section 4a(2) thereof, for offers and sales not involving a public offering.
During the quarter ended December 31, 2014, there were incentive stock options granted with respect to 6,000 shares under the 2014 Equity Plan. The exercise price of all options granted under the 2014 Equity Plan represents the fair market value of the shares on the date of grant.
The following table summarizes certain information regarding equity compensation under the Company's 2014 Equity Plan and 2008 ISO Plan:
Equity Compensation Plan Information as of December 31, 2014:
Five Year Performance Graph: Not applicable as the Company meets the qualification requirements for smaller reporting companies in this annual report.
Item 6.
Item 6. Selected Financial Data
Not applicable as the Company is permitted to provide the scaled disclosures for smaller reporting companies in this annual report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The following discussion and analysis by management focuses on those factors that, in management's view, had a material effect on the consolidated financial position of Union Bankshares, Inc. ("the Company," "our," "we," "us") and its subsidiary, Union Bank ("Union"), as of December 31, 2014 and 2013, and its results of operations for the years ended December 31, 2014 and 2013. 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 in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The purpose of this presentation is to enhance overall financial disclosures and to provide information about historical financial performance and developing trends as a means to assess to what extent past performance can be used to evaluate the prospects for future performance. The Company determined that it qualifies as a large reporting company based on the public float calculation as of June 30, 2014. As of January 1, 2015, the Company no longer qualifies as a smaller reporting company and will prepare the forms 10-Q and 10-K following the non-scaled disclosure requirements of Regulation S-K. The Company is allowed to and has elected to follow smaller reporting company scaled disclosure requirements with this Annual Report on Form 10-K and has presented audited statements of income, comprehensive income, cash flows and changes in stockholders' equity for each of the preceding two, rather than three, fiscal years. Management is not aware of the occurrence of any events after December 31, 2014 which would materially affect the information presented.
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 SEC, in its reports to stockholders, including this Annual 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 terms “believes,” “expects,” “anticipates,” “intends,” "projects," "potential," “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.
Factors that may cause results or performance to differ materially from those expressed in forward-looking statements include, but are not limited to: (1) continuing general economic conditions and financial instability, either nationally, internationally, regionally or locally resulting from elevated unemployment rates, changes in monetary and fiscal policies, and adverse changes in the credit rating of U.S. government debt; (2) increased competitive pressures from tax-advantaged credit unions and other financial service providers in the Company's northern Vermont and New Hampshire market area or in the financial services industry generally, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (3) interest rates change in such a way that continues to put pressure on the Company's margins, or result in lower fee income and lower gain on sale of real estate loans; (4) changes in laws or government rules, or the way in which courts or government agencies interpret or implement those laws or rules, that increase our costs of doing business or otherwise adversely affect the Company's business; (5) changes in federal or state tax policy; (6) the effect of federal and state health care reform efforts; (7) changes in the level of nonperforming assets and charge-offs; (8) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (9) changes in information technology that require increased capital spending; (10) changes in consumer and business spending, borrowing and savings habits; (11) further changes to the regulations governing the calculation of the Company’s regulatory capital ratios; and (12) the effect of and changes in the United States monetary and fiscal policies, including interest rate policies and regulation of the money supply by the FRB.
CERTAIN DEFINITIONS
Capitalized terms used in the following discussion and not otherwise defined below have the meanings assigned to them in Note 1 to the Company's audited consolidated financial statements contained in Part II, item 8, page 48 of this Annual Report.
NON-GAAP FINANCIAL MEASURES
Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation
of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s
reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures
certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly
used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore
constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard
those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating
the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in
accordance with GAAP.
RISK FACTORS
The Company, like other financial institutions, is subject to a number of risks, many of which are outside of the Company's direct control, though efforts are made to manage those risks while optimizing returns. Managing those risks is an essential part of successfully managing a financial institution. Risk identification and monitoring are key elements in overall risk management. Among the risks inherent in the Company's business operations are: (1) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, (2) interest rate risk, which is the risk that changes in market rates and prices will adversely affect the Company's financial condition or results of operation, (3) liquidity risk, which is the risk that the Company will have insufficient funds or access to funds to meet operational needs, (4) price risk, which is the risk to earnings or capital that results from the changes in the value of portfolios of financial instruments, (5) compliance risk, which is the risk of loss resulting from violations or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards, (6) strategic risk, which is the risk from adverse business decisions or improper implementation of those decisions, (7) reputation risk, which is the risk to earnings or capital from negative public opinion, and (8) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherently uncertain. Based on this definition, management has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Nevertheless, because the nature of the judgments and assumptions made by management are inherently subject to a degree of uncertainty, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, capital, or the results of operations of the Company.
Allowance for loan losses
The Company believes the ALL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. The amount of the ALL is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. Changes in these qualitative factors may cause management's estimate of the ALL to increase or decrease and result in adjustments to the Company's provision for loan losses in future periods. For additional information, see FINANCIAL CONDITION- Allowance for Loan Losses and Credit Quality below.
Other than temporary impairment of securities
The OTTI decision is a critical accounting policy for the Company. Accounting guidance requires a company to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the value of a security is OTT. A review of OTTI requires management to make certain judgments regarding the cause and materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery, the company's intent and ability to continue
to hold the security, and, with respect to debt securities, the likelihood that the company will have to sell the security before its value recovers. Pursuant to these requirements, management assesses valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as the nature of the issuer and its financial condition, business prospects or other factors or (2) market-related factors, such as interest rates or equity market declines. Declines in the fair value of securities below their costs that are deemed by management to be OTT are (1) if equity securities, recorded in earnings as realized losses and (2) if debt securities, recorded in earnings as realized losses to the extent they are deemed credit losses, with noncredit losses recorded in OCI (loss). Once an OTT loss on a debt or equity security is realized, subsequent gains in the value of the security may not be recognized in income until the security is sold.
Intangible assets
The Company's intangible assets include goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in the 2011 Branch Acquisition, as well as a core deposit intangible related to the deposits acquired. The core deposit intangible is amortized on a straight line basis over the estimated average life of the acquired core deposit base of 10 years. The Company evaluates the valuation and amortization of the core deposit intangible if events occur that could result in possible impairment. With respect to goodwill, in accordance with current authoritative guidance, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company is less than its carrying amount, which could result in goodwill impairment.
Pension liabilities
The Union Bank Pension Plan ("Plan") was closed to new participants on October 5, 2012. The accrual of retirement benefits for current participants was frozen as of that date. The benefit of the Plan, based on actuarial computations of current benefits for plan participants, is credited to Pension and other employee benefits.
The Company's defined benefit pension obligation and net periodic benefit are actuarially determined based on the following assumptions: discount rate, current and expected future return on plan assets, anticipated mortality rates, and Consumer Price Index rate. The determination of the defined benefit pension obligation and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgments related to the amount and timing of expected future cash outflows for benefit payments and cash inflows for maturities and returns on plan assets as well as Company contributions. Changes in estimates, assumptions and actual results could have a material impact on the Company's financial condition and/or results of operations.
Other
The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions, that are significant to understanding the Company's financial condition and results of operations, including the valuation of deferred tax assets, investment securities and OREO. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements and in the section below under the caption “FINANCIAL CONDITION” and the subcaptions “Allowance for Loan Losses and Credit Quality”, ”Investment Activities” and “Liability for Pension Benefits”. Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information presently available and can be impacted by events outside the control of the Company. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
OVERVIEW
The Company's net income was $7.7 million for 2014 compared to $7.1 million for 2013, an increase of $559 thousand, or 7.8%. These results reflected the effect of an increase in net interest income of $675 thousand, or 3.1%, and an increase in noninterest income of $400 thousand, or 4.7%, partially offset by an increase in noninterest expenses of $365 thousand, or 1.7%, an increase in the provision for loan losses of $40 thousand, or 4.7%, and an increase in the provision for income taxes of $111 thousand, or 6.0%.
Total interest income increased $371 thousand, or 1.5%, to $24.9 million for 2014, versus $24.5 million for 2013, while interest expense decreased $304 thousand, or 12.4%, from $2.5 million for 2013 to $2.2 million for 2014. These changes in interest income and interest expense resulted in net interest income of $22.7 million for 2014, up $675 thousand, or 3.1%, from interest income of $22.0 million for 2013.
Noninterest income increased $400 thousand, or 4.7%, for 2014 due to an increase in service fees of $295 thousand, or 5.8%, between periods, an increase in gains on sales of investment securities available-for-sale of $316 thousand and an increase of $82 thousand in trust income. These increases were partially offset by lower net gains on sales of loans held for sale, which decreased $208 thousand, or 9.0%, from $2.3 million for 2013 to $2.1 million for 2014. The decrease in net gains was a result of a decrease in the volume of residential loans sold to the secondary market from $123.1 million in 2013 to $94.9 million in 2014, a decrease of $28.2 million, or 22.9%.
Noninterest expenses increased $365 thousand, or 1.7%, for 2014 compared to 2013, resulting from increases of $110 thousand in equity in losses of limited partnerships, $129 thousand in supplies and printing expense, $105 thousand in professional fees, $87 thousand in penalties on the early payoff of FHLB advances, $84 thousand in trust expenses and $77 thousand in equipment expense. These increases were partially offset by a $224 thousand decrease in net OREO expense.
Net loans and loans held for sale increased $25.9 million, or 5.6%, to $486.4 million, or 77.9% of total assets, at December 31, 2014, compared to $460.5 million, or 78.7% of total assets, at December 31, 2013. Growth occurred in all loan categories except consumer loans.
Deposits increased $33.7 million, or 6.5%, from $518.4 million at December 31, 2013 to $552.1 million at December 31, 2014. The increase in deposits was primarily related to increases in non maturing deposits, partially offset by a decrease in time deposits as customers are shifting funds out of time deposits in anticipation of increases in rates.
The Company's total capital increased $1.6 million, or 3.24%, from $49.8 million at December 31, 2013 to $51.4 million at December 31, 2014. The Company continued to meet the regulatory guidelines for the well capitalized category, with the total risk based capital ratio increasing to 13.60% at December 31, 2014 from 13.28% at December 31, 2013. The regulatory guideline for well capitalized as of December 31, 2014 is 10.0% and the minimum requirement is 8.0%.
The following unaudited per share information and key ratios depict several measurements of performance or financial condition for or at the years ended December 31:
____________________
(1)
The ratio of tax equivalent net interest income to average earning assets. See page 20 for more information.
(2)
The ratio of noninterest expense to tax equivalent net interest income and noninterest income, excluding securities gains (losses).
(3)
The difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. See page 20 for more information.
(4)
Calculation includes the net carrying amount of loans recorded at fair value from the 2011 Branch Acquisition as of December 31, 2014 ($9.1 million), December 31, 2013 ($17.0 million) and December 31, 2012 ($22.9 million). Excluding such loans, the ALL to loans not purchased and not held for sale was 1.00% at December 31, 2014, 1.05% at December 31, 2013 and 1.11% at December 31, 2012.
(5)
Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as OREO or OAO.
(6)
Cash dividends declared and paid per common 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 paid on interest bearing liabilities. The Company’s net interest income increased $675 thousand, or 3.1%, to $22.7 million for the year ended December 31, 2014, from $22.0 million for the year ended December 31, 2013. The net interest spread decreased 2 bps to 4.08% for the year ended December 31, 2014, from 4.10% for the year ended December 31, 2013, as the average yield earned on interest earning assets dropped 11 bps, from 4.66% for 2013 to 4.55% for 2014, while the average interest rate paid on interest bearing liabilities dropped only 9 bps, from 0.56% for 2013 to 0.47% for 2014. The net interest margin for the 2014 year decreased 4 bps to 4.17% from 4.21% for the 2013 year. The Company's net interest income increased $345 thousand, or 1.59% to $22.0 million for the year ended December 31, 2013 from $21.7 million for the year ended December 31, 2012. The prolonged low rate environment continues to put pressure on the Company's net interest spread and margin, as interest earning assets continue to reprice at lower rates while the ability to further adjust deposit rates downward from their current historically low levels is more limited.
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 year, and is calculated by dividing the tax equivalent income or expense item for the year by the average balance of the appropriate balance sheet item for that year. Net interest margin is 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.
____________________
(1)
Average yields reported on a tax equivalent basis using a marginal tax rate of 34%.
(2)
Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities, if applicable.
(3)
Includes loans held for sale as well as nonaccrual loans, unamortized costs and premiums and is net of the ALL.
Tax exempt interest income amounted to $1.6 million for the year ended December 31, 2014 and $1.5 million for both years ended December 31, 2013 and 2012. The following table presents the effect of tax-exempt income on the calculation of net interest income, using a marginal tax rate of 34% for all years:
Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates (on a fully tax equivalent basis) and changes in volume of average interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to:
•
changes in volume (change in volume multiplied by prior rate);
•
changes in rate (change in rate multiplied by prior volume); and
•
total change in rate and volume.
Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
Interest and Dividend Income. The Company’s interest and dividend income increased $371 thousand, or 1.5%, to $24.9 million for the year ended December 31, 2014, from $24.5 million for the year ended December 31, 2013, driven by an overall increase in average earning assets of $23.1 million, or 4.3%, to $562.5 million from $539.4 million for the year ended December 31, 2013. However, the positive effect on interest income resulting from the rise in the average volume of earning assets was partially offset by the lower rates earned on all interest earning assets except nonmarketable equity securities and interest bearing deposits in banks. The Company’s interest and dividend income decreased $547 thousand, or 2.2%, to $24.5 million for the year ended December 31, 2013, from $25.0 million for the year ended December 31, 2012.
Interest income on loans increased $82 thousand, or 0.4%, to $23.4 million for the year ended December 31, 2014 versus $23.3 million for the 2013 comparison period, in conjunction with an increase in average loan volume between periods. Average loan volume approximated $478.6 million at an average yield of 5.01% for the year ended December 31, 2014, up $16.1 million, or 3.5%, from an average volume of $462.4 million at an average yield of 5.16% for the year ended December 31, 2013. The positive impact of the increase in average total loan volume was partially offset by a 15 bps decrease in average yield. Interest income on loans decreased $350 thousand, or 1.5%, to $23.3 million for the year ended December 31, 2013 compared to $23.7 million for 2012. Average loans approximated $462.4 million at an average yield of 5.16% for the year ended December 31, 2013, up $16.1 million, or 3.5% from an average volume of $444.8 million at an average yield of 5.44% for the year ended December 31, 2012.
