EDGAR 10-K Filing

Company CIK: 706863
Filing Year: 2021
Filename: 706863_10-K_2021_0000706863-21-000047.json

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ITEM 1. BUSINESS
Item 1. 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 53 of this Annual Report.
General: Union Bankshares, Inc. (“Company”) is a one-bank holding company whose sole subsidiary is Union Bank (“Union”). It was incorporated in the State of Vermont in 1982 to serve as a holding company for Union Bank. 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 upon completion of the holding company reorganization in 1982. 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 18 banking offices, two loan centers, and several ATMs covering northern Vermont and northern 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, including occupancy and equipment 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, loan servicing income, 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, changes in corporate tax rates, 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, 2020, Union employed 193 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:
•Commercial loans for business purposes to business owners and investors for plant and equipment, working capital, real estate renovation and other sound business purposes;
•Commercial real estate loans on income producing properties, including commercial construction loans;
•SBA guaranteed loans;
•Residential construction and mortgage loans;
•Online cash management services, including account reconciliation, credit card depository, Automated Clearing House origination, wire transfers and night depository;
•Merchant credit card services for the deposit and immediate credit of sales drafts;
•Remote deposit capture for merchants;
•Online mortgage applications;
•Business checking accounts;
•Standby letters of credit, bank checks or money orders, and safe deposit boxes;
•ATM services;
•Debit MasterCard and ATM cards;
•Telephone, internet, and mobile banking services, including bill pay;
•Home improvement loans and overdraft checking privileges against preauthorized lines of credit;
•Retail depository services including personal checking accounts, checking accounts with interest, savings accounts, money market accounts, certificates of deposit, IRA/SEP/KEOGH accounts and Health Savings accounts; and
•Asset management and trust services to individuals and organizations.
Consistent with the objective of the Company to serve the financial needs of individuals, businesses and others within its market areas, the Company seeks to concentrate its assets in loans. For the year ended December 31, 2020, the Company's rate of average loans to average deposits was 88.6%. 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 and 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, ICS or through other deposit brokers, and borrowings from the FHLB, correspondent banks or the Federal Reserve discount window.
Competition: The Company and Union face substantial competition for loans and deposits in northern Vermont and 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. Although the Company exprerienced significant deposit growth during 2020 due to the deposit by customers of PPP loan proceeds and COVID-19 related government assistance payments, in previous years 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 have made 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
The following discussion addresses elements of the regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily for the protection of depositors, the Federal Deposit Insurance Fund (“DIF”), and the banking system as a whole, rather than the protection of shareholders or non-depository creditors of a bank holding company such as the Company.
As a bank holding company, the Company is subject to regulation, supervision and examination by the FRB under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a state chartered commercial bank, Union Bank is subject to the regulation and supervision by the FDIC and the DFR.
The following is a summary of certain aspects of various statutes and regulations applicable to the Company and its subsidiary. This summary is not a comprehensive analysis of all applicable laws, and you should refer to the applicable statutes and regulations for more information. Changes in applicable laws or regulations, and in their interpretation and application by regulatory agencies and other governmental authorities, cannot be predicted, but may have a material effect on our business, financial condition or results of operations.
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 the NASDAQ Global Select Market 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, enacted in 2010, comprehensively reformed the regulation of financial institutions and the products and services they offer. Among other things, the Dodd-Frank Act:
•granted the FRB increased supervisory authority and codified the source of strength doctrine,
•provided new capital standards applicable to the Company,
•modified the scope and costs associated with deposit insurance coverage,
•permitted well capitalized and well managed banks to acquire other banks in any state subject to certain deposit concentration limits and other conditions,
•permitted the payment of interest on business demand deposit accounts,
•established the CFPB and transferred rulemaking authority to it under various consumer protection laws relating to financial products and services,
•established new minimum mortgage underwriting standards for residential mortgages,
•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
•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 the Dodd-Frank Act is focused principally on changes to the financial regulatory system, it includes several corporate governance, disclosure and compensation provisions applicable to public companies. Those provisions include:
•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. The Company's last Say-on-Pay vote was held at the 2019 annual meeting with shareholders approving the Company's executive compensation program by a wide margin, with the next Say-on-Pay vote scheduled to occur at the 2022 annual meeting,
•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,
•Provisions calling for the SEC to adopt expanded disclosure requirements for annual proxy statements 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,
•Provisions requiring the adoption or revision of certain other corporate policies, such as compensation "clawback" policies providing for the recovery of executive compensation in the event of a financial restatement, and
•A provision clarifying the SEC's authority to adopt rules requiring issuers to include in their proxy statements solicitations for shareholder nominations for directors.
Although disclosure requirements for public companies increased under the Dodd-Frank Act, the Company is a “smaller reporting company” and as permitted under the rules and regulations of the SEC, has elected to provide certain scaled disclosures in this Annual Report and in its annual meeting proxy statement, including scaled disclosures regarding executive compensation.
COVID-19 Related Legislation and Other Initiatives
The CARES Act and other Legislation. In response to the COVID-19 pandemic, the CARES Act was signed into law in March, 2020 to provide national emergency economic relief measures. More recently, in March 2021 the American Rescue Plan was signed into law, providing additional COVID-19 relief measures. Many of the federal government's COVID-19 related programs are dependent upon the direct involvement of U.S financial institutions and have been implemented through rules and
guidance adopted by federal departments and agencies, including the U.S Department of Treasury, the Federal Reserves, and other federal banking agencies. As the COVID-19 pandemic evolves, additional regulatory guidance continues to be issued. The Company will continue to assess the impact of the CARES Act and other legislation and regulatory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other expenses during the COVID-19 pandemic. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the "Consolidated Appropriations Act" that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "HHSB Act"). Among other things, the HHSB Act renewed the PPP, allocating $284.45 Billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for "Shuttered venue operators." The Company will continue to assess the impact of these guidance related to the CARES Act and the COVID-19 pandemic.
Guidance on Non-TDR Loan Modifications due to COVID-17. On March 22, 2020, a statement was issued by our banking regulators and titled the "Interagency Statement on Loans Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak, declared by the President of the United States under the National Emergencies Act terminates. Section 541 of the "Consolidated Appropriation Act" extends this relief to the earlier of January 1, 2022 to 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators' views on consumer protection consideration. The Company will continue to assess the impact of these guidance related to the CARES Act and the COVID-19 pandemic.
Bank Holding Company Regulation
As a bank holding company, the Company is subject to regulation, supervision and examination by the FRB, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
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. Financial holding companies may engage in certain nonbanking activities not permitted for bank holding companies. 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
Union is subject to regulation, supervision, and examination by the FDIC and the DFR. Pursuant to the Dodd-Frank Act, the FRB may directly examine the subsidiary of the Company. The enforcement powers available to the federal banking regulators include, among other things, the ability to issue cease and desist or removal orders; to terminate insurance of deposits; to assess civil money penalties; to issue directives to increase capital; to place the Bank into receivership; and to initiate injunctive actions against banking organizations and institution-affiliated parties. The DFR possesses similar enforcement powers under Vermont law. There are no such enforcement actions currently in place against Union.
Deposit Insurance. As a member of the FDIC, the deposits of Union are 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, 2020, the Bank's total FDIC insurance assessment expense was $443 thousand.
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 primarily through its membership with the Promontory Interfinancial Network in CDARS and ICS, respectively. Additionally, Union has established an account with one of its approved investment brokers to accept brokered deposits as an approved liquidity source. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 allows the Company to hold reciprocal deposits up to 20 percent of total liabilities without those deposits being treated as brokered for regulatory purposes.
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. Union has received an "Outstanding" rating from its most recent CRA compliance examination by the FDIC.
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. Prior to March 26, 2020, all banks, including the Company's subsidiary, were required to maintain vault cash or a noninterest bearing reserve balance under FRB regulations. The required reserve is based on a specified ratio of reservable liabilities. The reserve requirement was effectively eliminated effective March 26, 2020, when the FRB reduced the required reserve ratio to zero percent.
Capital Adequacy and Safety and Soundness
Capital Adequacy Guidelines. The FDIC and other federal bank regulatory agencies adopted a final rule for leverage and risk-based capital requirements and the method for calculating risk-weighted assets which is consistent with agreements that were reached by the Basel Committee on Banking Supervision under the so-called Basel III framework and certain provisions of the Dodd-Frank Act that became effective on January 1, 2015. Among other things, the rule established a common equity Tier 1 capital ratio with a minimum requirement of 4.5%, increased the minimum Tier 1 risk based ratio from 4.0% to 6.0%, and assigned 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 required accumulated OCI be included for purposes of calculating regulatory capital unless a one time opt-out election was made during the first quarter of 2015. The Company and Union both made the election. 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. Following a multi-year phase in period, the 2.5% capital conservation buffer requirement became fully effective for the Company and Union on January 1, 2019.
