NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (together, the Company) as of March 31, 2023, and for the three months ended March 31, 2023 and 2022, have been prepared in conformity with GAAP for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report), except as disclosed in the Summary of Significant Accounting Policies below. The Company's sole subsidiary is Union Bank. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of the information contained herein, have been made. This information should be read in conjunction with the Company’s 2022 Annual Report. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023, or any future interim period.
The Company is a “smaller reporting company” and as permitted under the rules and regulations of the SEC, has elected to provide its consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for a two year, rather than three year, period. The Company has also elected to provide certain other scaled disclosures in this report, as permitted for smaller reporting companies. Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the current year presentation.
In addition to the definitions set forth elsewhere in this report, the acronyms, abbreviations and capitalized terms identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
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ACL: | Allowance for credit losses | HTM: | Held-to-maturity |
AFS: | Available-for-sale | HUD: | U.S. Department of Housing and Urban Development |
ASC: | Accounting Standards Codification | ICS: | Insured Cash Sweeps of the Promontory Interfinancial Network |
ASU: | Accounting Standards Update | MBS: | Mortgage-backed security |
Board: | Board of Directors | MSRs: | Mortgage servicing rights |
bp or bps: | Basis point(s) | OAO: | Other assets owned |
CDARS: | Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network | OCI: | Other comprehensive income (loss) |
Company: | Union Bankshares, Inc. and Subsidiary | OREO: | Other real estate owned |
CECL: | Current Expected Credit Losses | RD: | USDA Rural Development |
DCF: | Discounted cash flow | RSU: | Restricted Stock Unit |
DRIP: | Dividend Reinvestment Plan | SBA: | U.S. Small Business Administration |
FASB: | Financial Accounting Standards Board | SEC: | U.S. Securities and Exchange Commission |
FDIC: | Federal Deposit Insurance Corporation | TDR: | Troubled-debt restructuring |
FHA: | U.S. Federal Housing Administration | Union: | Union Bank, the sole subsidiary of Union Bankshares, Inc |
FHLB: | Federal Home Loan Bank of Boston | USDA: | U.S. Department of Agriculture |
FRB: | Federal Reserve Board | VA: | U.S. Veterans Administration |
FHLMC/Freddie Mac: | Federal Home Loan Mortgage Corporation | 2014 Equity Plan: | 2014 Equity Incentive Plan, as amended |
GAAP: | Generally Accepted Accounting Principles in the United States | 2022 Annual Report: | Annual Report on Form 10-K for the year ended December 31, 2022 |
Summary of Significant Accounting Policies
The disclosures below supplement and update the accounting policies previously disclosed in Note 1. Significant Accounting Policies in the Company’s 2022 Annual Report. The updates reflect the adoption of the FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, more commonly referred to as Current Expected Credit Losses (CECL), effective January 1, 2023.
Union Bankshares, Inc. Page 7
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss methodology under previously applicable GAAP.
Allowance for Credit Losses on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2023, for AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.
A change in the ACL on AFS debt securities is recorded as expense (credit) within the Credit loss expense on the consolidated statement of income. Losses are charged against the ACL when management believes the uncollectibility of an AFS debt security is confirmed based on the above described analysis. As of March 31, 2023 and CECL adoption date of January 1, 2023, there was no ACL carried on the Company's AFS debt securities. Refer to Note 5 of the consolidated financial statements for further discussion.
Allowance for Credit Losses on Loans: The ACL on loans is a significant accounting estimate used in the preparation of the Company's consolidated financial statements. The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. The expected life of the loans is based on the contractual term of the loans adjusted for estimated prepayments. The contractual life is calculated based on the maturity date and excludes expected extensions, renewals, and modifications.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL on loans when they are deemed uncollectible. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.
The Company uses the DCF method to estimate expected credit losses for all loan pools. For each of the loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical benchmark data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level that represents the sum of expected losses to determine the estimated ACL on loans.
The ACL on loans evaluation also considers various qualitative factors, including changes in policy and/or underwriting standards, actual or expected changes in economic trends and conditions, changes in the nature and volume of the portfolio, changes in credit and lending staff/administration, problem loan trends, credit risk concentrations, loan review results, changes in the value of underlying collateral for loans, and changes in the regulatory and business environment.
Union Bankshares, Inc. Page 8
Certain loans are individually evaluated for estimated credit losses, including those greater than $500,000 that are classified as substandard or doubtful and are on nonaccrual or that have other unique characteristics differing from the segment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.
Management may also adjust its assumptions to account for differences between expected and actual losses from period-to-period. The variability of management's assumptions could alter the ACL on loans materially and impact future results of operations and financial condition. The loss estimation models and methods used to determine the ACL are continually refined and enhanced.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The ACL on off-balance sheet credit exposures is a component of Accrued interest and other liabilities on the Company's consolidated balance sheets and represents the estimate of probable credit losses inherent in unfunded commitments to extend credit as of the balance sheet date. Unfunded commitments to extend credit include unused portions of lines of credit, commitments to originate loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the ACL on loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge or credit to Credit loss expense on the consolidated statements of income is made to account for the change in the ACL on off-balance sheet exposures between reporting periods.
Accrued Interest: Upon adoption of CECL on January 1, 2023, the Company elected to present accrued interest receivable balances in Other assets on the consolidated balance sheets and exclude accrued interest from the ACL on loans and AFS debt securities. The Company will continue to write-off accrued interest receivable by reversing interest income when a security or loan is placed in nonaccrual, which is generally when payments on a security or loan are 90 days or more past due.
Union Bankshares, Inc. Page 9
Impact of Adoption:
The following table illustrates the adoption of ASU No. 2013-16 on January 1, 2023. As noted above, there was no ACL on AFS debt securities required to be recorded upon adoption of the ASU.