The average balance of nonloan instruments increased $7.0 million, or 9.1%. The average balance of investments increased $15.9 million, or 44.7%, from $35.7 million for the year ended December 31, 2013, to $51.6 million for the year ended December 31, 2014. This increase was partially offset by a decrease in the average balances of federal funds sold and overnight deposits of $2 million, or 10.5%, from $17.9 million for the year ended December 31, 2013 to $16.0 million for the year ended December 31, 2014 and a decrease in the average balance in interest bearing deposits in banks of $7.2 million, or 33.5%, to $14.2 million for the year ended December 31, 2014, versus $21.4 million for the 2013 comparison period. The changes in average volume combined with a drop in yields resulted in an increase in interest income from average nonloan instruments of $289 thousand between years. Interest income from nonloan instruments decreased $197 thousand, or 14.7%, to $1.1 million for the year ended December 31, 2013 compared to $1.3 million for 2012.
Interest Expense. The Company’s interest expense decreased $304 thousand, or 12.4%, to $2.2 million for the year ended December 31, 2014, from $2.5 million for the year ended December 31, 2013, despite an increase of $15.5 million, or 3.6%, in the average volume of interest bearing liabilities between years. The decrease was attributable to lower rates paid on all interest bearing liabilities, reflecting the persistent low interest rate environment, price discipline, and the payoff of higher rate FHLB advances that were outstanding during 2014 and 2013. The Company’s interest expense decreased $892 thousand, or 26.6%, to $2.5 million for the year ended December 31, 2013, from $3.4 million for the year ended December 31, 2012.
Interest expense on deposits decreased $197 thousand, or 10.1%, from $1.9 million for the year ended December 31, 2013 to $1.7 million for the year ended December 31, 2014, despite an increase of $16.7 million, or 4.0%, in the average balance of interest bearing deposits to $436.1 million for the year ended December 31, 2014, compared to $419.4 million for the year ended December 31, 2013, reflecting the overall growth in the franchise. The average rate paid on interest bearing deposits decreased 6 bps from 0.46% in 2013 to 0.40% in 2014. Average time deposits decreased $4.8 million, or 3.2%, to $145.7 million for 2014 from $150.5 million for 2013, with the average rate paid on time deposits during 2014 decreasing 8 bps. Average interest bearing checking accounts increased $15.7 million, or 16.7%, from $94.2 million for the year ended December 31, 2013 to $109.9 million for the year ended December 31, 2014. The average balances of savings and money market accounts increased $5.8 million, or 3.3%, from $174.7 million for the year ended December 31, 2013 to $180.5 million for the year ended December 31, 2014. Interest expense on deposits decreased $473 thousand, or 19.6%, to $1.9 million for the year ended December 31, 2013 compared to $2.4 million for 2012.
Interest expense on borrowed funds decreased $107 thousand, or 20.7%, to $409 thousand for the year ended December 31, 2014, from $516 thousand for the year ended December 31, 2013 in conjunction with a decrease in average borrowed funds of $1.2 million, or 6.6%, from $18.0 million for 2013, to $16.8 million for 2014. Average customer overnight collateralized repurchase sweeps, included in borrowed funds, decreased $1.0 million for the comparable year, partially offset by an increase in average borrowings from the FHLB of $490 thousand. Despite the increase in average borrowings from the FHLB, higher rate advances were paid off during 2014 and 2013 while lower rate advances were taken subsequently in both years, contributing to the decrease in the average rate paid on borrowings from 2.84% for the year ended December 31, 2013 to 2.41% for the year ended December 31, 2014. Interest expense on borrowed funds decreased $419 thousand, or 44.8%, to $516 thousand for the year ended December 31, 2013 compared to $935 thousand for 2012.
Provision for Loan Losses. The provision for loan losses increased from $305 thousand in 2013 to $345 thousand in 2014. The provision for 2014 was deemed appropriate by management based on the size and mix of the loan portfolio, the level of nonperforming loans, the results of the qualitative factor review and the outlook for future economic conditions. For further details, see FINANCIAL CONDITION Asset Quality and Allowance for Loan Losses below.
Noninterest Income. Noninterest income before gains and losses on sales of investment securities AFS was $8.6 million, or 25.7%, of total income for the year ended December 31, 2014, compared to $8.5 million, or 25.8%, for the year ended December 31, 2013. The following table sets forth the components of noninterest income and changes from 2013 to 2014:
The significant changes in noninterest income for the year ended December 31, 2014 compared to the year ended December 31, 2013 are described below:
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Trust income. Trust income increased $82 thousand as the dollar amount of assets under management grew between December 31, 2014 and 2013, aided by the improvement in the stock market. In addition, there was a one-time fee from an estate distribution recognized in 2014.
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Service fees. There was a $295 thousand increase in service fees for 2014 compared to 2013. Growth in the volume of electronic transactions increased debit card and ATM fees, which accounted for $141 thousand of the increase. Loan servicing fees accounted for $132 thousand of the increase due to the increased level of residential mortgage loans serviced. The implementation of a new fee structure on deposit accounts during the third quarter of 2014 increased service charges on deposit accounts approximately $104 thousand, while overdraft fee income decreased $55 thousand.
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Net gains on sales of loans held for sale. Continuing the Company's strategy to mitigate long-term interest rate risk, residential loans totaling $94.9 million were sold to the secondary market during 2014, versus residential loan sales of $123.1 million during 2013. Net gains on sold loans decreased $208 thousand, or 9.0%, reflecting the decline in the volume of loan sales during 2014.
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Other income. Other income decreased $207 thousand for 2014 compared to 2013. The decrease in income from MSR, net of amortization, due to a reduction in loan sales with servicing retained accounted for $187 thousand of the decrease. There was also a reduction of $27 thousand in income related to the gain on the utilization of state tax credits.
Noninterest Expense. Noninterest expense increased $365 thousand, or 1.7%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The following table sets forth the components of noninterest expense and changes from 2013 to 2014:
The significant changes in noninterest expense for the year ended December 31, 2014 compared to the year ended December 31, 2013 are described below:
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Salaries and wages. The $48 thousand decrease reflects normal annual salary increases which were more than offset by an increase in the deferral of salary expense due to accounting methods utilized to account for loan origination costs.
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Pension and employee benefits. The $52 thousand decrease relates to a reduction in expense for the defined benefit pension plan of $317 thousand, or 267.2%, due to the October 5, 2012 freeze of the plan, which stopped the accrual of benefits and closed the plan to new participants. This decrease was partially offset by increases in the Company's medical and dental plans of $293 thousand, or 22.1% due to increases in premium rates and the number of participants between years.
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ATM and debit card expense. The $100 thousand decrease between 2013 and 2014 reflects accrual adjustments related to reward programs and negotiation of vendor contracts.
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Prepayment penalties on borrowings. Prepayment of $1.3 million in FHLB advances occurred in 2014 compared to prepayment of $1.4 million in FHLB advances in 2013. Prepayment penalties are determined by the FHLB based on individual terms of the advances being prepaid.
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Equity in losses of limited partnerships. The Company exited three limited partnerships that had reached the final year of tax credits and were near or at the end of the limited partnership compliance period. This resulted in an increase in the provision for undistributed net losses recognized in 2014.
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Trust expenses. The increase in trust expenses primarily relates to additional costs for professional assistance resulting from the growth in assets in managed accounts as well as an increase in education and training costs for trust employees.
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Professional fees. The increase in professional fees for 2014 were incurred for services rendered in consultations regarding process improvements and efficiencies in select areas of Union. Also, a compensation and benefit consultant was engaged during 2014 to assist with the implementation of the 2014 Equity Plan.
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Supplies and Printing. The increase in 2014 is primarily attributable costs associated with rebranding of the Company and Union. These costs represent expenditures for new printed materials such as brochures, business cards, letterhead etc.
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Expenses of OREO, net. There were six residential properties and one commercial real estate property held during 2014, compared to five commercial real estate and ten residential properties during 2013, resulting in decreased costs to maintain the properties held in 2014. In addition there was $23 thousand in write-downs on one OREO property charged against earnings in 2014 compared to $175 thousand in write-downs on eight OREO properties in 2013.
Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the current and all prior periods presented. The Company's net provision for income taxes increased to $2.0 million for 2014 from $1.9 million for 2013, due to the increase in taxable income, despite a decline in the Company’s effective tax rate for 2014 to 20.4% compared to 20.7% for 2013. The decrease in the effective tax rate related to an increase in tax credits recorded from investments in affordable housing projects to $735 thousand for 2014 versus $675 thousand for 2013.
FINANCIAL CONDITION
At December 31, 2014, the Company had total consolidated assets of $624.1 million, including gross loans and loans held for sale (total loans) of $490.7 million, deposits of $552.1 million and stockholders' equity of $51.4 million. The Company’s total assets increased $38.6 million, or 6.6%, from $585.4 million at December 31, 2013.
Total net loans and loans held for sale increased a total of $25.9 million, or 5.6%, to $486.4 million, or 77.9% of total assets, at December 31, 2014, compared to $460.5 million, or 78.7% of total assets, at December 31, 2013. (See Loan Portfolio below.)
Deposits increased $33.7 million, or 6.5%, to $552.1 million at December 31, 2014, from $518.4 million at December 31, 2013. Noninterest bearing deposits increased $3.1 million, or 3.6%, from $87.2 million at December 31, 2013 to $90.4 million at December 31, 2014 and interest bearing deposits increased $33.1 million, or 12.3%, from $269.6 million at December 31, 2013 to $302.7 million at December 31, 2014, while time deposits decreased $2.5 million, or 1.6%, from $161.5 million at December 31, 2013, to $159.0 million at December 31, 2014. (See average balances and rates in the Yields Earned and Rates Paid table on page 20.)
Total borrowed funds increased $1.9 million, or 14.4%, from $13.2 million at December 31, 2013 to $15.1 million at December 31, 2014. There was an increase in customer overnight collateralized repurchase sweeps of $492 thousand, or 35.4%, and an increase in FHLB advances of $1.4 million, or 11.9%, between December 31, 2013 and December 31, 2014. (See Borrowings on page 35.)
Total stockholders’ equity increased $1.6 million, or 3.2%, from $49.8 million at December 31, 2013 to $51.4 million at December 31, 2014. (See Capital Resources on page 40.)
Loan Portfolio. The Company's gross loan portfolio (including loans held for sale) increased $25.7 million, or 5.5%, to $490.7 million, representing 78.6% of assets at December 31, 2014, from $465.0 million, representing 79.4% of assets at December 31, 2013. The Company's loans consist primarily of adjustable-rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. Real estate secured loans represent $425.2 million, or 86.7%, of total loans at December 31, 2014 compared to $404.9 million, or 87.1%, of total loans at December 31, 2013. Although competition for good loans is strong, especially in the commercial sector, the Company has been able to originate loans to both current and new customers while maintaining credit quality. The composition mix of the Company's loan portfolio remained relatively unchanged from December 31, 2013, and there was no material change in the Company's lending programs or terms during 2014.
The composition of the Company's loan portfolio at year-end for each of the last five years was as follows:
The Company originates and sells qualified residential mortgages in various secondary market avenues, with a majority of sales made to the FHLMC/Freddie Mac. At December 31, 2014, the Company serviced a $511.1 million residential real estate mortgage portfolio, of which $10.7 million was held for sale and approximately $334.9 million was serviced for unaffiliated third parties. This compares to a residential real estate mortgage portfolio of $455.1 million at December 31, 2013, of which $3.8 million was held for sale and approximately $291.8 million was serviced for unaffiliated third parties. Loans held for sale are accounted for at the lower of cost or fair value and are reviewed by management at least quarterly based on current market pricing.
The Company sold $94.9 million of qualified residential real estate loans originated during 2014 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of $123.1 million during 2013. The Company generally retains the servicing rights on sold residential mortgage loans. The Company originates and sells FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire locations without needing prior HUD approval. Some of the government backed loans qualify for zero down payments without geographic or income restrictions. The Company sells VA and FHA loans as originated with servicing released. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities we serve, including low and moderate income borrowers, while the government guaranty mitigates our exposure to credit risk.
The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs which provide an agency guaranty for a portion of the loan amount. There was $4.9 million and $5.3 million guaranteed under these various programs at December 31, 2014 and 2013, respectively, on an aggregate balance of $6.1 million and $6.6 million in subject loans for the same time frames. The Company occasionally sells the guaranteed portion of a loan to other financial concerns and retains servicing rights, which generates fee income. There were no commercial real estate loans sold during 2014.
The Company serviced $30.6 million and $27.7 million of commercial and commercial real estate loans for unaffiliated third parties as of December 31, 2014 and 2013, respectively. This includes $26.6 million and $23.9 million of commercial or commercial real estate loans the Company has participated out to other financial institutions at December 31, 2014 and 2013, respectively. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
The Company capitalizes servicing rights for all loans sold with servicing retained and recognizes gains and losses on the sale of the principal portion of these loans as they occur. The unamortized balance of servicing rights on loans sold with servicing retained was $1.4 million as of December 31, 2014 and $1.3 million as of December 31, 2013, with an estimated market value in excess of the carrying value at both year ends. Management periodically evaluates and measures the servicing assets for impairment.
The following table breaks down by classification the contractual maturities of the gross loans held in portfolio and for sale as of December 31, 2014:
Asset Quality. The Company, like all financial institutions, is exposed to certain credit risks, including those related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Consistent application of the Company’s conservative loan policies has helped to mitigate this risk and has been prudent for both the Company and its customers. The Company's Board has set forth well-defined lending policies (which are periodically reviewed and revised as appropriate) that include conservative individual lending limits for officers, aggregate and advisory board approval levels, Board approval for large credit relationships, a quality control program, a loan review program and other limits or standards deemed necessary and prudent. The Company's loan review program encompasses a review process for loan documentation and underwriting for select loans as well as a monitoring process for credit extensions to assess the credit quality and degree of risk in the loan portfolio. Management performs, and shares with the Board, periodic concentration analyses based on various factors such as industries, collateral types, location, large credit sizes and officer portfolio loads. Board approved policies set forth portfolio diversification levels to mitigate concentration risk and the Company participates large credits out to other financial institutions to further mitigate that risk. The Company has established underwriting guidelines to be followed by its officers; material exceptions are required to be approved by a senior loan officer or the Board.