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 directed the federal banking regulators to adopt rules providing for a simplified regulatory capital framework for qualifying community banking organizations. In September 2019, the banking regulators finalized a rule that introduced the community bank leverage ratio (CBLR) framework as an optional simplified measure of capital adequacy for qualifying institutions. A banking organization with a Tier I leverage ratio greater than 9.0%, less than $10 billion in average consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities may opt into the CBLR framework and will be deemed "well capitalized" and will not be required to report or calculate risk-based capital. A qualifying community bank was able to utilize the CBLR framework beginning with the March 31, 2020 regulatory capital calculation. A community banking organization that does not meet the requirements for use of the simplified CBLR framework will continue to calculate its regulatory capital ratios under existing guidelines. A provision of the CARES Act temporarily lowers the minimum Tier 1 leverage ratio to 8.0% for a banking organization to elect to use the CBLR framework, with a phased increase back to 9.0% by the end of 2021. Please refer to Note 22 (Regulatory Capital Requirements) to the Company's audited consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for the regulatory capital ratios for the Company and Union as of December 31, 2020 and December 31, 2019.
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.
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, Common Equity 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 2020, a “well capitalized” institution must have a Tier 1 capital ratio of at least 8.0%, a Common Equity Tier 1 ratio of 6.5%, 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.
At December 31, 2020, Union's Tier I and Total Risk Based Capital Ratios were 12.5% and 13.8% respectively, and its Leverage Capital Ratio was 7.3%, and it is considered well capitalized under applicable regulatory guidelines in effect as of such date.
Safety and Soundness Standards. 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 a requirement to provide 90 days prior notice to customers and regulatory authorities before closing any branch. Union is 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 that 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. Further, the Basel III capital standards limit a financial institution's ability to pay dividends if it does not maintain a required capital conservation buffer.
Consumer Protection Regulation
The Company and Union are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices, including, but not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, the 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 under the various federal consumer protection laws. The CFPB is charged with enforcing consumer protection laws against banks with assets in excess of $10 billion, while community banks continue to be subject to the enforcement authority of 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. Additionally, the CFPB adopted rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a residential mortgage loan under the Truth in Lending Act (Regulation Z) and the Real Estate Settlement Procedures Act (Regulation X), also known as the TILA and RESPA Integrated Disclosures, or TRID. TRID established new disclosure timing requirements and applies to most closed-end consumer credit transactions secured by real property.
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 consumer customers with a disclosure that explains our policies and procedures regarding the disclosure of such nonpublic personal information. We must also provide an updated notice if we change our information-sharing practices. 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 amended 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 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 information must be compiled each calendar year on a Loan/Application Register, and submitted to the FFIEC 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. In accordance with the Dodd-Frank Act, the CFPB adopted new regulations effective for covered loan applications with action taken dates on or after January 1, 2018. The new rules expand coverage to include the majority of loan applications secured by a dwelling, including many applications for open-end loans. Additionally, the CFPB has increased the number of data points that must be collected and reported upon, to include information regarding geographical data, loan terms, underwriting practices and loan pricing.
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 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 applicable 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 have resulted 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, the May 2011 acquisition of three New Hampshire branches, the opening of a full service branch in Lincoln in 2014, and the opening of a loan production office in North Conway in 2018.
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. Effective May 11, 2018, banks are required to comply with enhanced customer due diligence regulations requiring collection of information on beneficial owners and control persons of legal entity customers.
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 amended 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 applications under these acts for mergers, acquisitions, and certain other expansion activities.
SOX Act. This far reaching federal legislation, enacted in 2002, 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 comprehensive 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
2019 and will do the same for 2020. 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, and 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”). These reports, proxy statements, and other documents are available to the public on the internet website maintained by 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 this 2020 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 2021 Annual Meeting are available at www.materials.proxyvote.com/905400 no later than the date on which they are mailed to shareholders.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in the Company involves risk, some of which, including market, liquidity, credit, operational, legal, compliance, reputational and strategic risks, could be substantial and is inherent in our business. The material risks and uncertainties that management believes affect the Company are described below. Any of the following risks could affect the Company’s financial condition and results of operations and could be material and/or adverse in nature. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Credit and Interest Rate Risks
Our loans are concentrated in certain areas of Vermont and New Hampshire and adverse conditions in those markets could adversely affect our operations.
We are exposed to real estate and economic factors throughout Vermont and New Hampshire. Further, because a substantial portion of our loan portfolio is secured by real estate in Vermont and New Hampshire, the value of the associated collateral is subject to real estate market conditions in those states and in the northern New England region more generally. Adverse economic, political and business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these areas experience adverse economic, political or business conditions, or significant natural hazards, we would likely experience higher rates of loss and delinquency on our loan portfolio than if the portfolio were more geographically diverse.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. On a quarterly basis the allowance for loan loss is presented to Union's Board of Directors for discussion, review, and approval. We rely on our loan reviews, our experience, and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover the losses we could experience, resulting in additions to our allowance and a related charge to our income. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, which may have a material adverse effect on our financial condition or results of operations.
Our commercial, commercial real estate and construction loan portfolio may expose us to increased credit risks.
At December 31, 2020, approximately 56% of our loan portfolio was comprised of commercial and commercial real estate loans. In general, commercial and commercial real estate loans have historically posed greater credit risks than owner occupied residential mortgage loans. The repayment of commercial real estate loans depends on the business and financial condition of borrowers. Economic events and changes in government regulations, which we and our borrowers cannot control or reliably predict, could have an adverse impact on the cash flows generated by the businesses and properties securing our commercial and commercial real estate loans and on the values of the collateral securing those loans. Repayment of commercial loans depends substantially on the borrowers’ underlying business, financial condition and cash flows. Commercial loans are
generally collateralized by equipment, inventory, accounts receivable and other fixed assets. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed.
Changes in interest rates and interest rate volatility may reduce our profitability.
Our consolidated earnings and financial condition are primarily dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. Net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce our net interest income as the difference between interest income and interest expense decreases. As a result, we have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, there can be no assurance that a change in interest rates will not negatively impact our results of operations or financial condition. Because market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. A prolonged low interest rate environment could also have a negative impact on our results of operations due to continued asset yield compression. Asset yield compression could outpace funding cost relief as deposit costs are nearing implied floor levels while assets continue to adjust downward in the low rate environment. If the yield on average earning assets decreases at a rate greater than the yields on interest-bearing liabilities, net interest income will be negatively affected.
Our cost of funds for banking operations may increase as a result of loss of deposits or a change in deposit mix.
Deposits are a lower cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and net income.
Wholesale funding sources may prove insufficient to replace deposits at maturity and support our operations and future growth.
We and our bank subsidiary must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include FHLB advances, liquidity lines of credit with correspondent banks, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
Prepayments of loans may negatively impact our business.
Generally, our customers may prepay the principal amount of their outstanding loans at any time. The speed at which such prepayments occur, as well as the size of such prepayments, are within our customers’ discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered at these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owners or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
Risks Relating to Regulation of the Industry
We operate in a highly regulated environment and may be adversely affected by changes in laws, regulations and monetary policy.
We are subject to regulation and supervision by the FRB and Union Bank is subject to regulation and supervision by the FDIC and the DFR. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and sound financial condition, branching activities, permissible types, amounts and terms of loans and investments, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments. The FDIC and the DFR possess the power to issue cease and desist orders against banks subject to their jurisdiction to prevent or remedy unsafe or unsound banking practices or violations of law, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we may conduct business and obtain financing.
We are also affected by the monetary policies of the FRB. Changes in monetary or legislative policies may affect the interest rates we must offer to attract deposits and the interest rates we must charge on our loans, as well as the manner in which we offer deposits and make loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including Union Bank.
The laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. It is impossible to predict the competitive impact that any such changes would have on the banking and financial services industry in general or on our business in particular. Such changes may, among other things, increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of government intervention in the financial services sector. Other changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, or results of operations.
Additional requirements imposed by the Dodd-Frank Act could adversely affect us.
The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. Among other things, the Dodd-Frank Act established the CFPB as an independent bureau of the FRB. The CFPB has the authority to prescribe rules for all depository institutions governing the provision of consumer financial products and services, which may result in rules and regulations that reduce the profitability of such products and services or impose greater costs and restrictions on us and our subsidiaries. The Dodd-Frank Act also established new minimum mortgage underwriting standards for residential mortgages, and the regulatory agencies have focused on the examination and supervision of mortgage lending and servicing activities.
The CFPB’s qualified mortgage rule, or “QM Rule,” became effective on January 10, 2014. The QM Rule requires mortgage lenders, prior to originating most residential mortgage loans, to make a determination of a borrower’s ability to repay the loan and establishes protections from liability under this requirement for so-called “qualified mortgages” that meet certain heightened criteria. If a mortgage lender does not appropriately establish a borrower’s ability to repay the loan, the borrower may be able to assert against the originator of the loan or any subsequent transferee, as a defense to foreclosure by way of recoupment or setoff, a violation of the ability-to-repay requirement. Loans that meet the definition of “qualified mortgage” will be presumed to have complied with the ability-to-repay standard. Although amendments to the QM Rule adopted by the CFPB in March 2021 will make it less challenging for a loan to meet the definition, the QM Rule and related ability-to-repay requirements and similar rules could nevertheless still limit Union's ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and time-consuming to make these loans, which could limit the Bank’s growth or profitability.
Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under the Dodd-Frank Act, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, or results of operations; may require us to invest significant management attention and resources to evaluate and make any changes required by the legislation and related regulations; and may make it more difficult for us to attract and retain qualified executive officers and employees.
We may become subject to more stringent capital requirements.