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| Pre-CECL Adoption | Reclassification to CECL Portfolio Segmentation | Pre-CECL Adoption Portfolio Segmentation | Post-CECL Adoption | Impact of CECL Adoption |
Assets | (Dollars in thousands) |
Loans | | | | | |
Residential real estate | $ | 352,433 | | $ | (352,433) | | $ | — | | $ | — | | $ | — | |
Non-revolving residential real estate | — | | 335,470 | | 335,470 | | 335,470 | | — | |
Revolving residential real estate | — | | 16,963 | | 16,963 | | 16,963 | | — | |
Construction real estate | 96,620 | | (96,620) | | — | | — | | — | |
Commercial construction real estate | — | | 56,501 | | 56,501 | | 56,501 | | — | |
Residential construction real estate | — | | 40,119 | | 40,119 | | 40,119 | | — | |
Commercial real estate | 377,947 | | (377,947) | | — | | | — | |
Non-residential commercial real estate | — | 282,397 | 282,397 | | 282,397 | — | |
Multi-family residential real estate | — | 95,550 | 95,550 | | 95,550 | — | |
Commercial | 40,973 | | — | | 40,973 | | 40,973 | | — | |
Consumer | 2,204 | | — | | 2,204 | | 2,204 | | — | |
Municipal | 87,980 | | — | | 87,980 | | 87,980 | | — | |
Total loans | $ | 958,157 | | $ | — | | $ | 958,157 | | $ | 958,157 | | $ | — | |
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ACL on loans | | | | | |
Residential real estate | $ | 2,417 | | $ | (2,417) | | $ | — | | $ | — | | $ | — | |
Non-revolving residential real estate | — | | 2,294 | | 2,294 | | 2,024 | | (270) | |
Revolving residential real estate | — | | 123 | | 123 | | 148 | | 25 | |
Construction real estate | 1,032 | | (1,032) | | — | | — | | — | |
Commercial construction real estate | — | | 611 | | 611 | | 1,593 | | 982 | |
Residential construction real estate | — | | 421 | | 421 | | 131 | | (290) | |
Commercial real estate | 3,935 | | (3,935) | | — | | — | | — | |
Non-residential commercial real estate | — | 2,931 | 2,931 | | 2,174 | (757) | |
Multi-family residential real estate | — | 1,004 | 1,004 | | 224 | (780) | |
Commercial | 301 | | — | | 301 | | 492 | | 191 | |
Consumer | 10 | | — | | 10 | | 5 | | (5) | |
Municipal | 95 | | — | | 95 | | 53 | | (42) | |
Unallocated | 549 | | — | | 549 | | — | | (549) | |
Total ACL on loans | $ | 8,339 | | $ | — | | $ | 8,339 | | $ | 6,844 | | $ | (1,495) | |
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Liabilities | | | | | |
ACL on off-balance sheet credit exposures | | | $ | — | | $ | 1,458 | | $ | 1,458 | |
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Retained earnings | | | | | |
Decrease in ACL on loans | | | | | $ | 1,495 | |
Increase in ACL on off-balance sheet credit exposures | | | | (1,458) | |
Increase to retained earnings | | | | | $ | 37 | |
Union Bankshares, Inc. Page 10
Note 2. Legal Contingencies
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Note 3. Per Share Information
The following table presents the reconciliation between the calculation of basic EPS and diluted EPS for the three months ended March 31, 2023 and 2022:
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| For the Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
| (Dollars in thousands, except per share data) |
Net income | $ | 2,977 | | $ | 2,482 | | | | |
Weighted average common shares outstanding for basic EPS | 4,509,099 | | 4,494,871 | | | | |
Dilutive effect of stock-based awards (1) | 10,890 | | 11,893 | | | | |
Weighted average common and potential common shares for diluted EPS | 4,519,989 | | 4,506,764 | | | | |
Earnings per common share: | | | | | |
Basic EPS | $ | 0.66 | | $ | 0.55 | | | | |
Diluted EPS | $ | 0.66 | | $ | 0.55 | | | | |
____________________(1)Dilutive effect of stock based awards represents the effect of vesting of restricted stock units. Unvested awards do not have dividend or dividend equivalent rights.
Note 4. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance in the ASU requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as AFS. The ASU became effective for the Company beginning with the 2023 fiscal year. The impact of the ASU on the Company's consolidated financial statements is discussed in Note 1, Summary of Significant Accounting Policies.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024. The transition away from LIBOR is not expected to have a material impact on the Company's consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are also intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in ASU No. 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU No. 2022-02 effective January 1, 2023. The adoption of the provisions contained within ASU No. 2022-02 did not have a material impact on the consolidated financial statements.
Union Bankshares, Inc. Page 11
In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, adoption must be as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of this standard for its tax equity investments and the impact to noninterest income, noninterest expense, and income tax expense within the consolidated financial statements.
Note 5. Investment Securities
Debt securities AFS as of the balance sheet dates consisted of the following:
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March 31, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
| | | | |
| | | | |
U.S. Government-sponsored enterprises | $ | 44,699 | | $ | — | | $ | (4,985) | | $ | 39,714 | |
Agency mortgage-backed | 194,772 | | 177 | | (31,311) | | 163,638 | |
State and political subdivisions | 72,547 | | 404 | | (7,018) | | 65,933 | |
Corporate | 6,347 | | — | | (215) | | 6,132 | |
Total | $ | 318,365 | | $ | 581 | | $ | (43,529) | | $ | 275,417 | |
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December 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in thousands) |
| | | | |
| | | | |
U.S. Government-sponsored enterprises | $ | 45,090 | | $ | — | | $ | (5,845) | | $ | 39,245 | |
Agency mortgage-backed | 198,478 | | 104 | | (34,150) | | 164,432 | |
State and political subdivisions | 47,722 | | 281 | | (7,537) | | 40,466 | |
Corporate | 6,343 | | — | | (219) | | 6,124 | |
Total | $ | 297,633 | | $ | 385 | | $ | (47,751) | | $ | 250,267 | |
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There were no investment securities HTM at March 31, 2023 or December 31, 2022. Investment securities AFS with carrying amounts of $999 thousand and $433 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at March 31, 2023 and December 31, 2022, respectively.