The Company does not make loans that are interest only, have teaser rates or that result in negative amortization of the principal, except for construction, lines of credit and other short-term loans for either commercial or consumer purposes where the credit risk is evaluated on a borrower-by-borrower basis. The Company evaluates the borrower's ability to pay on variable-rate loans over a variety of interest rate scenarios, not only the rate at origination.
The majority of the Company's loan portfolio is secured by real estate located throughout the Company's primary market area of northern Vermont and northwestern New Hampshire. For residential loans, the Company generally does not lend more than 80% of the appraised value of the home without a government guaranty or the borrower purchasing private mortgage insurance. Although the Company lends up to 80% of the collateral value on commercial real estate loans to strong borrowers, the majority of commercial real estate loans do not exceed 75% of the appraised collateral value. Rarely, the loan to value may go up to 100% on loans with government guarantees or other mitigating circumstances. Although the Company's loan portfolio consists of different business segments, there is a portion of the loan portfolio centered in tourism related loans. The Company has implemented risk management strategies to mitigate exposure in this industry through utilizing government guaranty programs as well as participations with other financial institutions as discussed above. Additionally, the loan portfolio contains many loans to seasoned and well established businesses and/or well secured loans which further reduce the Company's risk. Management closely follows the local and national
economies and their impact on the local businesses, especially on the tourism industry, as part of the Company's risk management program.
The Company also monitors its delinquency levels for any adverse trends. There can be no assurance that the Company's loan portfolio will not become subject to increasing pressures from deteriorating borrower financial strength or declining collateral values due to general or local economic conditions. Renewed market volatility, high unemployment rates or weakness in the general economic condition of the country or our market area, may have a negative effect on our customers’ ability to make their loan payments on a timely basis and/or on underlying collateral values. Management closely monitors the Company’s loan and investment portfolios, OREO and OAO for potential problems and reports to the Company’s and Union's Board at regularly scheduled meetings. Repossessed assets and loans or investments that are 90 days or more past due are considered to be nonperforming assets.
TDR loans involve one or more of the following; forgiving a portion of interest or principal, refinancing at a rate materially less than the market rate, rescheduling loan payments, or granting other concessions to a borrower due to financial or economic reasons related to the debtor's financial difficulties that the Company would not ordinarily grant. When evaluating the ALL, management makes a specific allocation for TDR loans as they are considered impaired.
The following table details the composition of the Company's nonperforming assets as of December 31:
There were three loans in process of foreclosure at December 31, 2014 included in nonperforming loans. The aggregate interest on nonaccrual loans not recognized was $1.1 million for each of the years ended December 31, 2014 and 2013 and $1.0 million for the year ended December 31, 2012.
The following table shows trends of certain asset quality ratios monitored by Company's management at December 31:
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(1)
Calculation includes the net carrying amount of loans recorded at fair value from the 2011 branch acquisition as of December 31, 2014 ($9.1 million), December 31, 2013 ($17.0 million) and December 31, 2012 ($22.9 million). Excluding such loans, the ALL to loans not purchased and not held for sale was 1.00% at December 31, 2014, 1.05% at December 31, 2013 and 1.11% at December 31, 2012.
Nonperforming loans at December 31, 2014 increased in terms of dollars by $2.9 million, or 169.8%, and as a percentage of assets from December 31, 2013, with the ALL as a percentage of nonperforming loans decreasing significantly from 273.84% to 102.51%,
bringing this ratio back in line with historical trends. The nonperforming and delinquency ratios have increased in comparison to December 31, 2013, however, management still considers the ratios to be at favorable levels. The Company's success at keeping the ratios at favorable levels in these challenging economic conditions is the result of continued focus on maintaining strict underwriting standards, as well as our practice, as a community bank, of actively working with troubled borrowers to resolve the borrower's delinquency, while maintaining the safe and sound credit practices of Union and safeguarding our strong capital position.
At December 31, 2014, the Company had loans rated substandard that were on a performing status totaling $2.4 million, representing 14 customer relationships, compared to $4.0 million at December 31, 2013, representing 16 customer relationships. In management's view, such loans represent a higher degree of risk of becoming nonperforming loans in the future. While still on a performing status, in accordance with the Company's credit policy, loans are internally classified when a review indicates the existence of any of the following conditions, making the likelihood of collection questionable:
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the financial condition of the borrower is unsatisfactory;
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repayment terms have not been met;
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the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth;
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confidence in the borrower's ability to repay is diminished;
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loan covenants have been violated;
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collateral is inadequate; or
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other unfavorable factors are present.
The Company actively works with customers who may be delinquent or who may have financial difficulties. One of the benefits of being a community financial institution is our employees' and Boards' knowledge of the community and borrowers, which allows us to be proactive and to work closely with our loan customers. The Company's delinquency rates have historically run higher than similar institutions nationally, while losses have been lower. Although management believes that the Company's nonperforming and internally classified loans are generally well-secured and that probable credit losses inherent in the loan portfolio are provided for in the Company's ALL, there can be no assurance that future deterioration in economic conditions and/or collateral values, or changes in other relevant factors will not result in future credit losses.
Except for those nonperforming loans discussed above, the Company's management is not aware of any loans as of December 31, 2014, for which known financial problems of the borrower would cause serious doubts as to the borrower's ability to materially comply with the present loan repayment terms, nor are there any known events that would result in any other loans being designated as nonperforming as of December 31, 2014. The Company’s management is focused on the impact that the prolonged weakened economy may have on its borrowers and closely monitors industry and geographic concentrations for evidence of financial problems. Improvement in local economic indicators has been identified over the past year. The unemployment rate has stabilized in Vermont and was at a 4.2% level at December 31, 2014 and December 31, 2013, while in New Hampshire the rate improved from 5.1% at December 31, 2013 to 4.0% at December 31, 2014. These rates compare favorably with the nationwide rate at 5.6% and 6.7% for the comparable periods. Management will continue to monitor the national, regional and local economic environment and its impact on unemployment, business failures and real estate values in the Company’s market area.
On occasion, the Company acquires residential or commercial real estate properties through or in lieu of loan foreclosure. These properties are held for sale and are initially recorded as OREO at fair value less estimated selling costs at the date of the Company’s acquisition of the property, with fair value based on an appraisal for more significant properties and on a broker’s price opinion for less significant properties. Holding costs and declines in fair value of properties acquired are expensed as incurred. Declines in the fair value after acquisition of the property result in charges against income before tax. There was a $23 thousand decline recognized during 2014, compared to a $175 thousand decline during 2013. The Company evaluates each OREO property at least quarterly for changes in the fair value. The Company had three residential real estate properties classified as OREO at December 31, 2014 valued at $297 thousand, and five residential real estate properties valued at $559 thousand at December 31, 2013. Further softening in the local real estate market would make the potential to recover all principal and related costs for OREO properties uncertain.
Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ALL to absorb such losses. The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio; however, actual loan losses may vary from current estimates.
The ALL is evaluated quarterly using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specific loans when determining the appropriate level of the ALL, management also takes into consideration other qualitative factors such as changes in the mix and size of the loan portfolio, credit concentrations, historic loss experience, the amount of delinquencies and loans adversely classified, industry trends, and the impact of the local and regional economy on the Company's borrowers as well as the estimated value of any underlying collateral. The appropriate
level of the ALL is assessed by an allocation process whereby specific loss allocations are made against impaired loans and general loss allocations are made against segments of the loan portfolio that have similar attributes. Although the ALL is assessed by allocating reserves by loan category, the total ALL for possible loan losses is available to absorb losses that may occur within any loan category.
The ALL is increased by a provision for loan losses charged to earnings, and reduced by charge-offs, net of recoveries. The provision for loan losses represents management's estimate of the current period credit cost associated with maintaining an appropriate ALL. Based on an evaluation of the loan portfolio and other relevant qualitative factors, management presents a quarterly analysis of the appropriate level of the ALL to the Board, indicating any changes in the ALL since the last review and any recommendations as to adjustments in the ALL and the level of future provisions.
Credit quality of the commercial portfolio is quantified by a credit rating system designed to parallel regulatory criteria and categories of loan risk and has historically been well received by the various regulatory authorities. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of commercial and retail credit portfolios are also assessed on a regular basis by an independent loan review function.
The level of ALL allocable to each loan portfolio category with similar risk characteristics is determined based on historical charge-offs, adjusted for qualitative risk factors. A quarterly analysis of various qualitative factors, including portfolio characteristics, national and local economic trends, overall market conditions, and levels of, and trends in, delinquencies and nonperforming loans, helps to ensure that areas with the potential risk for loss are considered in management's ALL estimate. In addition, loans are also evaluated for specific impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Commercial loans with balances greater than $500 thousand was established by management as the threshold for individual impairment evaluation with a specific reserve allocated when warranted. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows.
The composition of the Company’s loan portfolio remained relatively unchanged from December 31, 2013, and there was no material change in the Company’s lending programs or terms during the year.
The following table reflects activity in the ALL for the years ended December 31:
The following table (net of loans held for sale) shows the internal breakdown by risk component of the Company's ALL and the percentage of loans in each category to total loans in the respective portfolios at December 31:
There were no changes to the reserve factors assigned to any of the loan portfolios based on the qualitative factor reviews performed during 2014. Management of the Company believes, in its best estimate, that the ALL at December 31, 2014 is appropriate to cover probable credit losses inherent in the Company’s loan portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods which could be greater than the size of the ALL at December 31, 2014. In addition, our banking regulators, as an integral part of their examination process, periodically review our ALL. Such agencies may require us to recognize adjustments to the ALL based on their judgments about information available to them at the time of their examination. A large adjustment to the ALL for losses in future periods may require increased provisions to replenish the ALL, which could negatively affect earnings. While the Company recognizes that economic slowdowns or financial and credit market turmoil may adversely impact its borrowers' financial performance and ultimately their ability to repay their loans, management continues to be cautiously optimistic about the collectability of the Company's loan portfolio.
Investment Activities. The investment portfolio is used to generate interest and dividend income, manage liquidity and mitigate interest rate sensitivity. At December 31, 2014, the fair value of investment securities AFS was $45.7 million, or 7.3% of assets, compared to $34.3 million, or 5.9% of assets at December 31, 2013. At December 31, 2014, there were $7.2 million of investment securities classified as HTM, compared to $11.2 million at December 31, 2013. The Company had no investments classified as trading. Investment securities classified as AFS are marked-to-market, with any unrealized gain or loss after estimated taxes charged to the equity portion of the balance sheet through the Accumulated other comprehensive (loss) gain component of stockholders' equity. The fair value of investment securities AFS at December 31, 2014 reflects a net unrealized gain of $290 thousand.
At December 31, 2014, 40 debt securities had unrealized losses of $439 thousand, with aggregate depreciation of 0.83% from the Company's amortized cost basis. Securities are evaluated at least quarterly for OTTI and at December 31, 2014, in management's estimation no security was OTTI. Management's evaluation of OTTI is subject to risks and uncertainties and is intended to determine the appropriate amount and timing of recognition of any impairment charge. The assessment of whether such impairment for debt securities has occurred is based on management's best estimate of the cash flows expected to be collected at the individual security level. We regularly monitor our investment portfolio to ensure that securities that may be OTTI are identified in a timely manner and that any impairment charge is recognized in the proper period and, with respect to debt securities, that the impairment is properly allocated between credit losses recognized in earnings and noncredit unrealized losses recognized in OCI (loss). Further deterioration in credit quality, imbalances in liquidity in the financial marketplace or a quick rise in interest rates might adversely affect the fair values of the Company's investment portfolio and may increase the potential that certain unrealized losses will be designated as OTT in future periods, resulting in write-downs.
At December 31, 2014, the Company had no investments in a single company or entity (other than U.S. Government-sponsored enterprise securities) that had an aggregate book value in excess of 2% of our stockholders' equity. As of December 31, 2014, all MBS the Company owned were issued by Government National Mortgage Association, Fannie Mae or the FHLMC/Freddie Mac. Although the Fannie Mae and Freddie Mac debt securities are not explicitly guaranteed by the federal government, one of the stated purposes of the U.S. Treasury's September, 2008 conservatorship and capital support of the two institutions was to stabilize the market in their debt securities, and that purpose was again evident in legislation passed by Congress in late 2009 which effectively lifted any dollar ceiling on the implicit U.S. Treasury guaranty of Fannie Mae and Freddie Mac debt securities.
The following tables show as of December 31 the amortized cost, fair value and weighted average yield on a tax equivalent basis of the Company's investment debt securities portfolio maturing within the stated periods:
There were no marketable equity securities held at December 31, 2014. The tables above exclude marketable equity securities with a book value of $746 thousand and a market value of $1.0 million at December 31, 2013, and a book value of $746 thousand and a market value of $797 thousand at December 31, 2012, which have no maturity but were able to be sold by the Company at any time. The tables also exclude mutual funds with a book and market value of $337 thousand at December 31, 2014, of $258 thousand at December 31, 2013 and of $173 thousand at December 31, 2012.
Federal Home Loan Bank of Boston Stock. Union is a member of the FHLB, with an investment of $2.0 million in its Class B common stock at December 31, 2014 and 2013. The Class B common stock has a five year notice requirement for redemption and there is no guarantee of future redemption. Also, there is the possibility of future capital calls by the FHLB on member banks to ensure compliance with its capital plan. Union's investment in FHLB stock is carried in Other assets at cost and is nonmarketable. Similar to evaluating investment securities for OTTI, the Company has evaluated its investment in the FHLB. The FHLB remains in compliance with all regulatory capital ratios as of December 31, 2014 and 2013. Management's most recent evaluation of the Company's holdings of FHLB common stock concluded that the investment was not impaired at December 31, 2014.