The federal banking agencies issued a joint final rule, or the “Final Capital Rule,” that implemented the Basel III capital standards and established the minimum capital levels required under the Dodd-Frank Act which became effective as of January 1, 2015. The Final Capital Rule established a minimum common equity Tier I capital ratio of 6.5% of risk-weighted assets for a
“well capitalized” institution and increased the minimum Tier I capital ratio for a “well capitalized” institution from 6.0% to 8.0%. Additionally, subject to a transition period, the Final Capital Rule requires an institution to maintain a 2.5% common equity Tier I capital conservation buffer over the 6.5% minimum risk-based capital requirement for “adequately capitalized” institutions, or face restrictions on the ability to pay dividends or discretionary bonuses, and engage in share repurchases. The Final Capital Rule increased the required capital for certain categories of assets, including high-volatility construction real estate loans and certain exposures related to securitizations; however, the Final Capital Rule retained the current capital treatment of residential mortgages. Under the Final Capital Rule, we made a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. If we had not made this election, unrealized gains and losses would be included in the calculation of our regulatory capital. 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.
As mandated by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, the federal banking regulators in 2019 adopted a simplified capital framework known as the community bank leverage ratio (CBLR) framework for qualifying community banks which became effective with the March 31, 2020 regulatory capital calculation, the Company did not qualify to utilize the CBLR framework as of December 31, 2020. To the extent that the Company does not qualify to utilize the CBLR framework in the future, further increases in applicable capital requirements may adversely affect our ability to pay dividends, or require us to reduce business levels or raise capital, including in ways that may adversely affect our results of operations or financial condition.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. For example, we are subject to regulations issued by the Office of Foreign Assets Control, or “OFAC,” that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries and certain other persons or entities whose interest in property is blocked by OFAC-administered sanctions. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation and could restrict the ability of institutional investment managers to invest in our securities.
We face significant legal risks, both from regulatory investigations and proceedings and from private actions brought against us.
From time to time we are named as a defendant or are otherwise involved in various legal proceedings. There is no assurance that litigation with private parties will not increase in the future. Future actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. As a participant in the financial services industry, we are exposed to a high level of litigation related to our businesses and operations. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation could have a material adverse effect on our financial condition and results of operation.
Our businesses and operations are also subject to increasing regulatory oversight and scrutiny, which could lead to regulatory investigations or enforcement actions. These and other initiatives from federal and state officials could result in judgments, settlements, fines or penalties, or cause us to be required to restructure our operations and activities, all of which could lead to reputational damage, or higher operational costs, thereby reducing our revenue.
Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the FASB changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations. For example, the FASB’s current financial instruments project will significantly change the way the Company's loan loss provision is determined, from an incurred loss model to an expected loss model.
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If the assumptions or estimates underlying our financial statements are incorrect, we may experience material losses.
Risks Relating to the Company's Stock
If we do not maintain net income growth, the market price of our common stock could be adversely affected.
Our return on stockholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on our continued growth and expansion. Our growth strategy has two principal components: internal growth and external growth. Our ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets we serve. Our ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is an important component of our external growth strategy. In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.
We are a holding company and depend on Union Bank for dividends, distributions and other payments.
We are a legal entity that is separate and distinct from Union Bank. Our revenue (on a parent company only basis) is derived primarily from interest and dividends paid to us by Union Bank. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors (including depositors, in the case of Union Bank), except to the extent that certain claims of Union in a creditor capacity may be recognized.
Our stockholders may not receive dividends on our common stock.
Holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically declared cash dividends on our common stock, we are not required to do so and our board of directors may reduce or eliminate our common stock dividend in the future. The FRB has the authority to prohibit a bank holding company, such as us, from paying dividends if it deems such payment to be an unsafe or unsound practice. The FDIC has the authority to use its enforcement powers to prohibit Union from paying dividends to us if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Further, our ability to pay dividends would be restricted if we do not maintain a required capital conservation buffer under applicable regulatory capital rules. A reduction or elimination of dividends could adversely affect the market price of our common stock.
We may need to raise additional capital in the future and such capital may not be available when needed.
As a bank holding company, we are required by regulatory authorities to maintain adequate levels of capital to support our operations. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms or at all. Our inability to raise sufficient additional capital on acceptable terms when needed could subject us to certain activity restrictions or to a variety of enforcement remedies available to the regulatory authorities, including limitations on our ability to pay dividends or pursue acquisitions, the issuance by regulatory authorities of a capital directive to increase capital and the termination of deposit insurance by the FDIC.
Market volatility may impact our business and the value of our common stock.
Our business performance and the trading price of shares of our common stock may be affected by many factors affecting financial institutions, including volatility in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and the value of debt and mortgage-backed and other securities that we hold in our investment portfolio. Government action and legislation may also impact us and the value of our common stock. We cannot predict what impact, if any, market volatility will have on our business or share price and for these and other reasons our shares of common stock may trade at a price lower than that at which they were purchased.
Certain provisions of our articles of incorporation may have an anti-takeover effect.
Provisions of our certificate of incorporation and bylaws and regulations and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
Operational Risks
A failure in or breach of our operational systems, information systems, or infrastructure, or those of our third party vendors and other service providers, may result in financial losses, loss of customers, or damage to our reputation.
We rely heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including internet connections, and network access. These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. These third parties with which we do business or that facilitate our business activities, including exchanges, clearing firms, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints. Although we have safeguards and business continuity plans in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and our customers, resulting in financial losses, loss of customers, or damage to our reputation.
An interruption or breach in security of our information systems or those related to merchants and third party vendors, including as a result of cyber attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, or result in financial losses.
Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. These cybersecurity threats and attacks may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including payment card numbers and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. As customer, public, legislative and regulatory expectations and requirements regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, payment card numbers, bank account information or other personal information or to introduce viruses to our customers’ computers. These communications may appear to be legitimate messages sent by the Bank or other businesses, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program. Despite our efforts to mitigate these threats through product improvements, use of encryption and authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and will continue to evolve.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely
mitigate this risk. A security breach or other significant disruption could: 1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; 2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; 3) result in a violation of applicable privacy, data breach and other laws, subjecting the Bank to additional regulatory scrutiny and exposing the Bank to civil litigation, governmental fines and possible financial liability; 4) require significant management attention and resources to remedy the damages that result; or 5) harm our reputation or cause a decrease in the number of customers that choose to do business with us or reduce the level of business that our customers do with us. The occurrence of any such failures, disruptions or security breaches could have a negative impact on our results of operations, financial condition, and cash flows as well as damage our brand and reputation.
Although we maintain an insurance policy covering certain cybersecurity risks which we believe provides appropriate coverage for a financial institution of our size and business and technology profile, we cannot provide any assurance that such policy would be sufficient to cover all financial losses or damages we might suffer in the event that we or one of our third party vendors experiences a system failure or suffers a system intrusion or other cyberattack.
We may suffer losses as a result of operational risk or technical system failures.
The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our internal processes, systems, relationships with third parties and the associates and executives in our day-to-day and ongoing operations. Operational risk also encompasses the failure to implement strategic objectives in a successful, timely and cost-effective manner. Failure to properly manage operational risk subjects us to risks of loss that may vary in size, scale and scope, including loss of customers, operational or technical failures, unlawful tampering with our technical systems, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of key individuals to perform properly. Although we seek to mitigate operational risk through a system of internal controls, losses from operational risk could take the form of explicit charges, increased operational costs, harm to our reputation or foregone opportunities.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant business disruption, delay and expense.
Strategic Risks
Competition in the local banking industry may impair our ability to attract and retain customers at current levels.
Competition in the markets in which we operate may limit our ability to attract and retain customers. In particular, we compete for loans, deposits and other financial products and services with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, trust companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally as well as nationally. Additionally, banks and other financial institutions with larger capitalization, as well as financial intermediaries not subject to bank regulatory restrictions, have larger lending limits and are able to serve the credit and investment needs of larger customers. There is also increased competition by out-of-market competitors through the Internet. If we are unable to attract and retain customers, we may be unable to continue our loan growth and our results of operations and financial condition may otherwise be negatively impacted.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes.
We must adapt to information technology changes in the financial services industry, which could present operational issues, require significant capital spending, or impact our reputation.
The financial services industry is constantly undergoing technological changes, with frequent introductions of new technology-driven products and services. We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for
convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully implement and integrate future system enhancements could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
Economic Risks
Our financial condition and results of operations have been adversely affected, and may continue to be adversely affected, by general market and economic conditions.
We have been, and continue to be, impacted by general business and economic conditions in the United States and, to a lesser extent, abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. Deterioration or continued weakness in any of these conditions could result in increases in loan delinquencies and nonperforming assets, decreases in loan collateral values, the value of our investment portfolio and demand for our products and services.
General Risks
We may be unable to attract and retain key personnel.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and we may not be able to hire or retain the key personnel that we depend upon for success. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of the loss of their skills, knowledge of the markets in which we operate and years of industry experience, and because of the difficulty of promptly finding qualified replacement personnel.
We are subject to reputational risk.
We are dependent on our reputation within our market area, as a trusted and responsible financial service provider, for all aspects of our relationships with customers, employees, vendors, third-party service providers, and others, with whom we conduct business or potential future business. Our actual or perceived failure to (a) identify and address potential conflicts of interest, ethical issues, money-laundering, or privacy issues; (b) meet legal and regulatory requirements applicable to the Bank and to the Company; (c) maintain the privacy of customer and accompanying personal information; or (d) maintain adequate record keeping; and (e) identify the legal, reputational, credit, liquidity and market risks inherent in our products, could give rise to reputational risk that could harm our business prospects and adversely affect our financial condition and results of operations. If we fail to address any of these issues in an appropriate manner, we could be subject to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged.