Union Bankshares, Inc. Page 12
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of March 31, 2023 were as follows:
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| Amortized Cost | Fair Value |
Available-for-sale | (Dollars in thousands) |
Due in one year or less | $ | 502 | | $ | 495 | |
Due from one to five years | 24,431 | | 22,354 | |
Due from five to ten years | 25,463 | | 23,036 | |
Due after ten years | 73,197 | | 65,894 | |
| 123,593 | | 111,779 | |
Agency mortgage-backed | 194,772 | | 163,638 | |
Total debt securities available-for-sale | $ | 318,365 | | $ | 275,417 | |
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Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities usually differ from contractual maturities on agency MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and are not included in the contractual maturity categories in the above maturity summary.
Information pertaining to all AFS debt securities with gross unrealized losses, for which an ACL has not been recorded, 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:
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March 31, 2023 | Less Than 12 Months | 12 Months and over | Total |
| Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses |
| | (Dollars in thousands) |
| | | | | | | | | |
U.S. Government- sponsored enterprises | 1 | | $ | 2,970 | | $ | (4) | | 34 | | $ | 36,608 | | $ | (4,981) | | 35 | | $ | 39,578 | | $ | (4,985) | |
Agency mortgage-backed | 4 | | 9,714 | | (375) | | 89 | | 148,189 | | (30,936) | | 93 | | 157,903 | | (31,311) | |
State and political subdivisions | 15 | | 25,647 | | (644) | | 60 | | 32,923 | | (6,374) | | 75 | | 58,570 | | (7,018) | |
Corporate | 7 | | 3,255 | | (92) | | 6 | | 2,877 | | (123) | | 13 | | 6,132 | | (215) | |
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Total | 27 | | $ | 41,586 | | $ | (1,115) | | 189 | | $ | 220,597 | | $ | (42,414) | | 216 | | $ | 262,183 | | $ | (43,529) | |
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December 31, 2022 | Less Than 12 Months | 12 Months and over | Total |
| Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses |
| | (Dollars in thousands) |
| | | | | | | | | |
U.S. Government- sponsored enterprises | 4 | | $ | 8,000 | | $ | (533) | | 31 | | $ | 31,103 | | $ | (5,312) | | 35 | | $ | 39,103 | | $ | (5,845) | |
Agency mortgage-backed | 31 | | 24,306 | | (2,192) | | 62 | | 134,297 | | (31,958) | | 93 | | 158,603 | | (34,150) | |
State and political subdivisions | 39 | | 15,457 | | (1,846) | | 27 | | 18,613 | | (5,691) | | 66 | | 34,070 | | (7,537) | |
Corporate | 10 | | 4,719 | | (124) | | 3 | | 1,405 | | (95) | | 13 | | 6,124 | | (219) | |
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Total | 84 | | $ | 52,482 | | $ | (4,695) | | 123 | | $ | 185,418 | | $ | (43,056) | | 207 | | $ | 237,900 | | $ | (47,751) | |
AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the
Union Bankshares, Inc. Page 13
security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For AFS debt securities, any decline in fair value that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.
No ACL for AFS debt securities was recorded at adoption of ASU No. 2016-13 or at March 31, 2023 or December 31, 2022. Accrued interest receivable on AFS debt securities totaled $1.1 million and $1.0 million at March 31, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses.
There were no sales or calls of securities for the three months ended March 31, 2023. The following table presents the proceeds from sales resulting in gross realized gains and gross realized losses from the disposition of AFS securities for the three months ended March 31, 2022:
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| | For The Three Months Ended March 31, | |
| | 2022 | | |
| | (Dollars in thousands) |
Proceeds from sales | | $ | 6,827 | | | |
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Gross gains | | 76 | | | |
Gross losses | | (50) | | | |
Net gains on sales of investment securities AFS | | $ | 26 | | | |
Note 6. 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 ACL, 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. In general, loans that are 90 days or more past due are placed in nonaccrual, unless there are circumstances that cause management to believe the collection of interest is not 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 payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent. Loans are considered in process of foreclosure when a judgment of foreclosure has been issued by the court.
Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company generally amortizes these amounts over the estimated average life of the related loans.
Effective with the adoption of CECL on January 1, 2023, the Company evaluates the risk characteristics of its loans based on regulatory call report code with segmentation based on the underlying collateral or purpose for certain loan types. Prior to the adoption of CECL, under the incurred loss model, the Company evaluated the risk characteristics of its loans based on the underlying collateral securing the loans.
Union Bankshares, Inc. Page 14
The composition of Net loans as of the balance sheet dates, by regulatory call report code segmentation based on underlying collateral or purpose for certain loan types, was as follows:
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| March 31, 2023 | December 31, 2022 |
| (Dollars in thousands) |
Residential real estate | | |
Non-revolving residential real estate | $ | 341,880 | | $ | 335,470 | |
Revolving residential real estate | 16,299 | | 16,963 | |
Construction real estate | | |
Commercial construction real estate | 60,847 | | 56,501 | |
Residential construction real estate | 46,320 | | 40,119 | |
Commercial real estate | | |
Non-residential commercial real estate | 278,366 | | 282,397 | |
Multi-family residential real estate | 93,953 | | 95,550 | |
Commercial | 41,553 | | 40,973 | |
Consumer | 2,373 | | 2,204 | |
Municipal | 90,818 | | 87,980 | |
Gross loans | 972,409 | | 958,157 | |
ACL losses on loans | (6,934) | | (8,339) | |
Net deferred loan costs | 1,358 | | 1,336 | |
Net loans | $ | 966,833 | | $ | 951,154 | |
Qualifying residential first mortgage loans and certain commercial real estate loans with an aggregate carrying value of $265.8 million and $272.9 million were pledged as collateral for borrowings from the FHLB under a blanket lien at March 31, 2023 and December 31, 2022, respectively.