Deposits. The following table shows information concerning the Company's average deposits by account type and the weighted average nominal rates at which interest was paid on such deposits for the years ended December 31:
Deposits grew $33.7 million, or 6.5%, from $518.4 million at December 31, 2013 to $552.1 million at December 31, 2014. Total average deposits grew $20.8 million, or 4.1%, between years with average nontime deposits growing $25.6 million, or 7.3%, during the same time frame. Average deposits for all categories, except money market and time deposits less than $100 thousand, grew between years. Time deposits have trended towards short duration or migrated to nontime deposits because of the low interest rate environment and the perceived customer desire to be in a position to redeploy funds should there be a rise in interest rates, as evidenced by the decrease in time deposits of $2.5 million, or 1.6%, from December 31, 2013.
The Company participates in the CDARS of Promontory Interfinancial Network, LLC, which permits the Company to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. Participants may also purchase deposits through CDARS. There were $11.0 million of time deposits of $250,000 or less on the balance sheet at December 31, 2014, $7.1 million at December 31, 2013 and $6.7 million at December 31, 2012, which were exchanged with other CDARS participants and are therefore considered for certain regulatory purposes to be “brokered” deposits. The Company also participates in Promontory Interfinancial Network's ICS program. ICS is a service through which Union can offer its customers a savings product with access to multi-million dollar FDIC insurance while receiving reciprocal deposits from other banks. Like the exchange of certificate of deposit accounts through CDARS, exchange of savings deposits through ICS provides full deposit insurance coverage for the customer, thereby helping Union to retain the full amount of the deposit on its balance sheet. There were $2.2 million in ICS money market deposits on the balance sheet at December 31, 2014, $2.3 million at December 31, 2013 and $1.9 million at December 31, 2012. None of the Company’s CDARS or ICS deposits, as of the respective balance sheet dates, represent purchased deposits as all such deposits were matched dollar for dollar with Union's customer deposits which were placed in other participating financial institutions, in order to provide our customers with full FDIC insurance coverage for their deposit balances.
A provision of the Dodd-Frank Act permanently raised FDIC deposit insurance coverage to $250 thousand per depositor per insured depository institution for each account ownership category. At December 31, 2014, the Company had deposit accounts with less than $250 thousand totaling $373.6 million, or 67.7% of its deposits, with FDIC insurance protection. An additional $41.6 million of municipal deposits were over the FDIC insurance coverage limit at December 31, 2014 and were collateralized by Union under applicable state regulations by investment securities or loans.
The following table provides a maturity distribution of the Company’s time deposits in denominations of $100 thousand or more at December 31:
Borrowings. Advances from the FHLB are another key source of funds to support earning assets. These funds are also used to manage the Bank's interest rate and liquidity risk exposures. The Company's borrowed funds at December 31, 2014 were comprised of borrowings from the FHLB of $13.2 million, at a weighted average rate of 2.30%, and overnight secured customer repurchase agreement sweeps of $1.9 million, at a weighted average rate of 0.25%. At December 31, 2013, borrowed funds were comprised of FHLB advances of $11.8 million, at a weighted average rate of 3.33%, and overnight secured customer repurchase agreement sweeps of $1.4 million, at a weighted average rate of 0.24%. The maximum borrowings outstanding on overnight secured customer repurchase agreement sweeps was $3.4 million and $6.1 million during 2014 and 2013, respectively. The activity related to option advance borrowings reflected a $5.0 million one year bullet advance at a rate of 0.33% taken during the second quarter of 2014 for liquidity purposes, offset by the prepayment of an advance totaling $1.3 million with an interest rate of 5.52% and a maturity date in 2026, and scheduled monthly payments of $325 thousand on long-term amortizing advances during 2014. The borrowing prepayments resulted in penalties paid for the year ended December 31, 2014 of $256 thousand compared to penalties of $169 thousand during 2013 from the prepayment of $1.4 million of advances. The prepayment penalties are included in Other expenses on the Company's consolidated Statements of Income. The Company had no overnight federal funds purchased on December 31, 2014 or 2013. Average borrowings outstanding for 2014 were $16.8 million, compared to average borrowings outstanding for 2013 of $18.0 million. The weighted average interest rate on the Company's borrowings dropped from 2.84% for 2013 to 2.41% for 2014, reflecting the prepayment of higher rate advances and the continued low interest rate environment that prevailed throughout both years.
Liability for Pension Benefits. On October 5, 2012, the Company closed the Plan to new participants and froze the accrual of additional retirement benefits for current participants. As a result of a decrease in the discount rate from 4.84% in 2013 to 3.83% in 2014 and to a lesser extent, worse than expected investment performance experienced during 2014, the net asset of $2.0 million as of December 31, 2013 for the defined benefit pension plan changed to a net liability of $803 thousand as of December 31, 2014. Offsetting the pension liability at December 31, 2014, the Company had deferred tax assets of $810 thousand, and Accumulated other comprehensive loss, net of tax, of $1.6 million. The Accumulated other comprehensive loss has no impact on regulatory capital amounts or ratios or the Company's legal lending limit.
Weighted average assumptions used to determine net periodic pension benefit for the years ended December 31, 2014 and 2013 were a discount rate of 4.84% and 3.95%, respectively, no rate of compensation increase for 2014 or 2013 and an expected long-term rate of return on plan assets of 6.75% for both years. Note 15 to the Consolidated Financial Statements includes further discussion and information on the Company's employee benefits.
There was no minimum required contribution under the ERISA guidelines for 2014 or 2013.
The Company's defined pension benefit obligation and net periodic benefit cost are actuarially determined based on assumptions regarding the appropriate discount rate, current and expected future return on Plan assets, and anticipated mortality rates. While a change in any of the assumptions would have an impact on financial condition and future results of operations, a change in the discount rate and future rate of return on Plan assets could be material. A discount rate is used both to determine the present value of future benefit obligations and the net periodic benefit. The expected rate of return on Plan assets is only used to determine net periodic benefit.
The 2014 pension benefit obligation discount rate utilized is based on the Plan's expected benefit payment stream utilizing December 2014 benchmark pension liability index yield curve spot rates. The discount rate at December 31, 2014 was 3.83%, down from 4.84% at December 31, 2013 and reflecting the decrease in long-term rates between years.
The Company bases its expected rate of return on Plan assets on past history, current earning rates available on investments and economic forecasts of where rates are headed in the future. The expected rate of return is conservative as the Plan has typically taken short-term risk by investing more heavily in equity securities which over the long-term have proved to be good decisions.
Through the end of 2014, our actual net annual investment returns over the last 23 years had a high of 21.94% and a low of negative 26.93%. The latest one year return, as of December 31, 2014, was 2.64% compared to a return of 21.94% as of December 31, 2013. The Plan achieved a cumulative net investment return for the last three years of 11.97% and 8.80% over the last five years. Therefore, the expectation of a 6.75% return is balanced by our discount rate of 3.83% since the Plan has a long-term horizon. Management estimates that the impact of the pension plan for 2015 on the results of operations will approximate a benefit of $408 thousand, as calculated by the actuary as of December 31, 2014, compared to the actual benefit of $436 thousand for 2014 and $119 thousand for 2013.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Interest Rate Risk. Market risk is the potential of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices, and equity prices. As of December 31, 2014, the Company did not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing, deposit taking and borrowing activities. Management of interest rate risk is an important component of our asset and liability management process, which is governed by established policies that
are reviewed and approved annually. Our investment policy details the types of securities that may be purchased, and establishes
portfolio limits and maturity limits for the various sectors. Our investment policy also establishes specific investment quality limits. The ALCO develops guidelines and strategies impacting our asset and liability management-related activities based upon
estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Members of the ALCO also manage the investment portfolio to maximize net interest income while mitigating market and interest rate risk.
Interest rate risk arises naturally from imbalances in repricing, maturity and cash flow characteristics of our assets and liabilities.
The ALCO takes into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their
relation to possible changes in interest rates. The ALCO manages interest rate exposure primarily by using on-balance sheet strategies, generally accomplished through the management of the duration, rate sensitivity and average lives of our various investments, and by extending or shortening maturities of borrowed funds, as well as carefully managing and monitoring the maturities and pricing of loans and deposits.
An outside consultant is utilized to perform rate shocks of our balance sheet to assess our risk to earnings in different interest rate
environments, and to perform a variety of other analyses. The consultant’s most recent analysis was as of December 31, 2014. The base simulation assumed no changes in rates, as well as 200 and 300 basis point rising interest rate scenarios which assume
a parallel shift of the yield curve over a one-year period, and no growth assumptions. A summary of the results is as follows:
Current/Flat Rates: If rates remain at current levels net interest income is projected to trend downward for the entire simulation as asset yields will continue to erode while funding costs provide little to no relief.
•
Rising Rates: Higher rates indicate positive results under all scenarios. Under the rising rate scenarios if rates rise in a parallel fashion, net interest income is projected to increase throughout the simulation as asset yields will reset in the higher rate environment and funding cost increases will lag.
The net interest income simulation as of December 31, 2014 showed that the change in net interest income for the next 12 months from our expected or “most likely” forecast was as follows:
The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected
operating results. These estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit run-off rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
The model used to perform the base case balance sheet simulation assumes a parallel shift of the yield curve over twelve months
and reprices every interest earning asset and interest bearing liability on our balance sheet, simultaneously. The use of pricing betas help simulate the expected pricing behavior regarding non-maturing deposits, limiting the rate increases that occur when
market rates rise. A historic analysis of the bank's prepayment history was performed and the results were used as a basis for future prepayment expectations. Investment securities with call provisions are examined on an individual basis to estimate the likelihood of a call.
As market conditions vary from those assumed in the sensitivity analysis, actual results will likely differ due to: the varying impact
of changes in the balances and mix of loans and deposits differing from those assumed, the impact of possible off balance sheet commitments, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect all actions that the ALCO
might take in responding to or anticipating changes in interest rates.
Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates, and to implement its strategic objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contractual or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument.
The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company’s exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
The following table details the contractual or notional amount of financial instruments that represented credit risk at December 31, 2014:
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have a fixed expiration date or other termination clause and may require payment of a fee. Approximately $11.1 million of the unused lines of credit outstanding at December 31, 2014 relate to real estate construction loans that are expected to fund within the next twelve months. The remaining lines primarily relate to revolving lines of credit for other real estate or commercial loans. Since many of the loan commitments are expected to expire without being drawn upon and not all credit lines will be utilized, the total commitment amounts do not necessarily represent future cash requirements. Lines of credit incur seasonal volume fluctuations due to the nature of some customers' businesses, such as tourism and maple syrup products production.
Unused lines of credit increased $877 thousand, or 1.5%, from $58.3 million at December 31, 2013 to $59.2 million at December 31, 2014. Some of the larger lines have underlying participation agreements in place with other financial institutions in order to permit the Company to support the credit needs of larger dollar borrowers without bearing all the credit risk in the Company's balance sheet. Commitments to originate loans increased $2.2 million, or 8.9%, from $25.3 million at December 31, 2013 to $27.5 million at December 31, 2014.
The Company may, from time-to-time, enter into commitments to purchase, participate or sell loans, securities, certificates of deposit, or other investment instruments which involve market and interest rate risk. At December 31, 2014, the Company had binding loan commitments to sell residential mortgage loans at fixed rates totaling $1.4 million.
The Company sells 1-4 family residential mortgage loans under the MPF loss-sharing program with FHLB, when management believes it is economically advantageous to do so. Under this program the Company shares in the credit risk of each mortgage, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation based on the credit quality of these loans. FHLB funds a first loss account based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLB first loss account funds are then utilized, followed by the member's credit enhancement obligation, with the balance the responsibility of FHLB. These loans must meet specific underwriting standards of the FHLB. As of December 31, 2014, the Company had $23.0 million in loans sold through the MPF program with an outstanding balance of $16.4 million and a contract for the potential delivery of an additional $7.6 million of future loan sales. The volume of loans sold to the MPF program and the corresponding credit obligation are closely monitored by management. As of December 31, 2014, the notional amount of the maximum contingent contractual liability related to this program was $523 thousand, of which $25 thousand was recorded as a reserve through Other liabilities.
Contractual Obligations. The Company and Union have various financial obligations, including contractual obligations that may require future cash payments. The following table presents, as of December 31, 2014, significant fixed and determinable contractual obligations to third parties by payment date:
____________________
(1)
The amounts exclude interest payable, as such amounts other than $304 thousand in accrued interest payable at December 31, 2014 are not able to be estimated at this time.
(2)
While Union has a contractual obligation to depositors should they wish to withdraw all or some of the funds on deposit, management believes, based on historical analysis as well as current conditions in the financial markets, that the majority of these deposits will remain on deposit for the foreseeable future.
(3)
The amounts exclude $173 thousand in benefit payments, where the payment period begins at the individual's retirement which is not determinable at this time.
The Company’s subsidiary bank is required (as are all banks) to maintain vault cash or a noninterest bearing reserve balance as established by Federal Reserve regulations. The Bank’s average total required reserve for the 14 day maintenance period including December 31, 2014 was $738 thousand, which was satisfied by vault cash.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is defined as the difference between interest earning assets and interest bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.
The Company prepares its interest rate sensitivity “gap” analysis by scheduling interest earning assets and interest bearing liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amount of assets and liabilities shown within a particular period was determined in accordance with the contractual terms of the assets and liabilities, except that:
•
adjustable-rate loans, investment securities, variable rate interest bearing deposits in banks, variable-rate time deposits, FHLB advances and other secured borrowings are included in the period when they are first scheduled to adjust and not in the period in which they mature;
•
fixed-rate mortgage-related securities and residential loans reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by the Company, and empirical data;
•
other nonmortgage related fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and
•
interest bearing checking, money market and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company’s assets and liabilities in the following table could vary substantially if different assumptions were used, callable investment options were modeled, prepayment speeds changed or actual experience differs from the historical experience on which the assumptions are based.
The following table shows the Company's rate sensitivity analysis as of December 31, 2014:
____________________
(1)
Investment securities exclude mutual funds with a fair value of $337 thousand, respectively, that may be sold by the Company at any time.
(2)
Balances shown include deferred unamortized loan costs of $355 thousand.
(3)
Reflects estimated repayment assumptions considered in Asset/Liability model.