We may be required to write down goodwill and other identifiable intangible assets.
When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. At December 31, 2020, our goodwill and other identifiable intangible assets were approximately $2.5 million. Under current accounting standards, if we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets to fair value. We conduct an annual review, or more frequently if events or circumstances warrant such, to determine whether goodwill is impaired. We recently completed our goodwill impairment analysis as of December 31, 2020 and concluded goodwill was not impaired. We conduct a review of our other intangible assets for impairment should events or circumstances warrant such. We cannot provide assurance that we will not be required to take an impairment charge in the future. Any impairment charge would have a negative effect on our shareholders’ equity and financial results and may cause a decline in our stock price.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity, including in our Vermont and New Hampshire markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act and the American Rescue Plan Act of 2021, as well as the recent rollout of vaccinations for the virus, that may help reduce the spread of the outbreak and related economic impact, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
•credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, health care and senior care, retail, and restaurant industries, but across other industries as well;
•declines in collateral values;
•negative pressure on our net interest income due to FRB monetary policy in response to the pandemic;
•third party disruptions, including outages in network providers and other vendors;
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
•operational failures due to changes in normal business practices necessitated by the outbreak and related governmental actions.
The lingering impacts of these factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition, which includes capital, liquidity, and asset valuations, even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, limiting customer access to banking facilities, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None

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ITEM 2. PROPERTIES
Item 2. Properties
As of December 31, 2020, Union operated 14 community banking locations in Lamoille, Caledonia, Chittenden, Franklin and Washington counties of Vermont, four in Grafton and Coos counties of New Hampshire and loan centers in Williston, Vermont and North Conway, New Hampshire. In addition as of such date, Union also operated several ATMs in northern Vermont and New Hampshire. Union owns, free of encumbrances, 16 of its branch locations and its headquarters and leases two branch locations, the NH loan center location, the land the Williston branch and loan center was built on and certain ATM premises
from third parties under terms and conditions considered by management to be favorable to Union. 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, 2020, is set forth in Notes 8 and 9 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report.

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ITEM 3. LEGAL PROCEEDINGS
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 would not have a material effect on the consolidated financial position or results of operations of the Company and its subsidiary.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Trading Market for Common Stock
The common stock of the Company is traded on the NASDAQ Global Select Market under the trading symbol "UNB."
On February 28, 2021, there were 4,480,547 shares of common stock outstanding held by 503 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.”
Repurchase of Common Stock
There was no repurchase of the Company's equity securities during the quarter ended December 31, 2020.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding equity securities authorized for issuance under the Company's equity compensation plans is included in Part III, Item 12 of this Annual Report under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, and is incorporated herein by reference.
Five Year Performance Graph: The following graph illustrates the annual percentage change in the cumulative total shareholder return of the Company's common stock for the period December 31, 2015 through December 31, 2020. For purposes of comparison, the graph illustrates comparable shareholder returns of the SNL Bank $500M-$1B Index and the NASDAQ Composite Index. The graph assumes a $100 investment on December 31, 2015 in each case and measures the amount by which the market value, assuming reinvestment of dividends, has changed during the five year period ended December 31, 2020.
Period Ended
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Union Bankshares, Inc. 100.00 168.82 201.88 186.41 146.33 109.56
NASDAQ Composite 100.00 108.87 141.33 137.12 187.44 271.64
SNL Bank $500M-$1B 100.00 135.02 164.73 159.00 204.78 176.93
The performance graph and related information furnished under Part II, Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or “filed” with the SEC, nor subject to Exchange Act Regulations 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act. Such information shall not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act except to the extent that the Company specifically incorporates it by reference into such filing.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 (effective September 10, 2018) and the repeal of Item 301 of Regulation S-K adopted in SEC Releases 33-10890 and 34-90459.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2020 and 2019, and its consolidated results of operations for the years then ended. The Company is considered a "smaller reporting company" under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows, and changes in stockholders' equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems appropriate.
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 contained in Item 8, Part II of this Annual Report. 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. Management is not aware of the occurrence of any events after December 31, 2020 which would materially affect the information presented.
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 53 of this Annual Report.
NON-GAAP FINANCIAL MEASURES
The following discussion contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. The Company’s non-GAAP measures may not be comparable to similar non-GAAP information which may be presented by other companies. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results and condition for any particular year. A reconciliation of non-GAAP financial measures to GAAP measures is provided below.
The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's 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 is 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 debt 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 issuer-specific factors or (2) market-related factors, such as interest rates or equity market declines. Declines in the fair value of debt securities below their costs that are deemed by management to be OTT are 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 security is realized, subsequent gains in the value of the security may not be recognized in income until the security is sold.
Mortgage servicing rights
MSRs associated with loans originated and sold, where servicing is retained, are required to be capitalized and initially recorded at fair value on the acquisition date and are subsequently accounted for using the “amortization method”. Mortgage servicing rights are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. The value of capitalized servicing rights represents the estimated present value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the mortgage servicing rights is periodically reviewed for impairment based on a determination of estimated fair value compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a reduction of non-interest income. Subsequent improvement (if any) in the estimated fair value of impaired mortgage servicing rights is reflected in a positive valuation adjustment and is recognized in non-interest income up to (but not in excess of) the amount of the prior impairment. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayments. Factors that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. The Company analyzes and accounts for the value of its servicing rights with the assistance of a third party consultant.
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.
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 investment securities. 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” and ”Investment Activities”. Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information available when such estimates, assumptions and judgments are made and can be impacted by future events and events outside the control of the Company. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
OVERVIEW
By most measures, 2020 has been a difficult year for our nation and the world at large. The low interest rate environment has continued to pressure the Company's net interest spread, but also has precipitated a surge in residential refinances and increased the already strong real estate purchase market fueled by increased migration into the market areas served by the Company. Despite the economic disruption caused by the pandemic, many segments of the economy have survived allowing us to be cautiously optimistic for the future. The financial results for the Company are better than expected given the pandemic, which could not have been accomplished without a strong team of dedicated professionals.
On March 3, 2020, the Federal Open Market Committee (FOMC) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. Recent FOMC meetings indicate this low target range will remain in effect until members of the FOMC are confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals, which may not be until late in 2021 or beyond. Prolonged reductions in interest rates and other effects of the COVID-19 outbreak may continue to adversely affect the Company’s net interest income.
The Company's consolidated net income was $12.8 million, or $2.86 per share, for 2020 compared to $10.6 million, or $2.38 per share for 2019. The increase in net income reflects the combined effect of increases in net interest income of $1.3 million or 4.4%, and in noninterest income of $5.5 million, or 53.1%, partially offset by increases in noninterest expenses of $2.7 million, or 9.9%, the provision for loan losses of $1.4 million, or 183.9%, and the provision for income taxes of $589 thousand, or 32.2%.
Union originated $69.8 million in PPP loans as of December 31, 2020 to assist customers during the economic disruption caused by COVID-19. PPP loans in the amount of $3.6 million had been forgiven as of December 31, 2020. Interest income and origination fees from PPP loans were $481 thousand and $953 thousand, respectively, for the year ended December 31, 2020.
Additionally, sales of qualifying residential loans to the secondary market for the year ended December 31, 2020 were $263.1 million resulting in gain on sales of $8.2 million, compared to sales of $158.0 million and gain on sales of $2.9 million for the year ended December 31, 2019. The increased volume of loan sales reflects an increase in residential mortgage financing activity likely due to the drop in interest rates.
As of December 31, 2020, the Company had total consolidated assets of $1.1 billion, an increase of 25.3% compared to December 31, 2019. Net loans and loans held for sale increased $122.3 million or 18.2%, to $794.9 million, or 72.7% of total assets, at December 31, 2020, compared to $672.6 million, or 77.1% of total assets, at December 31, 2019.
The Company's primary source of funding, customer deposits, increased $250.3 million, or 33.6%, to reach $994.3 million at December 31, 2020. The increase was attributable to proceeds from PPP loans deposited into customer accounts at Union, customers' receipt of government stimulus payments, and the general lack of spending due to the economic disruption caused by COVID-19.
The Company's total capital increased from $71.8 million at December 31, 2019 to $80.9 million at December 31, 2020. This increase reflects net income of $12.8 million for 2020, less regular cash dividends paid of $5.7 million, and a $1.7 million increase in accumulated OCI resulting primarily from increases in the fair market value of the Company's investment portfolio. (See Capital Resources on page 44.)
RESULTS OF OPERATIONS
For the year ended December 31, 2020, net income was $12.8 million compared to $10.6 million for the year ended December 31, 2019. The primary components of these results, which include net interest income, provision for loan losses, noninterest income, noninterest expenses, and provision for income taxes, are discussed below:
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. Net interest income is affected by various factors, including but not limited to: changes in interest rates, loan and deposit pricing strategies, the volume and mix of interest earning assets and interest bearing liabilities, and the level of nonperforming assets. The net interest margin is calculated as net interest income on a fully tax equivalent basis as a percentage of average interest earning assets.