Accrued interest receivable on loans totaled $3.1 million at March 31, 2023 and December 31, 2022 and is excluded from the estimate of credit losses within Note 7.
Note 7. Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures
Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported under the incurred loss model in accordance with previously applicable GAAP as described in the 2022 Annual Report.
The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. For all loan classes, loan losses are charged against the ACL on loans when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ACL on loans.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.
Risk characteristics relevant to each portfolio segment are as follows:
•Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment.
•Construction real estate - Loans in this segment include residential and commercial construction properties, commercial real estate development loans (while in the construction phase of the projects), land and land development loans.
Union Bankshares, Inc. Page 15
Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment.
•Commercial real estate - Loans in this segment are primarily properties occupied by businesses or income-producing properties. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates which, in turn, could have an effect on the credit quality of this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans.
•Commercial - Loans in this segment are made to businesses and are generally secured by non-real 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 the credit quality of this segment.
•Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment, could have an effect on the credit quality of this segment.
•Municipal - Loans in this segment are made to municipalities located within the Company's service area. Repayment is primarily dependent on taxes or other funds collected by the municipalities. Management considers there to be minimal risk surrounding the credit quality of this segment.
Changes in the ACL on loans, by class of loans, for the three months ended March 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | |
For The Three Months Ended March 31, 2023 | Balance, December 31, 2022 | Impact of Adoption of ASU No. 2016-13 | Charge Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, March 31, 2023 |
| (Dollars in thousands) |
Non-revolving residential real estate | $ | 2,294 | | $ | (270) | | $ | — | | $ | — | | $ | 47 | | $ | 2,071 | |
Revolving residential real estate | 123 | | 25 | | — | | — | | (5) | | 143 | |
Residential real estate | 2,417 | | (245) | | — | | — | | 42 | | 2,214 | |
Commercial construction real estate | 611 | | 982 | | — | | — | | 120 | | 1,713 | |
Residential construction real estate | 421 | | (290) | | — | | — | | 17 | | 148 | |
Construction real estate | 1,032 | | 692 | | — | | — | | 137 | | 1,861 | |
Non-residential commercial real estate | 2,931 | | (757) | | — | | — | | 12 | | 2,186 | |
Multi-family residential real estate | 1,004 | | (780) | | — | | — | | (3) | | 221 | |
Commercial real estate | 3,935 | | (1,537) | | — | | — | | 9 | | 2,407 | |
Commercial | 301 | | 191 | | — | | — | | (124) | | 368 | |
Consumer | 10 | | (5) | | — | | — | | — | | 5 | |
Municipal | 95 | | (42) | | — | | — | | 26 | | 79 | |
Unallocated | 549 | | (549) | | — | | — | | — | | — | |
Total | $ | 8,339 | | $ | (1,495) | | $ | — | | $ | — | | $ | 90 | | $ | 6,934 | |
Union Bankshares, Inc. Page 16
Changes in the ACL on loans, by class of loans under the incurred loss methodology, for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
For The Three Months Ended March 31, 2022 | Balance, December 31, 2021 | Charge Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, March 31, 2022 |
| (Dollars in thousands |
Residential real estate | $ | 2,068 | | $ | — | | $ | — | | $ | 156 | | $ | 2,224 | |
Construction real estate | 837 | | — | | — | | 6 | | 843 | |
Commercial real estate | 4,122 | | — | | — | | (125) | | 3,997 | |
Commercial | 275 | | — | | — | | 14 | | 289 | |
Consumer | 11 | | (1) | | 1 | | (1) | | 10 | |
Municipal | 86 | | — | | — | | 2 | | 88 | |
Unallocated | 937 | | — | | — | | (52) | | 885 | |
Total | $ | 8,336 | | $ | (1) | | $ | 1 | | $ | — | | $ | 8,336 | |
Effective with the adoption of ASU No, 2016-13 on January 1, 2023, the Company's ACL on off-balance sheet credit exposures is recognized as a liability (Accrued interest and other liabilities on the consolidated balance sheet), with adjustments to the ACL recognized in Credit loss expense in the consolidated statement of income. In accordance with previously applicable GAAP, there was no ACL on off-balance sheet credit exposures required during the three months ended March 31, 2022. The Company's activity in the ACL on off-balance sheet credit exposures for the three months ended March 31, 2023 was as follows:
| | | | | |
ACL on Off-Balance Sheet Credit Exposures | (Dollars in thousands) |
Balance, December 31, 2022 | $ | — | |
Impact of adoption of ASU No. 2016-13 | 1,458 | |
Credit loss benefit | (16) | |
Balance, March 31, 2023 | $ | 1,442 | |
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.
4-4.5 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.