Liquidity. Liquidity is a measurement of the Company’s ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, and for other general business
purposes. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our
cash flow needs in the most economical and expedient manner. The Company’s principal sources of funds are deposits; amortization,
prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities and loans AFS; earnings; and funds provided from operations. Contractual principal repayments on loans are a relatively
predictable source of funds, however, deposit flows and loan and investment prepayments can be significantly influenced by market interest rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining
both depositor confidence and earnings stability
As a member of the FHLB, Union had access to pre-approved lines of credit up $16.9 million at December 31, 2014 over and above the $13.2 million term advances already drawn on the lines, based on a FHLB estimate as of that date. With the purchase of required FHLB Class B common stock and evaluation by the FHLB of the underlying collateral available, line availability could have risen to approximately $30.6 million at December 31, 2014. This line of credit can be used for either short-term or long-term liquidity or other needs.
Union also maintains an IDEAL Way Line of Credit with the FHLB. The total line available was $551 thousand at December 31, 2014. There were no borrowings against this line of credit as of such date. Interest on these borrowings is chargeable at a rate determined by the FHLB and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.
In addition to its borrowing arrangements with the FHLB, Union maintains preapproved Federal Funds lines of credit totaling $12.0 million with two of its correspondent banks, a repurchase agreement line of credit and access to the Federal Reserve discount window, which would require pledging of qualified assets. There were no balances outstanding on the Federal Funds purchase lines, repurchase agreement line or at the discount window at December 31, 2014.
While scheduled loan and securities payments and FHLB advances are relatively predictable sources of funds, deposit flows and prepayments on loans and MBSs are greatly influenced by market interest rates, economic conditions and competition. The Company's liquidity is actively managed on a daily basis, monitored by the ALCO, and reviewed monthly with the subsidiary's Board. The ALCO measures the Company's marketable assets and credit available to fund liquidity requirements and compares the adequacy of that aggregate amount against the aggregate amount of the Company's interest sensitive or volatile liabilities, such as core deposits and time deposits in excess of $100,000, borrowings and term deposits with short maturities, and credit commitments outstanding. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.
Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management’s internal assessment of economic capital, funds the Company’s business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments and provide continued support for deposits. The Company and its subsidiary continue to be considered well capitalized under the capital adequacy requirements to which they are subject. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions. The dividend payouts and treasury stock purchases during the last few years reflect the Board’s desire to utilize our capital for the benefit of the stockholders.
Stockholders’ equity increased from $49.8 million at December 31, 2013 to $51.4 million at December 31, 2014, reflecting net income of $7.7 million for 2014, an increase of $20 thousand from stock based compensation, a $39 thousand increase due to the issuance of 2,010 shares of common stock resulting from the exercise of 2,010 incentive stock options and an increase of $705 thousand in OCI attributable to investment securities AFS. These increases were partially offset by cash dividends paid of $4.6 million, a decrease in OCI of $2.2 million attributable to the unfunded pension liability, and Treasury stock purchases of $45 thousand.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of December 31, 2014, the Company had 4,929,296 shares issued, of which 4,458,430 were outstanding and 470,866 were held in treasury. Effective May 21, 2014 upon approval by the stockholders, the Company adopted the 2014 Equity Plan which replaced the 2008 ISO Plan. As of December 31, 2014, there were outstanding employee incentive stock options with respect to 7,500 shares granted under the 2008 ISO Plan, all of which were exercisable. Also as of December 31, 2014 there were outstanding employee incentive stock options with respect to 6,000 shares granted under the 2014 Equity Plan that will become exercisable during the fourth quarter of 2015.
In January of 2014, the Company's Board reauthorized the limited stock repurchase plan that was established in May of 2010. The limited stock repurchase plan allows the repurchase of up to 2,500 shares of the Company's common stock each calendar quarter in open market purchases or privately negotiated transactions, as management may deem advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The quarterly repurchase program expired on December 31, 2014, and was reauthorized in January 2015 for another year. Since inception, as of December 31, 2014, the Company had repurchased 9,788 shares under this program, for a total cost of $192 thousand.
The Company's total capital to risk weighted assets increased to 13.6% at December 31, 2014 from 13.3% at December 31, 2013. Tier I capital to risk weighted assets increased to 12.4% at December 31, 2014 from 12.0% at December 31, 2013 and Tier I capital to average assets increased to 8.1% at December 31, 2014 from 8.0% at December 31, 2013. Union is categorized as well capitalized under the regulatory framework and the Company is well over the minimum capital requirements. The Company has evaluated its capital adequacy at December 31, 2014 on a proforma basis under the BASEL III requirements, which took effect on January 1, 2015, and would be considered well capitalized under such requirements as fully phased in. See Note 21 for additional discussion of BASEL III. The Company remains focused on long-term growth and above-average shareholder return. It has become more important than ever in today's economic environment for banks to ensure and plan ahead to maintain strong capital reserves.
Impact of Inflation and Changing Prices. The Company's consolidated financial statements have been prepared in accordance with GAAP, which allows for the measurement of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature, and their general and administrative costs constitute relatively small percentages of total expenses. Thus, increases in the general price levels for goods and services have a relatively minor effect on the Company's total expenses but could have an impact on our loan customers' financial condition. Interest rates have a more significant impact on the Company's financial performance than the effect of general inflation. During the last five years, the Federal Reserve maintained a target federal funds rate of 0.00% to 0.25% while the U.S. prime rate, which is the base rate that banks use in pricing short-term maturity commercial loans to their best, or most creditworthy, customers remained at 3.25%. The target federal funds rate, which is likely to remain unchanged at least until mid-2015, has never been this low and the last time the prime rate was at 3.25% was in 1955. These market rates are out of the Company's control but have a dramatic impact on net interest income.
Interest rates do not necessarily move in the same direction or change in the same magnitude as the prices of goods and services, although periods of increased inflation may accompany a rising interest rate environment. Inflation in the price of goods and services, while not having a substantial impact on the operating results of the Company, does affect all customers and therefore may impact their ability to keep funds on deposit or make loan payments in a timely fashion. The Company is aware of this risk and evaluates that risk along with others in making business decisions. Unprecedented deficit spending by federal, state and local governments and control of the money supply by the Federal Reserve including further quantitative easing of the money supply, may have unanticipated impacts on interest rates or inflation in future periods that could have an unfavorable impact on the future operating results of the Company.
Regulatory Matters. The Company and Union are subject to periodic examinations by the various regulatory agencies. These examinations include, but are not limited to, procedures designed to review lending practices, risk management, credit quality, liquidity, compliance and capital adequacy. The Company's 2011 corporate tax return was audited by the IRS during 2013. There was no material adjustment to the Company's tax liability as a result of the audit. In January of 2015 the FRB performed its regular, periodic examination of Union. During 2014, the FDIC performed a regular safety and soundness exam, and during 2013 , the Vermont Department of Financial Regulation performed its regular, periodic regulatory examination of Union. No comments were received that would have a material adverse effect on the Company’s or Union’s liquidity, financial position, capital resources, or results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data
Pursuant to regulatory relief available to smaller reporting companies the Company has elected to present audited statements of income, cash flows, comprehensive income, and changes in stockholders' equity for each of the preceding two, rather than three, fiscal years.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and 2013
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2014 and 2013
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2014 and 2013
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2014 and 2013
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2014 and 2013
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of financial statement presentation
The accounting and reporting policies of Union Bankshares, Inc. and the Subsidiary (the Company) are in conformity with U.S. GAAP and general practices within the banking industry. The following is a description of the more significant policies.
The consolidated financial statements include the accounts of Union Bankshares, Inc., and its wholly owned subsidiary, Union Bank headquartered in Morrisville, Vermont. All significant intercompany transactions and balances have been eliminated. The Company utilizes the accrual method of accounting for financial reporting purposes.
Certain amounts in the 2013 financial statements have been reclassified to conform to the current year presentation.
The acronyms, abbreviations and capitalized terms identified below are used throughout this Form 10-K, including Part I, Part II and III. The following is provided to aid the reader and provide a reference page when reviewing this Form 10-K:
AFS:
Available-for-sale
HUD:
U.S. Department of Housing and Urban Development
ALCO:
Asset Liability Management Committee
ICS:
Insured Cash Sweeps of the Promontory Interfinancial Network
ALL:
Allowance for loan losses
IRS:
Internal Revenue Service
ASC:
Accounting Standards Codification
MBS:
Mortgage-backed security
ASU:
Accounting Standards Update
MPF:
Mortgage Partnership Finance Program
BHCA:
Bank Holding Company Act of 1956
MSRs:
Mortgage Servicing rights
Board:
Board of Directors
NASDAQ:
NASDAQ Global Security Market
bp or bps:
Basis point(s)
OAO:
Other assets owned
Branch Acquisition:
The acquisition of three New Hampshire branches in May 2011
OCI:
Other comprehensive income (loss)
CDARS:
Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network
OFAC:
U.S. Office of Foreign Assets Control
CFPB:
Consumer Financial Protection Bureau
OREO:
Other real estate owned
COLI:
Company Owned Life Insurance
OTTI:
Other-than-temporary impairment
Company:
Union Bankshares, Inc. and Subsidiary
OTT:
Other-than-temporary
DFR:
Vermont Department of Financial Regulation
Plan:
The Union Bank Pension Plan
Dodd-Frank Act:
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
RD:
USDA Rural Development
FASB:
Financial Accounting Standards Board
SBA:
U.S. Small Business Administration
FDIC:
Federal Deposit Insurance Corporation
SEC:
U.S. Securities and Exchange Commission
FDICIA:
The Federal Deposit Insurance Corporation Improvement Act of 1991
SOX Act
Sarbanes Oxley Act of 2002
FHA:
U.S. Federal Housing Administration
TDR:
Troubled-debt restructuring
FHLB:
Federal Home Loan Bank of Boston
Union:
Union Bank, the sole subsidiary of Union Bankshares, Inc
FRB:
Federal Reserve Board
USDA:
U.S. Department of Agriculture
Fannie Mae:
Federal National Mortgage Association
VA:
U.S. Veterans Administration
FHLMC/Freddie Mac:
Federal Home Loan Mortgage Corporation
2006 Plan:
Executive Nonqualified Excess Plan
GAAP:
Generally accepted accounting principles in the United States
2008 Plan:
2008 Amended and Restated Nonqualified Deferred Compensation Plan
GLBA:
Gramm-Leach-Bliley Financial Modernization Act of 1999
2008 ISO Plan:
2008 Incentive Stock Option Plan of the Company
HTM:
Held-to-maturity
2014 Equity Plan:
2014 Equity Incentive Plan
Nature of operations
The Company provides a variety of financial services to individuals, municipalities, commercial and nonprofit customers through its branches, ATMs, telebanking, mobile and internet banking systems in northern Vermont and northwestern New Hampshire. This market area encompasses primarily retail consumers, small businesses, municipalities, agricultural producers and the tourism industry. The Company's primary deposit products are checking, savings, money market accounts, certificates of deposit and individual retirement accounts and its primary lending products are commercial, real estate, municipal and consumer loans. The Company also offers fiduciary and asset management services through its Asset Management Group, an unincorporated division of Union.
Concentration of risk
The Company's operations are affected by various risk factors, including liquidity risk, interest rate risk, credit risk, fraud risk and risk from geographic concentration of its deposit taking and lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities/repricing of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although national economic conditions have been volatile during the last few years, local economic conditions have been somewhat more stable. The Company has a diversified loan portfolio with a substantial portion of the Company's loans secured by real estate and/or partially guaranteed by a U.S. Government agency. Most of its lending activities are conducted within the northern Vermont and northwestern New Hampshire market area where its banking offices are located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy and real estate market conditions. Notes 5 and 6 discuss the types of lending in which the Company engages.
Use of estimates in preparation of financial statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Material estimates that are particularly susceptible to significant change in the near term and involve inherent uncertainties relate to the determination of the ALL on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, deferred tax assets, judgments regarding valuation and impairment of investment securities and other assets as well as pension plan accounting. These estimates involve a significant degree of complexity and subjectivity and the amount of the change that is reasonably possible, should any of these estimates prove inaccurate, cannot be estimated.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods) and overnight deposits.
Trust operations
Assets held by Union's Asset Management Group in a fiduciary or agency capacity, other than trust cash on deposit with Union, are not included in these consolidated financial statements because they are not assets of Union or the Company.
Fair value measurements
The Company utilizes FASB 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:
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
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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;
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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).
Investment securities
Investment securities purchased and held primarily for resale in the near future are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities the Company has the positive intent and ability to hold to maturity are classified as HTM and reported at amortized cost. Debt and equity securities not classified as either HTM or trading are classified as AFS. Investments classified as AFS are reported at fair value.
Accretion of discounts and amortization of premiums arising at acquisition on investment securities are included in income using the effective interest method over the life of the securities to maturity or call date for non amortizing securities and the level yield method which anticipates prepayments for amortizing securities. Unrealized gains and losses on investment securities AFS are excluded from earnings and reported in Accumulated OCI, net of tax and reclassification adjustment, as a separate component of stockholders' equity. The specific identification method is used to determine realized gains and losses on sales of AFS or trading securities.
The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if an OTTI exists. A 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 OTT.
An unrealized loss is generally deemed to be OTT and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTT write-down is recorded, net of tax effect, through net income as a component of OTT impairment losses in the consolidated statement of income, while the remaining portion of the impairment loss is recognized in OCI, provided the Company does not intend to sell the underlying debt security and it is "more likely than not" that the Company will not have to sell the debt security prior to recovery. Declines in the fair values of individual equity securities that are deemed by management to be OTT are reflected in noninterest income when identified.
Management considers the following factors in determining whether an OTTI exists and the period over which the security is expected to recover:
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The length of time, and extent to which, the fair value has been less than the amortized cost;
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Adverse conditions specifically related to the security, industry, or geographic area;
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The historical and implied volatility of the fair value of the security;
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The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;
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Failure of the issuer of the security to make scheduled interest or principal payments;
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Any changes to the rating of the security by a rating agency;
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Recoveries or additional declines in fair value subsequent to the balance sheet date; and
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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.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. The estimated fair value of loans held for sale is based on current price quotes that determine the amount that the loans could be sold for in the secondary market. Loans transferred from held for sale to portfolio are transferred at the lower of cost or fair value in the aggregate. Sales are normally made without recourse. Gains and losses on the disposition of loans held for sale are determined on the specific identification basis. Net unrealized losses are recognized through a valuation allowance by charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the ALL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Generally, any unpaid interest previously accrued on those loans is reversed against current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual status or after all principal has been collected. Interest income generally is not recognized on impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent.