Net interest income was $31.6 million on a fully tax equivalent basis for 2020, compared to $30.3 million for 2019, an increase of $1.3 million, or 4.4%. The net interest spread decreased 45 bps to 3.40% for the year ended December 31, 2020, from 3.85% for the year ended December 31, 2019, reflecting the net effect of the 18 bps decrease in the average rate paid on interest bearing liabilities and the 63 bps decrease in the average yield earned on interest earning assets between periods. The net
interest margin decreased 47 bps to 3.57% for the year ended December 31, 2020 compared to 4.04% for the year ended December 31, 2019.
The average yield on average earning assets was 4.14% for the year ended December 31, 2020 compared to 4.77% for the year ended December 31, 2019, a decrease of 63 bps despite an increase in average earning assets of $135.9 million. Interest income on investment securities decreased $169 thousand year over year due to a decrease of 38 bps in the average yield even though an increase in average balances of $6.4 million occurred between the comparison periods. Interest income on loans increased $1.2 million between comparison periods due to an increase in the average volume of loans outstanding of $96.8 million, despite a decrease in the average yield of 50 bps. The current interest rate environment and competition for quality loans continues to put downward pressure on loan yields. The decrease in the average yield between the comparison periods also reflects the lower yield on the PPP loans originated during the second quarter of 2020. The average balance of PPP loans for the year ended December 31, 2020 was $48.3 million with an average yield of 2.97%, which takes into account the interest income and origination fees earned on the loans in addition to the mandated 1.0% annual interest rate.
The average cost of funding, which is tied primarily to our customer deposits, decreased 18 bps to 0.74% for the year ended December 31, 2020, compared to 0.92% for the year ended December 31, 2019. Interest expense decreased $453 thousand to $5.1 million for the year ended December 31, 2020 compared to $5.6 million for the year ended December 31, 2019. The decrease in interest expense was primarily due to lower rates paid on interest bearing liabilities, partially offset by an increase in average balances of $87.6 million between periods. Management expects further reduction in the average cost of funds in future periods due to lowering of interest rates on time deposit and savings account products, and has no plans at this time to offer any time deposit specials. Interest expense on borrowed funds decreased $504 thousand year over year due to a decrease in the average balance of borrowed funds of $15.3 million, or 38.8%, and a decrease in the average rate paid of 68 bps, to 1.52%, for the year ended December 31, 2020. See the following tables for details.
The following table shows for the periods indicated the total amount of tax equivalent interest income from average interest earning assets, the related average tax equivalent yields, the tax equivalent interest expense associated with average interest bearing liabilities, the related tax equivalent average rates paid, and the resulting tax equivalent net interest spread and margin:
Years Ended December 31,
2020 2019 2018
Average
Balance Interest
Earned/
Paid Average
Yield/
Rate Average
Balance Interest
Earned/
Paid Average
Yield/
Rate Average
Balance Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits $ 47,020 $ 92 0.19 % $ 14,808 $ 190 1.26 % $ 12,274 $ 104 0.84 %
Interest bearing deposits in banks 8,919 162 1.81 % 7,813 195 2.49 % 9,805 207 2.11 %
Investment securities (1), (2) 87,352 1,964 2.39 % 81,002 2,133 2.77 % 71,123 1,852 2.80 %
Loans, net (1), (3) 753,779 34,435 4.62 % 656,937 33,209 5.12 % 615,739 29,883 4.91 %
Nonmarketable equity securities 1,795 97 5.40 % 2,433 143 5.89 % 2,840 150 5.27 %
Total interest earning assets (1) 898,865 36,750 4.14 % 762,993 35,870 4.77 % 711,781 32,196 4.59 %
Cash and due from banks 5,265 5,027 4,264
Premises and equipment 20,501 19,177 15,043
Other assets 35,910 29,208 23,319
Total assets $ 960,541 $ 816,405 $ 754,407
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts $ 197,698 $ 705 0.36 % $ 161,789 $ 487 0.30 % $ 147,553 $ 233 0.16 %
Savings/money market accounts 330,085 2,191 0.66 % 262,105 1,937 0.74 % 257,717 1,423 0.55 %
Time deposits 144,856 1,880 1.30 % 145,935 2,301 1.58 % 116,717 1,215 1.04 %
Borrowed funds 24,015 371 1.52 % 39,272 875 2.20 % 41,625 691 1.64 %
Total interest bearing liabilities 696,654 5,147 0.74 % 609,101 5,600 0.92 % 563,612 3,562 0.63 %
Noninterest bearing deposits 177,792 130,322 121,902
Other liabilities 10,188 8,874 8,943
Total liabilities 884,634 748,297 694,457
Stockholders' equity 75,907 68,108 59,950
Total liabilities and stockholders’ equity $ 960,541 $ 816,405 $ 754,407
Net interest income $ 31,603 $ 30,270 $ 28,634
Net interest spread (1) 3.40 % 3.85 % 3.96 %
Net interest margin (1) 3.57 % 4.04 % 4.09 %
____________________
(1)Average yields reported on a tax equivalent basis using a marginal federal corporate income tax rate of 21%.
(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 $2.6 million, and $2.4 million for the years ended December 31, 2020 and 2019, respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal federal corporate income tax rate of 21% for the years ended December 31, 2020 and 2019:
Years Ended December 31,
2020 2019
(Dollars in thousands)
Net interest income as presented $ 31,603 $ 30,270
Effect of tax-exempt interest
Investment securities 121 109
Loans 381 405
Net interest income, tax equivalent $ 32,105 $ 30,784
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.
Year Ended December 31, 2020
Compared to Year Ended
December 31, 2019
Increase/(Decrease) Due to Change In Year Ended December 31, 2019
Compared to Year Ended
December 31, 2018
Increase/(Decrease) Due to Change In
Volume Rate Net Volume Rate Net
(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits $ 163 $ (261) $ (98) $ 25 $ 61 $ 86
Interest bearing deposits in banks 25 (58) (33) (46) 34 (12)
Investment securities 165 (334) (169) 290 (9) 281
Loans, net 4,676 (3,450) 1,226 2,036 1,290 3,326
Nonmarketable equity securities (36) (10) (46) (23) 16 (7)
Total interest earning assets $ 4,993 $ (4,113) $ 880 $ 2,282 $ 1,392 $ 3,674
Interest bearing liabilities:
Interest bearing checking accounts $ 119 $ 99 $ 218 $ 25 $ 229 $ 254
Savings/money market accounts 465 (211) 254 24 490 514
Time deposits (17) (404) (421) 355 731 1,086
Borrowed funds (281) (223) (504) (39) 223 184
Total interest bearing liabilities $ 286 $ (739) $ (453) $ 365 $ 1,673 $ 2,038
Net change in net interest income $ 4,707 $ (3,374) $ 1,333 $ 1,917 $ (281) $ 1,636
Provision for Loan Losses. The provision for loan losses was $2.2 million and $775 thousand for the years ended December 31, 2020 and 2019, respectively. The increase in the provision resulted from management's adjustment to the economic qualitative factors utilized to estimate the allowance for loan losses due to the economic disruption related to the COVID-19 pandemic impacting Union's borrowers. The provision for 2020 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 prevailing economic conditions. For further details, see FINANCIAL CONDITION Asset Quality and Allowance for Loan Losses below.
Noninterest Income. The following table sets forth the components of noninterest income for the years ended December 31, 2020 and 2019 :
For The Years Ended December 31,
2020 2019 $ Variance % Variance
(Dollars in thousands)
Trust income $ 707 $ 692 $ 15 2.2
Service fees 5,924 6,108 (184) (3.0)
Net gains on sales of investment securities AFS 11 25 (14) (56.0)
Net gains on sales of loans held for sale 8,168 2,895 5,273 182.1
Net gain on other investments 240 132 108 81.8
Income from mortgage servicing rights, net 542 50 492 984.0
Income from Company-owned life insurance 318 281 37 13.2
Other income 93 272 (179) (65.8)
Total noninterest income $ 16,003 $ 10,455 $ 5,548 53.1
The significant changes in noninterest income for the year ended December 31, 2020 compared to the year ended December 31, 2019 are described below:
•Service fees. The Company's service fee income has been reduced as customers have managed account balances due to receipt of government stimulus money and general lack of spending opportunities due to the economic disruption caused by COVID-19. Service fees decreased $184 thousand for the year ended December 31, 2020 primarily due to reductions in service charge and overdraft fee income on customer accounts of $316 thousand and a decrease of $48 thousand in other fee income. These decreases were partially offset by an increase in loan servicing fees of $93 thousand due to the increase in our serviced loan portfolio from $579.9 million at December 31, 2019 to $629.5 million at December 31, 2020, or an increase of 8.5%, and an increase of $86 thousand in ATM network income.
•Net gains on sales of loans held for sale. Continuing the Company's strategy to mitigate long-term interest rate risk, residential and commercial loans totaling $263.2 million were sold to the secondary market during 2020, versus residential and commercial loan sales of $158.3 million during 2019. The increase in net gains on sales of real estate loans reflects both an increase in the volume of sold loans and higher premiums on those sales.
•Net gain on other investments. Participants in the 2020 Amended and Restated Executive Nonqualified Excess Plan elect to defer receipt of current compensation from the Company or its subsidiary and select designated reference investments consisting of investment funds. The performance of those funds, over which the Company has no control, resulted in net gains of $240 thousand for the year ended December 31, 2020 compared to net gains of $132 thousand for the year ended December 31, 2019.