Union Bankshares, Inc. Page 17
The following table summarizes the Company's loans by year of origination and by loan ratings applied by management to the Company's loans by class as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total |
Residential Real Estate | (Dollars in thousands) |
Pass | $ | 12,874 | | $ | 118,684 | | $ | 90,284 | | $ | 31,278 | | $ | 9,907 | | $ | 58,333 | | $ | — | | $ | 321,360 | |
Satisfactory/Monitor | — | | 6,866 | | 4,448 | | 2,355 | | 345 | | 5,882 | | — | | 19,896 | |
Substandard | — | | — | | — | | 40 | | — | | 584 | | — | | 624 | |
Non-revolving residential real estate | 12,874 | | 125,550 | | 94,732 | | 33,673 | | 10,252 | | 64,799 | | — | | 341,880 | |
Pass | — | | — | | — | | — | | — | | — | | 14,623 | | 14,623 | |
Satisfactory/Monitor | — | | — | | — | | — | | — | | — | | 1,604 | | 1,604 | |
Substandard | — | | — | | — | | — | | — | | — | | 72 | | 72 | |
Revolving residential real estate | — | | — | | — | | — | | — | | — | | 16,299 | | 16,299 | |
Construction Real Estate | | | | | | | | |
Pass | 435 | | 7,138 | | 6,877 | | 694 | | 1,983 | | 1,147 | | — | | 18,274 | |
Satisfactory/Monitor | 827 | | 18,108 | | 21,321 | | 236 | | 287 | | 1,792 | | — | | 42,571 | |
Substandard | — | | — | | — | | — | | — | | 2 | | — | | 2 | |
Commercial construction real estate | 1,262 | | 25,246 | | 28,198 | | 930 | | 2,270 | | 2,941 | | — | | 60,847 | |
Pass | 869 | | 30,865 | | 5,511 | | — | | — | | 1 | | — | | 37,246 | |
Satisfactory/Monitor | — | | 3,991 | | 4,585 | | 498 | | — | | — | | — | | 9,074 | |
Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
Residential construction real estate | 869 | | 34,856 | | 10,096 | | 498 | | — | | 1 | | — | | 46,320 | |
Commercial Real Estate | | | | | | | | |
Pass | 732 | | 38,378 | | 37,091 | | 18,291 | | 24,673 | | 65,640 | | 16,535 | | 201,340 | |
Satisfactory/Monitor | 4,204 | | 28,577 | | 4,006 | | 6,536 | | 7,120 | | 20,987 | | 1,063 | | 72,493 | |
Substandard | — | | — | | — | | 1,940 | | 53 | | 2,412 | | 128 | | 4,533 | |
Non-residential commercial real estate | 4,936 | | 66,955 | | 41,097 | | 26,767 | | 31,846 | | 89,039 | | 17,726 | | 278,366 | |
Pass | — | | 2,524 | | 2,168 | | 2,163 | | 8,920 | | 35,355 | | — | | 51,130 | |
Satisfactory/Monitor | — | | 6,481 | | 15,943 | | 5,755 | | 10,213 | | 3,042 | | — | | 41,434 | |
Substandard | — | | — | | — | | — | | — | | 1,389 | | — | | 1,389 | |
Multi-family residential real estate | — | | 9,005 | | 18,111 | | 7,918 | | 19,133 | | 39,786 | | — | | 93,953 | |
Pass | 1,091 | | 7,169 | | 4,748 | | 967 | | 3,613 | | 14,730 | | 4,316 | | 36,634 | |
Satisfactory/Monitor | 314 | | 739 | | 874 | | 749 | | 233 | | 620 | | 1,137 | | 4,666 | |
Substandard | — | | — | | — | | — | | — | | — | | 253 | | 253 | |
Commercial | 1,405 | | 7,908 | | 5,622 | | 1,716 | | 3,846 | | 15,350 | | 5,706 | | 41,553 | |
Pass | 566 | | 632 | | 398 | | 192 | | 253 | | 281 | | 21 | | 2,343 | |
Satisfactory/Monitor | 24 | | 4 | | — | | 2 | | — | | — | | — | | 30 | |
Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
Consumer | 590 | | 636 | | 398 | | 194 | | 253 | | 281 | | 21 | | 2,373 | |
Pass | 4,414 | | 73,877 | | 1,993 | | 5,057 | | 196 | | 5,281 | | — | | 90,818 | |
Satisfactory/Monitor | — | | — | | — | | — | | — | | — | | — | | — | |
Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
Municipal | 4,414 | | 73,877 | | 1,993 | | 5,057 | | 196 | | 5,281 | | — | | 90,818 | |
Total Loans | $ | 26,350 | | $ | 344,033 | | $ | 200,247 | | $ | 76,753 | | $ | 67,796 | | $ | 217,478 | | $ | 39,752 | | $ | 972,409 | |
There were no gross charge offs for the three months ended March 31, 2023.
Union Bankshares, Inc. Page 18
The following table summarizes the loan ratings applied by management to the Company's loans by class, under the incurred loss methodology, as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total |
| (Dollars in thousands) |
Pass | $ | 328,885 | | $ | 47,356 | | $ | 258,175 | | $ | 36,338 | | $ | 2,197 | | $ | 87,980 | | $ | 760,931 | |
Satisfactory/Monitor | 21,429 | | 49,206 | | 111,077 | | 4,368 | | 7 | | — | | 186,087 | |
Substandard | 2,119 | | 58 | | 8,695 | | 267 | | — | | — | | 11,139 | |
| | | | | | | |
| | | | | | | |
Total | $ | 352,433 | | $ | 96,620 | | $ | 377,947 | | $ | 40,973 | | $ | 2,204 | | $ | 87,980 | | $ | 958,157 | |
A summary of current and past due loans as of March 31, 2023 follows:
| | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | 30-59 Days | 60-89 Days | 90 Days and Over | Total Past Due | Current | Total |
| (Dollars in thousands) |
Residential real estate | | | | | | |
Non-revolving residential real estate | $ | 1,040 | | $ | 9 | | $ | 237 | | $ | 1,286 | | $ | 340,594 | | $ | 341,880 | |
Revolving residential real estate | — | | — | | 42 | | 42 | | 16,257 | | 16,299 | |
Construction real estate | | | | | | |
Commercial construction real estate | 2 | | — | | — | | 2 | | 60,845 | | 60,847 | |
Residential construction real estate | — | | — | | — | | — | | 46,320 | | 46,320 | |
Commercial real estate | | | | | | |
Non-residential commercial real estate | 153 | | — | | 2,068 | | 2,221 | | 276,145 | | 278,366 | |
Multi-family residential real estate | — | | — | | — | | — | | 93,953 | | 93,953 | |
Commercial | — | | — | | — | | — | | 41,553 | | 41,553 | |
Consumer | — | | — | | — | | — | | 2,373 | | 2,373 | |
Municipal | — | | — | | — | | — | | 90,818 | | 90,818 | |
Total | $ | 1,195 | | $ | 9 | | $ | 2,347 | | $ | 3,551 | | $ | 968,858 | | $ | 972,409 | |