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 2011 Branch Acquisition were recorded at the estimated fair value at the time of purchase. 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.
Allowance for loan losses
The ALL is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. For all loan classes, loan losses are charged against the ALL when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ALL.
The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the ALL is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. While management uses available information to recognize losses on loans, future additions to the ALL 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 ALL. Such agencies may require the Company to recognize additions to the ALL, with a corresponding charge to earnings, based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
The ALL consists of specific, general and unallocated components. The specific component relates to the loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. A TDR classification may result from the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments), or a combination. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial
loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship.
The general component represents the level of ALL allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:
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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.
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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.
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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.
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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.
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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.
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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 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 ALL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
All evaluations are inherently subjective as they require estimates that are susceptible to significant revision as more information becomes available or as changes occur in economic conditions or other relevant factors.
Other real estate owned
Real estate properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded based on an independent appraisal or a broker price opinion at the estimated fair value less estimated selling costs at the date of acquisition, establishing a new carrying basis. Thereafter, valuations are periodically performed by management, and the real estate is carried in Other assets at the lower of carrying amount or fair value, less estimated cost to sell. Costs of significant property improvements are capitalized, if deemed recoverable, whereas revenue and expenses from operations and changes in valuation are charged to Other expenses on the Company's consolidated statement of income.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. The cost of assets sold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the consolidated statement of income. Maintenance and repairs are charged to current expense as incurred and the costs of major renovations and betterments are
capitalized. Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use.
Intangible assets
Intangible assets include goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in the 2011 Branch Acquisition , as well as a core deposit intangible related to the deposits acquired (see Note 9). The core deposit intangible is amortized on a straight line basis over the estimated average life of the acquired core deposit base of 10 years. The Company evaluates the valuation and amortization of the core deposit intangible if events occur that could result in possible impairment. With respect to goodwill, in accordance with current authoritative guidance, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company is less than its carrying amount, which could result in goodwill impairment.
Federal Home Loan Bank stock
As a member of the FHLB, Union is required to invest in Class B common stock of the FHLB. The Class B common stock has a five year notice requirement for redemption and there is no guarantee of future redemption. Also, there is the possibility of future capital calls by the FHLB on member banks to ensure compliance with its capital plan. FHLB stock is reported in Other assets at its par value of $2.0 million at December 31, 2014 and December 31, 2013. The stock is nonmarketable, and is redeemable by the FHLB at par value.
Company-owned life insurance
COLI represents life insurance on the lives of certain current or former directors or employees who have provided positive consent allowing the Company to be the beneficiary of such policies. The Company utilizes COLI as tax-efficient funding for certain benefit obligations to its employees and directors, including obligations under one of the Company's nonqualified deferred compensation plans. (See Note 15.) The Company is the primary beneficiary of the insurance policies. Increases in the cash value of the policies, as well as any gain on insurance proceeds received, are recorded in Other income, and are not currently subject to income taxes. COLI is recorded at the cash value of the policies, less any applicable cash surrender charges (of which there are currently none). The Company reviews the financial strength of the insurance carriers prior to the purchase of COLI to ensure minimum credit ratings of at least investment grade. The financial strength of the carriers is reviewed annually and COLI with any individual carrier is limited by Company policy to 10% of capital plus reserves.
Servicing assets
Servicing assets are recognized as separate assets when servicing rights are acquired through purchase or through sale of loans with servicing rights retained. Capitalized servicing rights are reported in Other assets, are initially recorded at estimated fair market value and are amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The estimated fair value of capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans that have been previously sold. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value of a stratum is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual stratum, to the extent that estimated fair value is less than the capitalized amount for the stratum.
Investment in real estate limited partnerships
The Company has purchased various limited partnership interests in affordable housing partnerships. These partnerships were established to acquire, own and rent residential housing for elderly, low or moderate income residents in northeastern and central Vermont or in northwestern New Hampshire. Under current accounting rules, the investments are accounted for under a method approximating the equity method of accounting. These equity investments are recorded at cost and adjusted for the Company's proportionate share of the partnerships' undistributed earnings or losses through the consolidated statement of income.
Defined Benefit Pension plan
Union sponsors a noncontributory defined benefit pension plan covering all eligible employees employed prior to October 5, 2012. On that date, the Company closed The Plan to new participants and froze the accrual of retirement benefits for current participants. Union continues to maintain the frozen Plan and related Trust and continues to distribute benefits to participants in such manner as provided under the terms of the Plan. The costs of this Plan, based on actuarial computations of current benefits for employees, are credited to Pension and other employee benefits.
Advertising costs
The Company expenses advertising costs as incurred and they are included in Other expenses in the Company's consolidated statement of income.
Earnings per common share
Earnings per common share for the period are computed based on the weighted average number of shares of common stock issued, retroactively adjusted for stock splits and stock dividends and reduced for shares held in treasury. The weighted average shares outstanding were 4,458,393 and 4,457,261 for the years ended December 31, 2014 and 2013, respectively. There were incentive stock options with respect to 13,500 shares and 14,500 shares outstanding at December 31, 2014 and December 31, 2013, respectively, excluded from the computation of diluted earnings per share since dilution resulting from these stock options would be immaterial.
Income taxes
The Company prepares its federal income tax return on a consolidated basis. Federal income taxes are allocated to members of the consolidated group based on taxable income. The Company recognizes income taxes under the asset and liability method. This involves estimating the Company's actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and GAAP purposes. These differences result in deferred tax assets and liabilities, which are netted and included in Other assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities. Affordable housing tax credits are recognized as a reduction of the Provision for income taxes in the year they are earned.
Off-balance-sheet financial instruments
In the ordinary course of business, the Company is a party to off-balance-sheet financial instruments consisting of commitments to originate credit, unused lines of credit including commitments under credit card arrangements, commitments to purchase investment securities, commitments to invest in real estate limited partnerships, commercial letters of credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such financial instruments are recorded in the financial statements when they become fixed and certain.
Comprehensive income (loss)
Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities AFS that are not OTTI and the unfunded liability for the defined benefit pension plan, are not reflected in the consolidated statement of income. The cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the consolidated balance sheet (Accumulated OCI). OCI, along with net income, comprises the Company's total comprehensive income or loss.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Stock Based Compensation
Effective May 21, 2014 upon approval by the stockholders, the Company adopted the 2014 Equity Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock (including approximately 25,000 unused shares from the 2008 ISO Plan) are available for equity awards of incentive stock options, nonqualified stock options, restricted stock and restricted stock units to eligible officers and (except for awards of incentive stock options) nonemployee directors.
Recent accounting pronouncements
In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this ASU permit institutions to make accounting policy elections to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the ASU requires the investment to be accounted for as an equity method investment or a cost method investment. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial position or results of operations.
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this ASU clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial position or results of operations.
In August 2014, the FASB issued ASU No. 2014-14, Troubled Debt Restructurings by Creditors Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments in this ASU provide guidance on how to classify and measure certain government-guaranteed mortgage loans upon foreclosure. The amendments require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial position or results of operations.
Note 2. Restrictions on Cash and Cash Equivalents
The nature of the Company's business requires that it maintain amounts due from correspondent banks which, at times, may exceed federally insured limits. The balances in these accounts at December 31, were as follows:
No losses have been experienced in these accounts and the Company believes it is not exposed to any significant risk with respect to the accounts.
The Company had no requirement to maintain contracted clearing balances at December 31, 2014 or 2013. Balances at the Federal Reserve Bank of Boston and a portion of the funds at the FHLB are classified as overnight deposits as they earn interest. The Company is required to maintain vault cash or noninterest bearing reserve balances with Federal Reserve Bank of Boston. Total reserve balances required at December 31, 2014 and 2013 were $738 thousand and $652 thousand, respectively, which were both satisfied by vault cash.
Note 3. Interest Bearing Deposits in Banks
Interest bearing deposits in banks consist of certificates of deposit purchased from various financial institutions. Deposits at each institution are generally maintained at or below the FDIC insurable limit of $250 thousand. Certificates are held with rates ranging from 0.50% to 2.55% and mature at various dates through 2028, with $3.6 million scheduled to mature in 2015.
Note 4. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
Investment securities with a carrying amount of $6.5 million and $3.3 million at December 31, 2014 and 2013, respectively, were pledged as collateral for public deposits, customer repurchase agreements and for other purposes as required or permitted by law.
Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
The Company has the ability to hold the investment securities that had unrealized losses at December 31, 2014 for the foreseeable future and no declines were deemed by management to be OTT.
Proceeds from the sale of securities AFS were $7.4 million and $1.0 million in 2014 and 2013, respectively. Gross realized gains from the sale of securities AFS were $393 thousand and $3 thousand in 2014 and 2013, respectively, while gross realized losses were $78 thousand and $4 thousand in 2014 and 2013, respectively. The specific identification method is used to determine realized gains and losses on sales of AFS securities.
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of December 31, 2014, were as follows:
Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities may differ from contractual maturities on agency MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and not included in the contractual maturity categories in the above maturity summary.
Note 5. Loans Held for Sale and Loan Servicing
At December 31, 2014 and 2013, Loans held for sale consisted of conventional residential mortgages originated for subsequent sale. At December 31, 2014 and 2013, the estimated fair value of these loans was in excess of their carrying value, and therefore no valuation reserve was necessary for loans held for sale.
Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of commercial and mortgage loans serviced for others was $365.4 million and $319.5 million at December 31, 2014 and 2013, respectively. Loans sold during 2014 consisted of $94.9 million in residential loans, resulting in $2.1 million of net gains realized on the sale of those loans. There were $123.1 million in residential loans sold in 2013, resulting in net gains of $2.3 million. No commercial loans were sold during 2014 or 2013. There were no obligations to repurchase loans for any amount at December 31, 2014, but there were contractual risk sharing commitments on certain sold loans totaling $523 thousand as of such date.
The Company generally retains the servicing rights on loans sold. At December 31, 2014 and 2013, the unamortized balance of servicing rights on loans sold with servicing retained was $1.4 million and $1.3 million, respectively, included in Other assets. The estimated fair value of these servicing rights was in excess of their carrying value at both December 31, 2014 and 2013, and therefore no impairment reserve was necessary. Loan servicing rights of $571 thousand and $737 thousand were capitalized in 2014 and 2013, respectively. Amortization of servicing rights was $528 thousand and $507 thousand for 2014 and 2013, respectively. The net capitalization and amortization of MSRs is included in Other income.
Note 6. Loans
The composition of Net loans at December 31, was as follows:
The loans purchased in the 2011 Branch Acquisition were initially recorded at $32.9 million, the estimated fair value at the time of purchase. The estimated fair value contained 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. At the acquisition date, 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. The balance of the nonaccretable credit risk component was $193 thousand and $296 thousand at December 31, 2014 and 2013, respectively. There was a $103 thousand decrease in the nonaccretable credit risk component balance during the year ended December 31, 2014 due to a $24 thousand loss recognized on one acquired residential real estate loan and a $79 thousand adjustment from the transfer of the commercial, consumer, junior lien and municipal acquired loan portfolios to the Bank's existing loan portfolios. There was no change in the nonaccretable credit risk component during 2013. Changes in the accretable and nonaccretable components have been charged to Interest and fees on loans on the Company's consolidated statements of income for the periods reported. The net carrying amounts of the acquired loans were $9.1 million and $17.0 million at December 31, 2014 and 2013, respectively, and are included in the loan balances above.
The following table summarizes activity in the accretable loan premium component for the acquired loan portfolio:
Residential real estate loans aggregating $37.8 million and $22.7 million at December 31, 2014 and 2013, respectively, were pledged as collateral on deposits of municipalities. Qualified first mortgages held by Union may also be pledged as collateral for borrowings from the FHLB under a blanket lien.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
Aggregate interest on nonaccrual loans not recognized was $1.1 million for the years ended December 31, 2014 and 2013.
Note 7. Allowance for Loan Losses and Credit Quality
Changes in the ALL, by class of loans, were as follows for the years ended:
The allocation of the ALL, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates were as follows:
Despite the allocation shown in the tables above, the ALL is general in nature and is available to absorb losses from any class of loan.
The recorded investment in loans, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates were as follows:
Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:
1-3 Rating - Pass
Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.
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.
5-7 Rating - Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.
The following tables summarize the loan ratings applied to the Company's loans by class as of the balance sheet dates:
Acquired loans are risk rated, as appropriate, according to the Company's loan rating system, but such ratings are not taken into account in establishing the ALL. Rather, in accordance with applicable accounting principles, 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. As of December 31, 2014, there was no ALL for acquired loans.
The following table provides information with respect to impaired loans by class of loan as of and for the year ended December 31, 2014:
____________________
(1)
Does not reflect government guaranties on impaired loans as of December 31, 2014 totaling $244 thousand.
The following table provides information with respect to impaired loans by class of loan as of and for the year ended December 31, 2013:
____________________
(1)
Does not reflect government guaranties on impaired loans as of December 31, 2013 totaling $669 thousand.
The following is a summary of TDR loans by class of loan as of the balance sheet dates:
The TDR loans above represent loan modifications in which a concession was provided to the borrower, including due date extensions, maturity date extensions, interest rate reductions or the forgiveness of accrued interest. Troubled loans, that are restructured and meet established thresholds, are classified as impaired and a specific reserve amount is allocated to the ALL on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows.
The following table provides new TDR activity by class of loan for the years ended December 31, 2014 and 2013:
There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the years ended December 31, 2014 or 2013. TDR loans are considered defaulted at 90 days past due.
At December 31, 2014 and 2013, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.
Note 8. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at December 31, were as follows:
Depreciation included in Occupancy and Equipment expenses amounted to $976 thousand and $902 thousand for the years ended December 31, 2014 and 2013, respectively.
The Company is obligated under noncancelable operating leases for premises that expire in various years through the year 2018. Options to renew for additional periods are available with these leases. Future minimum rental commitments for these leases with original or remaining terms of one year or more at December 31, 2014 were as follows:
Rent expense for 2014 and 2013 amounted to $123 thousand and $120 thousand, respectively. Occupancy expense is shown in the consolidated statements of income, net of rental income of $224 thousand and $217 thousand in 2014 and 2013, respectively.