•Income from mortgage servicing. Income from mortgage servicing rights is derived from servicing rights acquired through the sale of loans where servicing is retained. Capitalized servicing rights are initially recorded at fair value and amortized in proportion to, and over the period of, the future estimate of servicing the underlying mortgages. The increase in the volume of sales of residential loans as discussed above resulted in increased income from mortgage servicing rights for 2020 compared to 2019.
•Income from Company-owned life insurance. The Company purchased $3.0 million of company owned life insurance covering select officers of Union during the third quarter of 2019, resulting in increased income for the year ended December 31, 2020.
•Other income. Other income for 2019 included $131 thousand in prepayment penalties from the early payoff of commercial loans and $50 thousand related to oil and gas income, which were not repeated in 2020.
Noninterest Expense. The following table sets forth the components of noninterest expenses for the years ended December 31, 2020 and 2019:
For The Years Ended December 31,
2020 2019 $ Variance % Variance
(Dollars in thousands)
Salaries and wages $ 13,220 $ 11,821 $ 1,399 11.8
Employee benefits 4,580 4,210 370 8.8
Occupancy expense, net 1,805 1,806 (1) (0.1)
Equipment expense 3,057 2,475 582 23.5
Other loan related expenses 346 263 83 31.6
Vermont franchise tax 759 678 81 11.9
FDIC insurance assessment 443 271 172 63.5
Professional fees 774 701 73 10.4
Supplies and printing 339 397 (58) (14.6)
Donations 272 190 82 43.2
Training and development 136 187 (51) (27.3)
Travel and entertainment 93 192 (99) (51.6)
Other expenses 4,358 4,281 77 1.8
Total noninterest expense $ 30,182 $ 27,472 $ 2,710 9.9
The significant changes in noninterest expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 are described below:
•Salaries and wages. The $1.4 million increase in salaries and wages was due to increases in commissions earned by mortgage loan originators, annual salary adjustments, and an increase in accrual amounts for the annual incentive plan payments to select officers of Union. Additionally, a one-time holiday gift was paid to all full and part-time employees totaling $192 thousand and a one-time payout of unused employee earned time off of $142 thousand occurred during 2020. Salaries and wages are reduced by deferred loan origination costs at the time of origination. Deferred loan origination costs reduced salaries and wages by $430 thousand at December 31, 2020 compared to $109 thousand at December 31, 2019. The increased deferred loan origination costs in 2020 was primarily attributable to the origination of PPP loans.
•Employee benefits. Employee benefit expense increased $370 thousand due to increases of $100 thousand in payroll taxes, $153 thousand in 401k plan contributions and $128 thousand in employee benefits related to the Company's deferred compensation plans, partially offset by a decrease in the cost of group health insurance of $12 thousand.
•Occupancy expense, net. In May 2020, the Company moved forward with the planned closure of two full service branches. These closures were not a result of COVID-19. One of the branch closures was a leased property with respect to which a loss on the disposal of leasehold improvements of $34 thousand was recorded during 2020. Property tax expense increased $21 thousand primarily due to the two new full service branches that opened in 2019. These increases were offset by reductions of $37 thousand in lease expense and $21 thousand in utilities.
•Equipment expense. Equipment expense increased by $582 thousand primarily due to increases of $333 thousand in depreciation expense, $172 thousand in software license and maintenance costs, $96 thousand in equipment rental and service contracts, partially offset by a decrease of $19 thousand in equipment repairs and operation expense.
•Other loan related expenses. Other loan related expenses consist of other costs incurred for originating and servicing loans such as insurance and property tax tracking expenses, credit report fees and other real estate closing costs. These expenses increased in 2020 compared to 2019 due to the increase in loan volumes throughout the Company's market areas.
•Vermont franchise taxes. The Vermont franchise tax is determined based on a quarterly tax rate applied to the Company's average balance of Vermont customer deposit balances. The tax rate remained unchanged throughout 2020 and 2019; however, the average balances in Vermont deposit accounts increased for the year ended December 31, 2020, resulting in an increase in expense.
•FDIC insurance assessment. Union was awarded a one-time assessment credit of $179 thousand by the FDIC to offset the deposit insurance assessment, which was utilized during 2019.
•Professional fees. During 2020, additional consultants were engaged to assist with employment searches and other advisory services that were not utilized in 2019, resulting in a $73 thousand increase between periods.
•Supplies and printing. Supplies and printing expense decreased $58 thousand primarily due to the economic disruption caused by COVID-19. Branch lobbies were closed to customers for approximately three months during 2020 and several employees were working remotely, resulting in less demand for operational supplies.
•Donations. As part of the Company's commitment to continually help to enhance the economic vitality and social welfare of our communities, charitable donations for 2020 increased $82 thousand compared to 2019.
•Training and development. Due to the economic disruption caused by COVID-19, training and development expenses have decreased during 2020 as the majority of in-person training opportunities were replaced with virtual options offered at lower costs.
•Travel and entertainment. Travel and entertainment expenses decreased primarily due to the economic disruption caused by COVID-19. The Company suspended business travel and intercompany travel between locations for the majority of the second quarter of 2020 and thereafter limited employee travel only for essential purposes.
•Other expenses. Other expenses increased $77 thousand during 2020 primarily due to prepayment penalties on the early payoff of FHLB advances of $66 thousand and increases of $40 thousand in electronic banking expenses and $29 thousand in new ICS account fees. These increases were partially offset by decreases of $34 thousand in postage expense and $21 thousand in losses on deposit accounts. The remaining variances between the comparison periods was comprised of changes in various other expense categories.
Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the current and prior periods presented. The Company's net provision for income taxes was $2.4 million for 2020 and $1.8 million for 2019. The Company’s effective federal corporate income tax rate was 15.5% and 14.4% for 2020 and 2019, respectively.
Amortization expense related to limited partnership investments included as a component of tax expense amounted to $935 thousand and $745 thousand for the years ended December 31, 2020 and 2019, respectively. These investments provide tax benefits, including tax credits. Low income housing tax credits with respect to limited partnership investments are also included as a component of income tax expense and amounted to $987 thousand and $803 thousand for the years ended December 31, 2020 and 2019, respectively. See Note 11 to the Company's consolidated financial statements.
FINANCIAL CONDITION
At December 31, 2020, the Company had total consolidated assets of $1.1 billion, including gross loans and loans held for sale (total loans) of $803.4 million, deposits of $994.3 million and stockholders' equity of $80.9 million. The Company’s total assets increased $220.6 million, or 25.3%, from $872.9 million at December 31, 2019.
Net loans and loans held for sale increased $122.3 million, or 18.2%, to $794.9 million, or 72.7% of total assets, at December 31, 2020, compared to $672.6 million, or 77.1% of total assets, at December 31, 2019. (See Loan Portfolio below.)
Total deposits increased $250.3 million, or 33.6% to $994.3 million at December 31, 2020, from $744.0 million at December 31, 2019. There were increases in interest bearing deposits of $178.4 million, or 38.9%, and noninterest bearing deposits of $78.8 million, or 57.8%, which were partially offset by a decrease in time deposits of $7.0 million, or 4.7%. (See average balances and rates in the Yields Earned and Rates Paid table on page 29.)
Total borrowed funds decreased $40.0 million, or 84.8%, from $47.2 million at December 31, 2019 to $7.2 million at December 31, 2020. (See Borrowings on page 42.)
Total stockholders’ equity increased $9.0 million, or 12.6%, from $71.8 million at December 31, 2019 to $80.9 million at December 31, 2020. (See Capital Resources on page 44.)
Loan Portfolio. The Company's gross loan portfolio (including loans held for sale) increased $125.7 million, or 18.5%, to $803.4 million, representing 73.5% of assets at December 31, 2020, from $677.7 million, representing 77.6% of assets at December 31, 2019. The Company's loans consist primarily of adjustable-rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. Real estate secured loans represented $593.4 million, or 73.9% of total loans, at December 31, 2020 compared to $559.1 million, or 82.5% of total loans, at December 31, 2019. The Company had 679 PPP loans totaling $66.2 million classified as commercial loans as of December 31, 2020. Changes in the composition of the Company's loan portfolio from December 31, 2019 (see table below) resulted from the increase in the commercial portfolio related to PPP loan originations, an increase in the volume of residential loans originated for sale to the secondary
market, a decrease in the outstanding balance of construction loans and an increase in the municipal portfolio. There was no material change in the Company's lending programs or terms during 2020, other than its participation in the PPP.