A summary of current and past due loans as of December 31, 2022, under the incurred loss methodology, follows:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | 30-59 Days | 60-89 Days | 90 Days and Over | Total Past Due | Current | Total |
| (Dollars in thousands) |
Residential real estate | $ | 1,724 | | $ | 79 | | $ | 289 | | $ | 2,092 | | $ | 350,341 | | $ | 352,433 | |
Construction real estate | 535 | | — | | — | | 535 | | 96,085 | | 96,620 | |
Commercial real estate | 515 | | 2,087 | | 34 | | 2,636 | | 375,311 | | 377,947 | |
Commercial | 7 | | 160 | | — | | 167 | | 40,806 | | 40,973 | |
Consumer | 7 | | — | | — | | 7 | | 2,197 | | 2,204 | |
Municipal | — | | — | | — | | — | | 87,980 | | 87,980 | |
Total | $ | 2,788 | | $ | 2,326 | | $ | 323 | | $ | 5,437 | | $ | 952,720 | | $ | 958,157 | |
Union Bankshares, Inc. Page 19
A summary of nonaccrual loans as of March 31, 2023 follows:
| | | | | | | | | | | |
March 31, 2023 | Nonaccrual | Nonaccrual With No Allowance for Credit Losses | 90 Days and Over and Accruing |
Residential real estate | (Dollars in thousands) |
Non-revolving residential real estate | $ | 104 | | $ | — | | $ | 133 | |
Revolving residential real estate | — | | — | | 42 | |
Construction real estate | | | |
Commercial construction real estate | 2 | | — | | — | |
Residential construction real estate | — | | — | | — | |
Commercial real estate | | | |
Non-residential commercial real estate | 2,068 | | — | | — | |
Multi-family residential real estate | — | | — | | — | |
Commercial | — | | — | | — | |
Consumer | — | | — | | — | |
Municipal | — | | — | | — | |
Total | $ | 2,174 | | $ | — | | $ | 175 | |
A summary of nonaccrual loans as of December 31, 2022, under the incurred loss methodology, follows:
| | | | | | | | | | | |
December 31, 2022 | Nonaccrual | Nonaccrual With No Allowance for Credit Losses | 90 Days and Over and Accruing |
| (Dollars in thousands) |
Residential real estate | $ | 103 | | $ | — | | $ | 186 | |
Construction real estate | 6 | | 6 | | — | |
Commercial real estate | 2,102 | | — | | — | |
Commercial | — | | — | | — | |
Consumer | — | | — | | — | |
Municipal | — | | — | | — | |
Total | $ | 2,211 | | $ | 6 | | $ | 186 | |
There was one residential real estate loan totaling $40 thousand in process of foreclosure at March 31, 2023 and one residential real estate loan totaling $28 thousand in process of foreclosure at December 31, 2022. Aggregate interest on nonaccrual loans not recognized was $98 thousand as of March 31, 2023 and $59 thousand as of December 31, 2022.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans that are individually evaluated and collateral dependent represent loans that the Company has determined foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the sale of the collateral. For these loans, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan at the measurement date.
The following table presents collateral dependent loans by loan class and collateral type as of the balance sheet dates:
| | | | | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
| Real Estate | | | Real Estate | | |
| (Dollars in thousands) | | |
| | | | | | |
| | | | | | |
Non-residential commercial real estate | $ | 2,068 | | | | $ | 2,068 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
For periods prior to the adoption of CECL, loans were evaluated for impairment and may have been classified as impaired when management believed it was probable that the Company would not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under previously applicable GAAP, a specific reserve amount was allocated to the ACL for individual loans that had 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
Union Bankshares, Inc. Page 20
Company accounted for the change in present value attributable to the passage of time in the ACL. Large groups of smaller balance homogeneous loans were collectively evaluated for impairment. Accordingly, the Company did not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans were subject to a restructuring agreement or had been identified as impaired as part of a larger customer relationship. Based on an evaluation of the Company's historical loss experience on substandard commercial loans, management established the commercial loan threshold for individual impairment evaluation as commercial loan relationships with aggregate balances greater than $500 thousand.
The following table provides information with respect to impaired loans by class of loan as of and for the year ended December 31, 2022, prior to the adoption of CECL:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | For The Year Ended December 31, 2022 |
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | Average Recorded Investment | Interest Income Recognized |
| (Dollars in thousands) |
Residential real estate | $ | 190 | | $ | 200 | | $ | 21 | | | |
| | | | | |
Commercial real estate | 2,068 | | 2,068 | | 9 | | | |
| | | | | |
With an allowance recorded | 2,258 | | 2,268 | | 30 | | | |
| | | | | |
Residential real estate | 1,283 | | 1,787 | | — | | | |
Construction real estate | 58 | | 83 | | — | | | |
Commercial real estate | 5,865 | | 6,403 | | — | | | |
Commercial | 7 | | 7 | | — | | | |
With no allowance recorded | 7,213 | | 8,280 | | — | | | |
| | | | | |
Residential real estate | 1,473 | | 1,987 | | 21 | | 1,570 | | 101 | |
Construction real estate | 58 | | 83 | | — | | 116 | | 27 | |
Commercial real estate | 7,933 | | 8,471 | | 9 | | 5,822 | | 185 | |
Commercial | 7 | | 7 | | — | | 8 | | 1 | |
Total | $ | 9,471 | | $ | 10,548 | | $ | 30 | | $ | 7,516 | | $ | 314 | |
____________________
(1)Does not reflect government guaranties on impaired loans as of December 31, 2022 totaling $423 thousand.
Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing interest rate reductions, term extensions, payment deferrals or principal forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL on loans. The following table summarizes loan modifications to borrowers experiencing financial difficulty by loan class, type of modification and the financial effect of the modifications as of and for the three months ended March 31, 2023:
| | | | | | | | | | | | | |
| Interest Rate Reduction | |
| Amortized Cost Basis | % of Loan Class | Financial Effect | | |
| (Dollars in thousands) | | | |
| | | | | |
| | | | | |
Non-residential commercial real estate | $ | 416 | | 0.15 | % | Reduced weighted average contractual interest rate from 8.75% to 6.85% | | |
Multi-family residential real estate | 449 | | 0.48 | % | Reduced weighted average contractual interest rate from 9.25% to 7.75% | | |
| | | | | |
| | | | | |
Union Bankshares, Inc. Page 21
The following table presents the performance of loans as of March 31, 2023 that have been modified in the last twelve months:
| | | | | | | | | | | |
March 31, 2023 | Current | Past Due 30-89 Days | Past Due 90 Days and Over |
| (Dollars in thousands) |
| | | |
| | | |
Non-residential commercial real estate | $ | 416 | | $ | — | | $ | — | |
Multi-family residential real estate | 449 | | — | | — | |
| | | |
| | | |
| | | |
| | | |
There were no loans to borrowers experiencing financial difficulty that were modified within the previous twelve months that had subsequently defaulted during the three months ended March 31, 2023. Loans are considered defaulted at 90 days past due.
At March 31, 2023, the Company was not committed to lend any additional funds to borrowers experiencing financial difficulty for which the Company modified the terms of the loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension.
Note 8. Stock Based Compensation
Under the Union Bankshares, Inc. 2014 Equity Incentive Plan, as amended in May 2022, a total of 150,000 shares of the Company’s common stock have been reserved for equity awards of incentive stock options, nonqualified stock options, restricted stock and RSUs to eligible officers and (except for awards of incentive stock options) nonemployee directors. Shares available for issuance of awards under the 2014 Equity Plan consist of unissued shares of the Company’s common stock and/or shares held in treasury. As of March 31, 2023, there were outstanding grants of RSUs under the 2014 Equity Plan as noted in the table below.
RSUs. Each outstanding RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The general terms of the awards are described in the Company's 2022 Annual Report. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.
The following table summarizes the RSUs awarded to Company executives in 2021, 2022 and 2023, and the number of such RSUs remaining unvested as of March 31, 2023:
| | | | | | | | | | | |
| Number of RSUs Granted | Weighted Average Grant Date Fair Value | Number of Unvested RSUs |
2021 Award | 17,685 | $ | 26.73 | | 1,745 |
2022 Award | 15,705 | 31.99 | | 7,822 |
2023 Award | 19,282 | 26.90 | | 19,282 |
Total | 52,672 | | 28,849 |
Unrecognized compensation expense related to the unvested RSUs as of March 31, 2023 and 2022 was $700 thousand and $288 thousand, respectively, and $297 thousand as of December 31, 2022.
On May 18, 2022, the Company's board of directors, as a component of total director compensation, granted an aggregate of 1,323 RSUs to the Company's non-employee directors. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The RSUs will vest in May 2023, subject to continued board service through the vesting date, other than in the case of the director's death or disability. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights. Unrecognized director compensation expense related to the unvested RSUs as of March 31, 2023 was $6 thousand.
Note 9. Subordinated Notes
In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. At its option, the Company may redeem the Notes, in whole or in part, beginning with the interest payment date of September 1, 2026 but not generally prior thereto, and on any scheduled interest payment date thereafter. The Notes qualify as Tier 2 capital instruments for the Company under bank holding company regulatory capital guidelines.
Union Bankshares, Inc. Page 22
The Company used the proceeds primarily to provide additional Tier 1 capital support to the Company's wholly-owned subsidiary, Union Bank, to support growth and for other general corporate purposes.
The unamortized issuance costs of the Notes were $287 thousand and $295 thousand at March 31, 2023 and December 31, 2022, respectively. The Company recorded $8 thousand of issuance costs in interest expense for the three months ended March 31, 2023 and 2022. The Notes are presented net of unamortized issuance costs in the consolidated balance sheets.
Note 10. Other Comprehensive Income (Loss)
Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities AFS that have not been recorded through an ACL are not reflected in the consolidated statements of income. The cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the consolidated balance sheets (Accumulated OCI). OCI, along with net income, comprises the Company's total comprehensive income or loss.
As of the balance sheet dates, the components of Accumulated OCI, net of tax, were:
| | | | | | | | |
| March 31, 2023 | December 31, 2022 |
| (Dollars in thousands) |
Net unrealized losses on investment securities AFS | $ | (33,514) | | $ | (37,419) | |
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The following tables disclose the tax effects allocated to each component of OCI for the three months ended March 31:
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| Three Months Ended |
| March 31, 2023 | March 31, 2022 |
| Before-Tax Amount | Tax Expense | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit/Expense | Net-of-Tax Amount |
Investment securities AFS: | (Dollars in thousands) |
Net unrealized holding gains (losses) arising during the period on investment securities AFS | $ | 4,943 | | $ | (1,038) | | $ | 3,905 | | $ | (20,067) | | $ | 4,214 | | $ | (15,853) | |
Reclassification adjustment for net gains on investment securities AFS realized in net income | — | | — | | — | | (26) | | 5 | | (21) | |
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Total other comprehensive income (loss) | $ | 4,943 | | $ | (1,038) | | $ | 3,905 | | $ | (20,093) | | $ | 4,219 | | $ | (15,874) | |
The following table discloses information concerning reclassification adjustments from OCI for the three months ended March 31, 2023 and 2022:
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| Three Months Ended | | |
Reclassification Adjustment Description | March 31, 2023 | March 31, 2022 | | | Affected Line Item in Consolidated Statement of Income |
| (Dollars in thousands) | |
Investment securities AFS: | | | | | |
Net gains on investment securities AFS | — | | (26) | | | | Net gains on sales of investment securities available-for-sale |
Tax expense | — | | 5 | | | | Provision for income taxes |
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Total reclassifications | $ | — | | $ | (21) | | | | Net income |
Note 11. Fair Value Measurement
The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
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The three levels of the fair value hierarchy are:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:
Investment securities AFS: Certain U.S. Treasury notes 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 AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.