Note 9. Goodwill and Other Intangible Assets
As a result of the 2011 Branch Acquisition, the Company recorded goodwill amounting to $2.2 million. The goodwill is not amortizable. Goodwill is evaluated for impairment annually, in accordance with current authoritative accounting guidance. Management assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company, in total, is less than its carrying amount. Management is not
aware of any such events or circumstances that would cause it to conclude that the fair value of the Company is less than its carrying amount.
The 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 acquired core deposit base, absent any future impairment. Management will evaluate the core deposit intangible for impairment if conditions warrant.
Amortization expense for the core deposit intangible was $171 thousand for 2014 and 2013. The amortization expense is included in other noninterest expenses on the consolidated statement of income and is deductible for tax purposes. As of December 31, 2014, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
Note 10. Other Real Estate Owned
There were three properties valued in the aggregate at $297 thousand in OREO at December 31, 2014 and five properties valued in the aggregate at $559 thousand at December 31, 2013, which are included in Other assets. There was an allowance for losses on OREO of $77 thousand and $104 thousand at December 31, 2014 and 2013, respectively, which have been netted out of the foregoing values and have been charged to earnings in Other expenses in the applicable period.
Note 11. Investment in Real Estate Limited Partnerships
The Company has purchased from time to time various limited partnership interests established to acquire, own and rent residential housing for elderly, low or moderate income individuals in northern Vermont and northwestern New Hampshire. The carrying values of investments carried at equity were $2.8 million and $3.1 million at December 31, 2014 and 2013, respectively. The capital contribution payable related to these investments was $151 thousand at December 31, 2014. There was no capital contribution payable at December 31, 2013. The provision for undistributed net losses of the partnerships charged to earnings was $800 thousand for 2014 and $690 thousand for 2013. In 2014, $144 thousand of the provision for undistributed net losses charged to earnings related to the exit from three limited partnerships that had reached the final year of tax credits and were near or at the end of the limited partnership compliance period. The federal income tax credits related to limited partnership investments were $735 thousand and $675 thousand for the years ended December 31, 2014 and 2013, respectively, and are recorded as a reduction of the Provision for income taxes.
Note 12. Deposits
The following is a summary of interest bearing deposits at December 31:
The following is a summary of time deposits by maturity at December 31, 2014:
Time deposits of $57.3 million and $56.0 million meet or exceed the FDIC insurance limit of $250 thousand at December 31, 2014 and 2013, respectively.
Note 13. Borrowed Funds
Borrowed funds were comprised of option advance borrowings from the FHLB of $13.2 million and $11.8 million at December 31, 2014 and 2013, respectively, and secured customer repurchase agreement sweeps of $1.9 million and $1.4 million at December 31, 2014 and 2013, respectively.
The FHLB option advance borrowings are a mix of straight bullets, balloons and amortizers with maturities through 2018. All of the FHLB borrowings had fixed interest rates ranging from 0.33% to 5.32% at December 31, 2014 and 0.99% to 5.52% at December 31, 2013. The weighted average interest rates on the borrowings were 2.30% and 3.33% at December 31, 2014 and 2013, respectively.
The contractual payments due for FHLB option advance borrowings, as of December 31, 2014, were as follows:
As of December 31, 2014, the Bank's total FHLB borrowing capacity, based on its holdings of FHLB stock, was $27.1 million, of which $13.9 million was unused and available for additional borrowings of either a short-term or long-term nature.
Collateral on FHLB borrowings consists of FHLB stock purchased by Union, all funds placed on deposit with the FHLB , qualified first mortgages held by Union, and any additional holdings which may be pledged as security.
In addition to its borrowing arrangements with the FHLB, Union maintains preapproved Federal Funds lines of credit with correspondent banks totaling $12.0 million. Interest on these borrowings is payable daily and charged at the federal funds rate at the time of the borrowing. Union also maintains a repurchase agreement line of credit and has access to the Federal Reserve discount window. There were no outstanding borrowings on the Federal Funds purchase lines, repurchase agreement line, or at the discount window at December 31, 2014 or 2013.
Secured customer repurchase agreement sweeps amounted to $1.9 million and $1.4 million at December 31, 2014 and 2013, respectively. These agreements are collateralized by U.S. Government-sponsored enterprise securities with a book value and fair value of $3.0 million at December 31, 2014 and a book value of $2.0 million and fair value of $1.9 million at December 31, 2013. The average daily balance of these repurchase agreement sweeps was $1.6 million and $2.6 million during 2014 and 2013 with weighted average interest rates of 0.26% and 0.39%, respectively. The maximum borrowings outstanding on these agreements during 2014 and 2013 was $3.4 million and $6.1 million, respectively. These repurchase agreements mature the next business day and carried weighted average interest rates of 0.25% and 0.24% as of December 31, 2014 and 2013, respectively.
Note 14. Income Taxes
The components of the Provision for income taxes for the years ended December 31, were as follows:
The total provision for income taxes differs from the amounts computed at the statutory federal income tax rate of 34% primarily due to the following for the years ended December 31:
Listed below are the significant components of the net deferred tax asset at December 31:
Deferred tax assets are recognized subject to management's judgment that it is more likely than not that the deferred tax asset will be realized. Based on the temporary taxable items, historical taxable income and estimates of future taxable income, the Company believes that it is more likely than not that the deferred tax assets at December 31, 2014 will be realized and therefore no valuation allowance is warranted.
Net deferred income tax assets are included in Other assets in the consolidated balance sheet at December 31, 2014 and 2013.
Based on management's evaluation, management has concluded that there were no significant uncertain tax positions requiring recognition in the Company's financial statements at December 31, 2014 and 2013. The Company's 2011 corporate tax return was audited by the IRS during 2013. There was no material adjustment to the Company's tax liability as a result of the audit. The Company's tax years ended December 31, 2011 through 2013 are open to examination by the IRS under the applicable statute of limitations. The 2014 tax return has not yet been filed.
The Company may from time to time be assessed interest and/or penalties by federal or state tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's financial results. In the event that the Company receives an assessment for interest and/or penalties, it will be classified in the financial statements as Other expenses.
Note 15. Employee Benefit Plans
Defined Benefit Pension Plan: Union sponsors a noncontributory defined benefit pension plan covering all eligible employees employed prior to October 5, 2012. On that date, the Company closed the Plan to new participants and froze the accrual of retirement benefits for current participants. Union continues to maintain the frozen Plan and related trust and continues to distribute benefits to participants at such time and in such manner as provided under the terms of the Plan. The Company will continue to recognize pension expense/benefit and cash funding obligations for the remaining life of the associated liability for the frozen benefits under the Plan. The Plan provides defined benefits based on years of service and final average salary prior to October 5, 2012, as defined by the Plan.
There was no minimum required contribution under the ERISA guidelines for 2014 or 2013. Union measures defined benefit plan assets and obligations as of December 31, its fiscal year-end.
Union's policy is to accrue annually an amount equal to the actuarially calculated expense for future benefits. Information pertaining to the activity in the Plan is as follows:
Obligations and funded status at December 31:
The impact of the Plan activity for 2014 and 2013 on OCI is detailed in Note 23.
The Company uses the alternate amortization method for prior service costs, as provided in FASB ASC Topic 715, Employers' Accounting for Pensions.
Net periodic pension benefit for 2014 and 2013 consisted of the following components:
Weighted average assumptions used to determine pension benefit obligation were a discount rate of 3.83% and 4.84% for December 31, 2014 and December 31, 2013, respectively. No rate of compensation increase was utilized for 2014 or 2013 due to the freeze on benefit accruals.
Weighted average assumptions used to determine net periodic pension benefit for the years ended December 31, 2014 and 2013 were a discount rate of 4.84% and 3.95%, respectively, no rate of compensation increase for 2014 or 2013, and an expected long-term rate of return on plan assets of 6.75% for both years.
The overall expected long-term rate of return on assets is consistent with future expected long-term rate of inflation assumptions as well as consideration of historical asset returns and the current financial marketplace. The return is more conservative than the Plan's long-term actual results and is at a level that management believes is sustainable. The 2014 pension benefit obligation discount rate is based on the Plan's expected benefit payment stream utilizing December 2014 benchmark pension liability index yield curve spot rates and a review of published high quality bond indices.
Union's Plan asset allocations at December 31, 2014 and 2013, by asset category based on their fair values were as follows:
The investment philosophy for the Plan is to prudently invest the assets of the Plan and future contributions received in a diversified manner that will ensure the future pension benefits due to participants and beneficiaries over a long-term horizon as well as provide liquidity to pay current benefits. The Trustees of the Plan seek to protect the Plan assets through prudent asset allocation, FDIC insurance on a portion of plan assets, utilization of professional asset management and periodic reviews. Investments in stocks and fixed income investments are diversified in a way which is consistent with risk tolerance, investment objectives and current financial market risks.
In order to achieve this goal the investment objective is to maintain a mix of growth and income investments allocated as follows, with no more than 20% of the equity portion of the portfolio invested in foreign equities:
There are no securities of the Company or Union held by the Plan. The assets of the Plan are managed by Union's Asset Management Group with the advice of the registered investment adviser of Union's Asset Management Group, under the guidance of the Plan's Trustees. There are no estimated employer contributions for 2015.
The fair values of the Plan's investments at December 31, 2014 and 2013, segregated by fair value hierarchy level, are summarized below:
The fair values of the Plan assets are determined by an independent pricing service which, given the nature of the assets within the portfolio, is able to utilize quoted prices in an active market to value the majority of the assets held. The market inputs sought for assets without a specific quote listed, in approximate order of priority, include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications that vary by asset class. For certain security types, additional inputs may be used, or some standard inputs may not be applicable. There were no significant transfers in or out of Levels 1 and 2 for the year ended December 31, 2014.
The following table summarizes the estimated future benefit payments expected to be paid under the Plan:
Nonqualified Deferred Compensation Plans: The Company and Union have two nonqualified deferred compensation plans for directors and certain key officers. The 2008 Plan replaced a 1990 Plan that was not compliant with section 409A of the Internal Revenue Code. The Company accrued an expense of $8 thousand in 2014 and in 2013 under the 2008 Plan. The benefit obligations under the 2008 Plan represent general unsecured obligations of the Company and no assets are segregated for such payments. However, the Company and Union have purchased life insurance contracts on the lives of each participant in order to recoup the funding costs of these benefits. The benefits accrued under the 2008 Plan aggregated $772 thousand and $835 thousand at December 31, 2014 and 2013, respectively, and are included in Accrued interest and other liabilities. The cash surrender value of the life insurance policies purchased to recoup the funding costs under the 2008 Plan aggregated $1.3 million and $1.2 million at December 31, 2014 and 2013, respectively, and is included in Company-owned life insurance in the Company's consolidated balance sheet.
The 2006 Plan was adopted for directors and certain key officers. The 2006 Plan is a defined contribution plan which provides a means by which participants may elect to defer receipt of current compensation from the Company or its subsidiary in order to provide retirement or other benefits as selected in the individual adoption agreements. Participants may select among designated reference investments consisting of investment funds, with the performance of the participant's account mirroring the selected reference investment. Distributions are made only upon a qualifying distribution event, which may include a separation from service, death, disability or unforeseeable emergency, or upon a date specified in the participant's deferral election form. The 2006 Plan is intended to comply with the provisions of Section 409A of the Internal Revenue Code. The 2006 Plan is unfunded, representing a general unsecured obligation of the Company of $285 thousand and $234 thousand as of December 31, 2014 and 2013, respectively.
401(k) Plan: Union maintains a defined contribution 401(k) plan under which employees may elect to make tax deferred contributions of up to the IRS maximum from their annual salary. All employees meeting service requirements are eligible to participate in the plan. Union may make employer matching and profit-sharing contributions to the 401(k) plan at the discretion of the Board. Company contributions are fully vested after three years of service. Union amended its 401(k) plan effective January 1, 2013, to include "Safe Harbor" provisions requiring annual nondiscretionary minimum contributions to the plan for all eligible plan participants in an amount equal to 3% of eligible earnings of each eligible plan participant. Additionally, in 2014 and 2013, a discretionary profit-sharing contribution was made to the plan in an amount equal to 3% percent of each employee's eligible earnings as defined by the plan. The following table summarizes employer contributions for the years ended December 31, 2014 and 2013:
Note 16. Stock Based Compensation
Effective May 21, 2014 upon approval by the stockholders, the Company adopted the 2014 Equity Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock (including approximately 25,000 unused shares from the 2008 ISO Plan) are available for equity awards of incentive stock options, nonqualified stock options, restricted stock and restricted stock units to eligible officers and (except for awards of incentive stock options) nonemployee directors.
The Company's 2008 ISO Plan was replaced by the 2014 Equity Plan. As of December 31, 2014, 7,500 options granted under the 2008 ISO Plan remained outstanding and exercisable, with the last of such options expiring in December 2020.
The exercise price of the options under both plans is equal to the market price of the stock at the date of grant; therefore, the intrinsic value of the options at the date of the grant is $0. All options have a one year requisite service period, vest after one year, and have a seven year contractual term. There were 6,000 options granted in 2014 under the 2014 Equity Plan and 6,000 options granted in 2013 under the 2008 ISO Plan. The compensation cost charged against income for the plans was $20 thousand for 2014 and $12 thousand for 2013.
The fair value of each option award is estimated on the date of grant using a Black-Scholes based option valuation model. The estimated weighted average grant date fair values for options granted during 2014 and 2013 and the weighted average assumptions used are presented in the following table:
Expected volatilities are based on historical volatilities of the market value of the Company's stock, and, possibly, other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is estimated from past exercise activity, and represents the period of time that granted options are expected to be outstanding. The risk free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The expected dividend rate is estimated by annualizing the last dividend paid divided by the closing price of the Company's stock on the grant date of the option.
The 6,000 options granted in 2014 were not exercisable as of December 31, 2014. The weighted average excise price of the options granted in 2014 was $24.00 and the weighted average remaining contractual term was seven years.