The composition of the Company's loan portfolio at year-end for each of the last five years was as follows:
2020 2019 2018 2017 2016
$ % $ % $ % $ % $ %
(Dollars in thousands)
Residential real estate $ 183,166 22.8 $ 192,125 28.4 $ 187,320 29.0 $ 178,999 30.1 $ 172,727 31.9
Construction real estate 57,417 7.1 69,617 10.3 55,322 8.6 42,935 7.2 34,189 6.3
Commercial real estate 320,627 39.9 289,883 42.8 276,500 42.8 254,291 42.8 249,063 46.0
Commercial 108,861 13.6 47,699 7.0 47,228 7.3 50,719 8.5 41,999 7.8
Consumer 2,601 0.3 3,562 0.5 3,241 0.5 3,894 0.7 3,962 0.7
Municipal 98,497 12.3 67,358 9.9 72,850 11.3 55,777 9.4 31,350 5.8
Loans held for sale 32,188 4.0 7,442 1.1 2,899 0.5 7,947 1.3 7,803 1.5
Total loans $ 803,357 100.0 $ 677,686 100.0 $ 645,360 100.0 $ 594,562 100.0 $ 541,093 100.0
The Company originates and sells qualified residential mortgage loans in various secondary market avenues, with a majority of sales made to the FHLMC/Freddie Mac, generally with servicing rights retained. At December 31, 2020, the Company serviced an $819.6 million residential real estate mortgage portfolio, of which $32.2 million was held for sale and approximately $604.2 million was serviced for unaffiliated third parties. This compares to a residential real estate mortgage servicing portfolio of $754.7 million at December 31, 2019, of which $7.4 million was held for sale and approximately $555.1 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 $263.1 million of qualified residential real estate loans originated during 2020 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of $158.0 million during 2019. Residential mortgage loan origination activity was strong during 2020, reflecting the low interest rate environment resulting from the FOMC target rate reductions beginning in March in response to the COVID-19 emergency. The Company originates and sells FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire locations without needing prior HUD underwriting approval. The Company sells FHA, VA and RD loans as originated with servicing released. Some of the government backed loans qualify for zero down payments without geographic or income restrictions. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities served, including low and moderate income borrowers, while the government guaranty mitigates the Company's exposure to credit risk.
The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs which provide a government agency guaranty for a portion of the loan amount. There was $70.2 million and $4.0 million guaranteed under these various programs at December 31, 2020 and 2019, respectively, on aggregate balances of $71.5 million and $5.1 million in subject loans for the same time periods. The December 31, 2020 amounts include the $66.2 million of PPP loans that are guaranteed 100% by SBA. The Company occasionally sells the guaranteed portion of a loan to other financial concerns and retains servicing rights, which generates fee income. There were $131 thousand and $315 thousand in commercial real estate or commercial loans sold during 2020 and 2019, respectively. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur.
The Company serviced $25.2 million and $24.8 million of commercial and commercial real estate loans for unaffiliated third parties as of December 31, 2020 and 2019, respectively. This includes $23.7 million and $23.1 million of commercial or commercial real estate loans the Company had participated out to other financial institutions at December 31, 2020 and 2019, respectively. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
As of December 31, 2020, total loans serviced had grown to $1.4 billion, which includes total loans on the balance sheet of $803.4 million as well as total loans sold with servicing retained of $629.5 million, compared to total loans serviced of $1.3 billion as of December 31, 2019.
The Company capitalizes MSRs 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 MSRs on loans sold with servicing retained was $2.3 million and $1.7 million as of December 31, 2020 and 2019, respectively, 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.
Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $210.0 million and $207.7 million were pledged as collateral for borrowings from the FHLB under a blanket lien at December 31, 2020 and 2019, respectively.
The following table breaks down by classification the contractual maturities of the gross loans held in portfolio and for sale as of December 31, 2020:
Within 1
Year 2-5
Years Over 5
Years Total
(Dollars in thousands)
Fixed rate
Residential real estate $ 674 $ 1,643 $ 131,874 $ 134,191
Construction real estate 31,134 59 2,772 33,965
Commercial real estate 4,171 912 23,519 28,602
Commercial 1,953 77,052 19,531 98,536
Consumer 1,356 1,101 124 2,581
Municipal 81,834 8,460 8,203 98,497
Total fixed rate 121,122 89,227 186,023 396,372
Variable rate
Residential real estate 1,103 796 79,264 81,163
Construction real estate 2,130 2,779 18,543 23,452
Commercial real estate 6,642 3,268 282,115 292,025
Commercial 3,269 1,485 5,571 10,325
Consumer 20 - - 20
Total variable rate 13,164 8,328 385,493 406,985
$ 134,286 $ 97,555 $ 571,516 $ 803,357
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, the President 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 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 to 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.
As a result of the current economic environment caused by the COVID-19 pandemic, numerous industries and individuals have and will continue to experience adverse impacts which may affect our borrowers’ ability to make their loan payments on a timely basis. The Company’s management is focused on the impact that the COVID-19 economic disruption is having on its borrowers and closely monitors industry and geographic concentrations, specifically the impact on the region's tourist and restaurant industries. As a result of the economic disruption including government mandated business shutdowns and curtailed re-openings, the nationwide unemployment rate was reported at 6.7% for December 2020 compared to 3.5% for December 2019. The Vermont unemployment rate was reported at 3.1% for December 2020 compared to 2.2% for December 2019 and the New Hampshire unemployment rate was 4.0% for December 2020 compared to 2.5% for December 2019. Management will continue to monitor the national, regional and local economic environment in relation to the COVID-19 crisis and its impact on unemployment, business outlook and real estate values in the Company’s market area.
The Company also monitors its delinquency levels for any adverse trends. Management closely monitors the Company’s loan and investment portfolios, OREO and OAO for potential problems and reports to the Boards of the Company and Union at regularly scheduled meetings. Repossessed assets and loans or investments that are 90 days or more past due or in nonaccrual status 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.
In March 2020, the federal banking agencies issued guidance, confirmed by the FASB, that certain short-term modifications made to loans to borrowers affected by the COVID-19 pandemic and government shutdown orders would not be considered TDRs under specified circumstances (See Note 1). During 2020, the Company executed modifications under this guidance on outstanding loan balances of $175.5 million that carried accrued interest of $1.2 million. Of the total modifications executed, outstanding loan balances of $37.6 million remained subject to modification terms and carried accrued interest of $352 thousand as of December 31, 2020. The Company intends to continue to follow the guidance of the banking regulators in making TDR determinations.
The following table details the composition of the Company's nonperforming assets as of December 31:
2020 2019 2018 2017 2016
(Dollars in thousands)
Nonaccrual loans $ 2,410 $ 2,323 $ 816 $ 1,191 $ 3,545
Loans past due 90 days or more and still accruing interest 511 1,179 1,140 494 840
Total nonperforming loans 2,921 3,502 1,956 1,685 4,385
OREO 50 - - 36 -
Total nonperforming assets $ 2,971 $ 3,502 $ 1,956 $ 1,721 $ 4,385
Guarantees of U.S. or state government agencies on the above nonperforming loans $ 177 $ 286 $ 114 $ 131 $ 599
TDR loans $ 2,864 $ 2,871 $ 3,309 $ 3,252 $ 3,419
The following table shows trends of certain asset quality ratios monitored by Company's management at December 31:
2020 2019 2018 2017 2016
Allowance for loan losses to loans not held for sale 1.07 % 0.91 % 0.89 % 0.92 % 0.98 %
Allowance for loan losses to nonperforming loans 283.16 % 174.81 % 293.40 % 320.95 % 119.66 %
Nonperforming loans to total loans 0.36 % 0.52 % 0.30 % 0.28 % 0.81 %
Nonperforming assets to total assets 0.27 % 0.40 % 0.24 % 0.23 % 0.63 %
Delinquent loans (30 days to nonaccruing) to total loans 0.83 % 1.35 % 1.41 % 1.05 % 1.55 %
Net charge-offs to average loans not held for sale 0.01 % 0.06 % 0.02 % 0.01 % 0.02 %
Nonperforming loans at December 31, 2020 decreased $581 thousand, or 16.6%, and decreased as a percentage of assets from 0.40% at December 31, 2019 to 0.27% at December 31, 2020, with the ALL as a percentage of nonperforming loans increasing from 174.81% to 283.16%. Management considers the asset quality ratios to be at favorable levels. The Company's success at keeping the ratios at favorable levels 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. There were no residential real estate loans in process of foreclosure at December 31, 2020, as a state-mandated moratorium on foreclosures related to the COVID-19 emergency remained in effect as of year end. The aggregate interest on nonaccrual loans not recognized was $420 thousand and $271 thousand for the years ended December 31, 2020 and 2019, respectively.
The Company had loans rated substandard that were on a performing status totaling $2.2 million at December 31, 2020 and $1.7 million at December 31, 2019. 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:
•the financial condition of the borrower is unsatisfactory;
•repayment terms have not been met;
•the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth;
•confidence in the borrower's ability to repay is diminished;
•loan covenants have been violated;
•collateral is inadequate; or
•other unfavorable factors are present.
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. The Company’s management is focused on the impact that the economy may have on its borrowers and closely monitors industry and geographic concentrations for evidence of financial problems. Management will continue to monitor the national, regional and local economic environment, particularly as it relates to the COVID-19 crisis 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 were no such declines during 2020 and 2019. The Company evaluates each OREO property at least quarterly for changes in the fair value. The Company had one residential real estate property valued at $50 thousand classified as OREO at December 31, 2020 and no properties classified as OREO at December 31, 2019.
Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ALL to absorb such losses. The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the evaluation date; however, actual loan losses may vary from management's 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 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 risk 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 and credit department personnel monitor 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. Due to the economic disruption currently impacting our borrowers, the economic qualitative reserve factor assigned to each loan portfolio in the ALL estimate was increased during 2020 to incorporate the current economic implications and rising unemployment resulting from the COVID-19 pandemic. The economic qualitative reserve factor was increased 25 bps for the residential real estate, construction real estate, commercial real estate and commercial and consumer loan portfolios and 10 bps for the municipal loan portfolio. In addition to the qualitative risk factor analysis of each loan portfolio, loans meeting specified criteria 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.