Assets measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022, segregated by fair value hierarchy level, are summarized below:
| | | | | | | | | | | | | | |
| Fair Value Measurements |
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
March 31, 2023: | (Dollars in thousands) |
Debt securities AFS: | | | | |
U.S. Government-sponsored enterprises | $ | 39,714 | | $ | 2,615 | | $ | 37,099 | | $ | — | |
Agency mortgage-backed | 163,638 | | — | | 163,638 | | — | |
State and political subdivisions | 65,933 | | — | | 65,933 | | — | |
Corporate | 6,132 | | — | | 6,132 | | — | |
Total debt securities | $ | 275,417 | | $ | 2,615 | | $ | 272,802 | | $ | — | |
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Other investments: | | | | |
Mutual funds | $ | 1,350 | | $ | 1,350 | | $ | — | | $ | — | |
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December 31, 2022: | | | | |
Debt securities AFS: | | | | |
U.S. Government-sponsored enterprises | $ | 39,245 | | $ | 2,551 | | $ | 36,694 | | $ | — | |
Agency mortgage-backed | 164,432 | | — | | 164,432 | | — | |
State and political subdivisions | 40,466 | | — | | 40,466 | | — | |
Corporate | 6,124 | | — | | 6,124 | | — | |
Total debt securities | $ | 250,267 | | $ | 2,551 | | $ | 247,716 | | $ | — | |
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Other investments: | | | | |
Mutual funds | $ | 1,264 | | $ | 1,264 | | $ | — | | $ | — | |
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There were no transfers in or out of Levels 1 and 2 during the three months ended March 31, 2023 or the year ended December 31, 2022, nor were there any Level 3 assets at any time during these periods. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as collateral dependent individually evaluated loans, MSRs and OREO, were not considered material at March 31, 2023 or December 31, 2022. The Company has
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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.
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
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| March 31, 2023 |
| Fair Value Measurements |
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) |
Financial assets | | | | | |
Cash and cash equivalents | $ | 21,819 | | $ | 21,819 | | $ | 21,819 | | $ | — | | $ | — | |
Interest bearing deposits in banks | 16,428 | | 16,428 | | — | | 16,428 | | — | |
Investment securities | 276,767 | | 276,767 | | 3,965 | | 272,802 | | — | |
Loans held for sale | 2,849 | | 2,893 | | — | | 2,893 | | — | |
Loans, net | | | | | |
Residential real estate | 356,465 | | 322,577 | | — | | — | | 322,577 | |
Construction real estate | 105,456 | | 103,544 | | — | | — | | 103,544 | |
Commercial real estate | 370,432 | | 353,857 | | — | | — | | 353,857 | |
Commercial | 41,243 | | 38,632 | | — | | — | | 38,632 | |
Consumer | 2,371 | | 2,321 | | — | | — | | 2,321 | |
Municipal | 90,866 | | 89,267 | | — | | — | | 89,267 | |
Accrued interest receivable | 4,178 | | 4,178 | | — | | 1,065 | | 3,113 | |
Nonmarketable equity securities | 2,681 | | N/A | N/A | N/A | N/A |
Financial liabilities | | | | | |
Deposits | | | | | |
Noninterest bearing | $ | 262,488 | | $ | 262,488 | | $ | 262,488 | | $ | — | | $ | — | |
Interest bearing | 709,401 | | 709,401 | | 709,401 | | — | | — | |
Time | 254,089 | | 250,567 | | — | | 250,567 | | — | |
Borrowed funds | | | | | |
Short-term | 45,000 | | 44,970 | | — | | 44,970 | | — | |
Long-term | 106 | | 106 | | — | | 106 | | — | |
Subordinated notes | 16,213 | | 16,506 | | — | | 16,506 | | — | |
Accrued interest payable | 396 | | 396 | | — | | 396 | | — | |
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| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fair Value Measurements |
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) |
Financial assets | | | | | |
Cash and cash equivalents | $ | 37,885 | | $ | 37,885 | | $ | 37,885 | | $ | — | | $ | — | |
Interest bearing deposits in banks | 16,428 | | 16,428 | | — | | 16,428 | | — | |
Investment securities | 251,531 | | 251,531 | | 3,815 | | 247,716 | | — | |
Loans held for sale | 1,178 | | 1,202 | | — | | 1,202 | | — | |
Loans, net | | | | | |
Residential real estate | 350,507 | | 319,066 | | — | | — | | 319,066 | |
Construction real estate | 95,723 | | 94,231 | | — | | — | | 94,231 | |
Commercial real estate | 373,990 | | 358,897 | | — | | — | | 358,897 | |
Commercial | 40,729 | | 38,588 | | — | | — | | 38,588 | |
Consumer | 2,197 | | 2,161 | | — | | — | | 2,161 | |
Municipal | 88,008 | | 86,306 | | — | | — | | 86,306 | |
Accrued interest receivable | 4,163 | | 4,163 | | — | | 1,014 | | 3,149 | |
Nonmarketable equity securities | 2,816 | | N/A | N/A | N/A | N/A |
Financial liabilities | | | | | |
Deposits | | | | | |
Noninterest bearing | $ | 286,145 | | $ | 286,145 | | $ | 286,145 | | $ | — | | $ | — | |
Interest bearing | 762,722 | | 762,722 | | 762,722 | | — | | — | |
Time | 153,045 | | 149,166 | | — | | 149,166 | | — | |
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Short-term borrowed funds | 50,000 | | 49,997 | | — | | 49,997 | | — | |
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Subordinated notes | 16,205 | | 14,037 | | — | | 14,037 | | — | |
Accrued interest payable | 354 | | 354 | | — | | 354 | | — | |
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. Accrued interest receivable and nonmarketable equity securities are included in Other assets in the consolidated balance sheets.
Note 12. Subsequent Events
Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to March 31, 2023 have been evaluated as to their potential impact to the consolidated financial statements.
On April 19, 2023, the Company declared a regular quarterly cash dividend of $0.36 per share, payable May 4, 2023, to stockholders of record on April 29, 2023.
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