The following summarizes the option activity under the 2008 ISO Plan for the year ended December 31, 2014:
Proceeds of $39 thousand were received from the exercise of options for 2,010 shares at weighted average price per share of $19.60 during 2014. Proceeds of $63 thousand were received from the exercise of options for 3,300 shares at $18.88 per share during 2013. The total intrinsic value of the options exercised was $10 thousand and $7 thousand for 2014 and 2013, respectively.
As of December 31, 2014, there was $35 thousand of unrecognized compensation cost related to unvested stock options granted under the 2014 Equity Plan which will be recognized in 2015.
Note 17. Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, guarantees on certain sold loans and risk-sharing commitments on certain sold loans under the MPF program with the FHLB. At December 31, 2014 and 2013, the Company had binding loan
commitments to sell residential mortgages at fixed rates totaling $1.4 million and $3.5 million, respectively. The fair value of these commitments is not material to the Company's financial statements.
Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments and the potential impact on the Company's future financial position, financial performance and cash flow.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors embedded in adjustable-rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures. Interest rate caps and floors on adjustable rate loans permit the Company to manage its interest rate risk and cash flow risk on these loans within parameters established by Company policy.
The Company generally requires collateral or other security to support financial instruments with credit risk. The following table shows financial instruments outstanding whose contract amount represents credit risk at December 31:
Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates within 90 days of the commitment. Unused lines of credit are generally renewable at least annually except for home equity lines which usually have a specified draw period followed by a specified repayment period. Unused lines may have other termination clauses and may require payment of a fee.
Since many of the commitments and lines are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon issuance of a commitment to extend credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are issued to support the customer's private borrowing arrangements or guarantee the customer's contractual performance on behalf of a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers and the Company evaluates each customer's creditworthiness on a case-by-case basis. The fair value of standby letters of credit has not been included in the Company's consolidated balance sheet for either year as the fair value is immaterial.
The Company did not hold or issue derivative instruments or hedging instruments during the years ended December 31, 2014 and 2013.
Note 18. Commitments and Contingencies
Contingent Liabilities: The Company sells 1-4 family residential loans under the MPF program with FHLB (See Note 17). Under this program the Company shares in the credit risk of each mortgage, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation based on the credit quality of these loans. FHLB funds a First Loss Account
based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLB First Loss Account funds are then utilized, followed by the member's Credit Enhancement Obligation, with the balance the responsibility of FHLB. These loans meet specific underwriting standards of the FHLB. As of December 31, 2014, the Company had sold $23.0 million in loans through the MPF program since inception of its participation in the program, with an outstanding balance of $16.4 million as of such date.
The volume of loans sold to the MPF program and the corresponding credit obligation are closely monitored by management. As of December 31, 2014 and 2013, the notional amount of the maximum contingent contractual liability related to this program was $523 thousand and $484 thousand, respectively, of which $25 thousand and $23 thousand had been recorded as a reserve through Accrued interest and other liabilities at December 31, 2014 and 2013, respectively.
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 statements.
Note 19. Fair Value Measurements and Disclosures
The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:
Investment securities 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 AFS have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service using market information. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
Assets measured at fair value on a recurring basis at December 31, 2014 and 2013, segregated by fair value hierarchy level, are summarized below:
There were no significant transfers in or out of Levels 1 and 2 for the year ended December 31, 2014. 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, investment securities HTM, MSRs and OREO, were not considered material at December 31, 2014 or 2013. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.
FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.
Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its significant financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated 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, and rental property mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that utilize unobservable inputs as defined by current accounting standards are classified as Level 3.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1, 2 or 3 in accordance with the classification of the related principal's valuation.
Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB stock, due to restrictions placed on their transferability.
Deposits: The fair values disclosed for noninterest bearing deposits 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 short-term debt approximate the carrying amounts reported in the consolidated balance sheet, resulting in a Level 1 classification. 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.
Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.
Note 20. Transactions with Related Parties
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with principal stockholders, directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and which do not represent more than the normal risk of collectability or present other unfavorable features.
Aggregate loan transactions with related parties for the years ended December 31 were as follows:
None of these loans are past due, in nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified at December 31, 2014 or 2013.
Deposit accounts with related parties were $2.1 million and $1.4 million at December 31, 2014 and 2013, respectively. Union's Asset Management Group also invested $777 thousand and $78 thousand in certificates of deposit with Union at December 31, 2014 and 2013, respectively.
Note 21. Regulatory Capital Requirements
The Company (on a consolidated basis) and Union are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and Union's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Union must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Union's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under applicable regulations in effect as of December 31, 2014, quantitative measures have been established to ensure capital adequacy which required the Company and Union to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2014 and 2013, the Company and Union met all capital adequacy requirements to which they were subject.
As of December 31, 2014 and 2013, the most recent notification from the FDIC categorized Union as well capitalized under the regulatory framework for prompt corrective action as then in effect. Under applicable regulations in effect as of December 31, 2014, to be categorized as well capitalized, an insured depository institution must maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the date of the most recent notification that management believes might result in an adverse change to Union's regulatory capital category. Prompt corrective action provisions are not applicable to bank holding companies.
Union's and the Company's regulatory capital amounts and ratios as of the balance sheet dates are presented in the following tables:
Dividends paid by Union are the primary source of funds available to the Company for payment of dividends to its stockholders. Union is subject to certain requirements imposed by federal banking laws and regulations, which among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by Union to the Company.
In July 2013, the FDIC and other federal bank regulatory agencies issued a final rule revising their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new Common equity Tier 1 capital ratio with a minimum requirement of 4.5%, increases the minimum Tier 1 risk based ratio from 4.0% to 6.0%, and assigns a higher risk weight of 150% to exposures that are more than 90 days past due or in nonaccrual status as well as certain commercial real estate loans that finance the acquisition, development or construction of real property. The final rule also requires accumulated OCI be included for purposes of calculating regulatory capital unless a one time opt-out election is made, which the Company and the Bank intends to elect. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" of 2.5% above the minimum capital ratio requirements. The final rule becomes effective for the Company and the Bank on January 1, 2015. The 2.5% capital conservation buffer requirement will be phased in over a four-year period beginning January 1, 2016 and ending January 1, 2019. Effective January 1, 2015, the FDIC adopted conforming changes to its prompt corrective action regulations. These changes include a new common equity Tier 1 ratio requirement, with a required minimum ratio of 6.5% for well-capitalized
status. The new regulations also increase the minimum ratio of Tier 1 capital to risk weighted assets for well-capitalized status to 8.0%, from the current 6.0%.
Note 22. Treasury Stock
The basis for the carrying value of the Company's treasury stock is the purchase price of the shares at the time of purchase. Since May 2010, the Company has maintained a limited stock repurchase plan which authorizes the repurchase of up to 2,500 shares of its common stock each calendar quarter in open market purchases or privately negotiated transactions, as management may deem advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The quarterly repurchase program was most recently reauthorized in January 2015 and will expire on December 31, 2015 unless reauthorized. The Company repurchased 1,939 shares under this program, at a total cost of $45 thousand during 2014, while 1,022 shares, at a total cost of $21 thousand were repurchased under the program during 2013. Since inception, the Company has repurchased 9,788 shares of its common stock at prices ranging from $17.86 to $25.00 per share, at a total cost of $192 thousand.
Note 23. Other Comprehensive (Loss) Income
The components of Accumulated OCI, net of tax, at December 31 were:
The following table discloses the tax effects allocated to each component of OCI for the years ended:
The following table discloses information concerning the reclassification adjustments from OCI for the years ended December 31:
Note 24. 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 stockholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to December 31, 2014 have been evaluated as to their potential impact to the consolidated financial statements.
Specifically, there are two types of subsequent events:
•
Those comprising events or transactions providing additional evidence about conditions that existed at the balance sheet date, including estimates inherent in the financial statement preparation process (referred to as recognized subsequent events).
•
Those comprising events that provide evidence about conditions not existing at the balance sheet date but, rather, that arose after such date (referred to as nonrecognized subsequent events).
On January 21, 2015, Union Bankshares, Inc. declared a $0.27 per share regular quarterly cash dividend payable February 9, 2015 to stockholders of record on January 31, 2015, representing an increase of $0.01, or 3.8%, over the quarterly cash dividend paid in each of the five previous fiscal quarters.
Note 25. Condensed Financial Information (Parent Company Only)
The following condensed financial statements are for Union Bankshares, Inc. (Parent Company Only), and should be read in conjunction with the consolidated financial statements of Union Bankshares, Inc. and Subsidiary.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, 2014 and 2013
The investment in subsidiary is carried under the equity method of accounting. The investment in subsidiary and cash, which is on deposit with Union, have been eliminated in consolidation.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2014 and 2013
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2014 and 2013
Note 26. Quarterly Financial Data (Unaudited)
A summary of consolidated financial data for each of the four quarters of 2014 and 2013 is presented below:
Note 27. Other Noninterest Income and Other Noninterest Expenses
There are no components of other noninterest income which are in excess of one percent of total revenues for the years ended December 31, 2014 and 2013. The components of other noninterest expenses which are in excess of one percent of total revenues for the years ended December 31, 2014 and 2013 are as follows:
Independent Registered Public Accounting Firm Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Union Bankshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Union Bankshares, Inc. and Subsidiary (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. We have also audited Union Bankshares, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Union Bankshares, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Board of Directors and Stockholders
Union Bankshares, Inc. and Subsidiary
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Union Bankshares, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Union Bankshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in COSO.
Portland, Maine
March 13, 2015
Vermont Registration No. 92-0000278
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer, with the assistance of the Disclosure Control Committee, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2014. Based on this evaluation they concluded that those disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files with the Commission is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required information.
Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f). The Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on the evaluation, the Company's management concluded that the Company's internal control over financial reporting was effective as of December 31, 2014.
Berry Dunn McNeil & Parker, LLC, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Form 10-K, has issued its written attestation report on management’s assessment of the Company’s internal control over financial reporting. This report can be found on page 87.
There have been no changes in the Company's internal controls over financial reporting during the fourth quarter of 2014 that have materially affected, or that are reasonably likely to materially affect, the Company's internal controls over financial reporting. While the Company believes that its existing disclosure controls and procedures have been effective to accomplish these objectives, the Company intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following information from the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders is hereby incorporated by reference:
Listing of the names, ages, principal occupations, business experience and specific qualifications of the directors under the caption “PROPOSAL I: TO ELECT DIRECTORS”.
Listing of the names, ages, titles and business experience of the executive officers and named executives under the caption “EXECUTIVE OFFICERS” and, with respect to the named executive officers who are also directors, under the caption "PROPOSAL I: TO ELECT DIRECTORS".
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 under the caption “SHARE OWNERSHIP INFORMATION - Section 16(a) Beneficial Ownership Reporting Compliance”.
The Company has adopted a Code of Ethics for Senior Financial Officers and the Chief Executive Officer and a Code of Ethics for all directors, officers and employees. A request for either of the Company's Code of Ethics can be made either in writing to
Kristy Adams Alfieri, Union Bankshares, Inc., PO Box 667, Morrisville, VT 05661, by email at ubexec@unionbankvt.com or a copy can be found on the Company's investor relations page accessed via Union Bank's website at www.ublocal.com. The Company will make any legally required disclosures regarding amendments to, or waivers of provisions of its Codes of Ethics in accordance with the rules and regulations of the SEC including posting the codes on the Company's investor relations page accessed via Union Bank's website at www.ublocal.com.
Item 11.
Item 11. Executive Compensation
The following information from the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding compensation of directors under the caption “PROPOSAL I: TO ELECT DIRECTORS - Directors' Compensation”.
Information regarding executive officer and named executive compensation and benefit plans under the captions - “EXECUTIVE COMPENSATION” and "COMPENSATION COMMITTEE REPORT".
Information regarding management interlocks and certain transactions under the caption “PROPOSAL I: TO ELECT DIRECTORS - Compensation Committee Interlocks and Insider Participation”.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following information from the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding the share ownership of management and principal shareholders under the caption “SHARE OWNERSHIP INFORMATION - Share Ownership of Management and Principal Holders”.
Information regarding equity securities authorized for issuance under the Company's equity compensation plans is included in Part II, Item 5 of this report under the caption “Equity Compensation Plans”, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Party Transactions, and Director Independence
The following information from the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding transactions with management and directors under the caption “PROPOSAL I: TO ELECT DIRECTORS - Transactions with Management and Directors”.
Item 14.
Item 14. Principal Accountant Fees and Services
The following information from the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders is hereby incorporated by reference:
Information on fees paid to the Independent Auditors set forth under the caption “PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS - Fees Paid to Independent Auditors”.
Description of Audit Committee pre-approval guidelines set forth under the caption “PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS - Fees Paid to Independent Auditors”.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Documents Filed as Part of this Report:
(1)
The following consolidated financial statements are included:
1)
Consolidated Balance Sheets at December 31, 2014 and 2013
2)
Consolidated Statements of Income for the years ended December 31, 2014 and 2013
3)
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013
4)
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2014 and 2013
5)
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
6)
Notes to the Consolidated Financial Statements
7)
Report of Independent Registered Public Accounting Firm
(2)
The following exhibits are either filed herewith as part of this report, or are incorporated herein by reference:
____________________
*
denotes compensatory plan or agreement
**
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, as of March 13, 2015.
Union Bankshares, Inc.
By:
/s/ David S. Silverman
By:
/s/ Karyn J. Hale
David S. Silverman
Karyn J. Hale
Chief Executive Officer and President
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2015.
Name
Title
/s/ David S. Silverman
Director, Chief Executive Officer and President
David S. Silverman
(Principal Executive Officer)
/s/ Karyn J. Hale
Chief Financial Officer
Karyn J. Hale
(Principal Financial/Accounting Officer)
/s/ Kenneth D. Gibbons
Director, Chairman of the Board
Kenneth D. Gibbons
/s/ Steven J. Bourgeois
Director
Steven J. Bourgeois
/s/ John M. Goodrich
Director
John M. Goodrich
/s/ Timothy W. Sargent
Director
Timothy W. Sargent
/s/ John H. Steel
Director
John H. Steel
/s/ Schuyler W. Sweet
Director
Schuyler W. Sweet
/s/ Cornelius J. Van Dyke
Director
Cornelius J. Van Dyke
EXHIBIT INDEX **
____________________
*
denoted compensatory plan or agreement
**
other than exhibits incorporated by reference to prior filings.
***
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.