Impaired loans, including $2.9 million of TDR loans, were $4.6 million at December 31, 2020, with government guaranties of $514 thousand and a specific reserve amount allocated of $58 thousand. Impaired loans, including $2.9 million of TDR loans, were $5.2 million at December 31, 2019, with government guaranties of $587 thousand and a specific reserve amount allocated of $196 thousand. The specific reserve amount allocated to individually identified impaired loans decreased $138 thousand as a result of the December 31, 2020 impairment evaluation.
The following table reflects activity in the ALL for the years ended December 31:
2020 2019 2018 2017 2016
(Dollars in thousands)
Balance at the beginning of year $ 6,122 $ 5,739 $ 5,408 $ 5,247 $ 5,201
Charge-offs 80 402 157 207 163
Recoveries 29 10 38 168 59
Net charge-offs (51) (392) (119) (39) (104)
Provision for loan losses 2,200 775 450 200 150
Balance at the end of year $ 8,271 $ 6,122 $ 5,739 $ 5,408 $ 5,247
Provision charged to income as a
percent of average loans 0.30 % 0.12 % 0.07 % 0.04 % 0.03 %
The following table (net of loans held for sale) shows the internal breakdown by class of loans of the Company's ALL and the percentage of loans in each category to total loans in the respective portfolios at December 31:
2020 2019 2018 2017 2016
$ % $ % $ % $ % $ %
(Dollars in thousands)
Residential real estate $ 1,776 23.8 $ 1,392 28.7 $ 1,368 29.2 $ 1,361 30.5 $ 1,399 32.4
Construction real estate 763 7.4 774 10.4 617 8.6 488 7.3 391 6.4
Commercial real estate 4,199 41.6 3,178 43.3 2,933 43.0 2,707 43.4 2,687 46.7
Commercial 458 14.1 394 7.1 354 7.4 395 8.6 342 7.9
Consumer 15 0.3 23 0.5 23 0.5 30 0.7 26 0.7
Municipal 214 12.8 76 10.0 82 11.3 64 9.5 40 5.9
Unallocated 846 - 285 - 362 - 363 - 362 -
Total $ 8,271 100.0 6,122 100.0 $ 5,739 100.0 $ 5,408 100.0 $ 5,247 100.0
Management of the Company believes, in its best estimate, that the ALL at December 31, 2020 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, 2020. 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.
Investment Activities. The investment portfolio is used to generate interest and dividend income, manage liquidity and mitigate interest rate sensitivity. At December 31, 2020, the fair value of investment securities AFS was $105.8 million, or 9.7% of total assets, compared to $87.4 million, or 10.0% of total assets, at December 31, 2019. There were no investment securities classified as HTM or as trading at December 31, 2020 or 2019. 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 OCI component of stockholders' equity. The fair value of investment securities AFS at December 31, 2020 reflects a net unrealized gain of $3.3 million, compared to a net unrealized gain of $1.2 million at December 31, 2019.
At December 31, 2020, 46 debt securities had unrealized losses of $207 thousand, with aggregate depreciation of 0.20% from the Company's amortized cost basis. Securities are evaluated at least quarterly for OTTI and at December 31, 2020, 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 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. Further deterioration in credit quality, imbalances in liquidity in the financial marketplace or a quick rise in interest rates might adversely affect the fair value 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 and related charges to earnings.
At December 31, 2020, 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, 2020, all MBS the Company owned were issued by the 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:
December 31, 2020 Maturities
Within
One Year One to
Five Years Five to
Ten Years Over
Ten Years Amortized
Cost Weighted
Average
Yield
Investment securities available-for-sale: (Dollars in thousands)
U.S. Government-sponsored enterprises $ - $ 361 $ 3,612 $ 2,489 $ 6,462 1.75 %
Agency MBS - - 5,921 55,202 61,123 1.62 %
State and political subdivisions 260 2,013 6,261 18,491 27,025 2.47 %
Corporate debt - 4,488 3,329 - 7,817 2.81 %
Total investment debt securities $ 260 $ 6,862 $ 19,123 $ 76,182 $ 102,427 1.95 %
Fair value $ 261 $ 7,273 $ 19,854 $ 78,375 $ 105,763
Weighted average yield 4.83 % 2.69 % 1.99 % 1.86 % 1.95 %
December 31, 2019 Maturities
Within
One Year One to
Five Years Five to
Ten Years Over
Ten Years Amortized
Cost Weighted
Average
Yield
Investment securities available-for-sale: (Dollars in thousands)
U.S. Government-sponsored enterprises $ - $ 191 $ 3,170 $ 2,988 $ 6,349 2.63 %
Agency MBS - - 3,167 42,336 45,503 2.23 %
State and political subdivisions 680 1,097 8,159 16,553 26,489 2.53 %
Corporate debt - 2,479 5,325 - 7,804 3.26 %
Total investment debt securities $ 680 $ 3,767 $ 19,821 $ 61,877 $ 86,145 2.45 %
Fair value $ 688 $ 3,923 $ 20,224 $ 62,558 $ 87,393
Weighted average yield 3.09 % 3.27 % 2.69 % 2.31 % 2.45 %
The tables above exclude mutual fund securities with a book and fair value of $1.0 million at December 31, 2020 and $690 thousand at December 31, 2019.
Federal Home Loan Bank of Boston Stock. Union is a member of the FHLB, with an investment of $1.0 million and $2.5 million in its Class B common stock at December 31, 2020 and 2019, respectively. Union is required to invest in $100 par value stock of the FHLB in an amount tied to the unpaid principal balances on qualifying loans, plus an amount to satisfy an activity based requirement. The stock is nonmarketable, and is redeemable by the FHLB at par value. Although the FHLB was in compliance with all regulatory capital ratios as of December 31, 2020 and 2019, 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 at cost in Other assets on the consolidated balance sheets. Similar to evaluating investment securities for OTTI, the Company has evaluated its investment in the FHLB. Management's most recent evaluation of the Company's holdings of FHLB common stock concluded that the investment was not impaired at December 31, 2020.
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:
2020 2019 2018
Average
Balance Percent
of Total
Deposits Average
Rate Paid Average
Balance Percent
of Total
Deposits Average
Rate Paid Average
Balance Percent
of Total
Deposits Average
Rate Paid
(Dollars in thousands)
Nontime deposits:
Noninterest bearing deposits $ 177,792 20.9 - $ 130,322 18.6 - $ 121,902 18.9 -
Interest bearing checking accounts 197,698 23.2 0.36 % 161,789 23.1 0.30 % 147,553 22.9 0.16 %
Money market accounts 206,466 24.3 0.99 % 157,102 22.5 1.13 % 153,135 23.8 0.83 %
Savings accounts 123,619 14.6 0.12 % 105,003 15.0 0.15 % 104,582 16.3 0.15 %
Total nontime deposits 705,575 83.0 0.41 % 554,216 79.2 0.44 % 527,172 81.9 0.31 %
Time deposits:
Less than $100,000 73,880 8.7 1.10 % 75,087 10.7 1.34 % 63,710 9.9 0.87 %
$100,000 and over 70,976 8.3 1.50 % 70,848 10.1 1.83 % 53,007 8.2 1.24 %
Total time deposits 144,856 17.0 1.30 % 145,935 20.8 1.58 % 116,717 18.1 1.04 %
Total deposits $ 850,431 100.0 0.56 % $ 700,151 100.0 0.67 % $ 643,889 100.0 0.45 %
Deposits grew $250.3 million, or 33.6%, from $744.0 million at December 31, 2019 to $994.3 million at December 31, 2020. Total average deposits grew $150.3 million, or 21.5%, between years, with average nontime deposits growing $151.4 million, or 27.3%, and average time deposits decreasing $1.1 million, or 0.7%, during the same time frame. The increase in average nontime deposits was attributable to proceeds from PPP loans deposited into customer accounts at Union, customers' receipt of government stimulus payments, and the general lack of spending due to the economic disruption caused by COVID-19.
The Company participates in CDARS, which permits the Company to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. CDARS also provides the Company with an additional source of funding and liquidity through the purchase of deposits. There were no purchased deposits as of December 31, 2020 or December 31, 2019. There were $14.2 million of time deposits of $250,000 or less on the balance sheet at December 31, 2020 and $12.0 million at December 31, 2019, which were exchanged with other CDARS participants.
The Company also participates in the ICS program, a service through which Union can offer its customers demand or savings products with access to unlimited FDIC insurance, while receiving reciprocal deposits from other FDIC-insured banks. Like the exchange of certificate of deposit accounts through CDARS, exchange of demand or savings deposits through ICS provides a depositor with full deposit insurance coverage of excess balances, thereby helping the Company retain the full amount of the deposit on its balance sheet. As with the CDARS program, in addition to reciprocal deposits, participating banks may also purchase one-way ICS deposits. There were $146.2 million and $115.3 million in exchanged ICS demand and money market deposits on the balance sheet at December 31, 2020 and December 31, 2019, respectively. There were no purchased ICS deposits at December 31, 2020 or December 31, 2019.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 allows the Company to hold reciprocal deposits up to 20 percent of total liabilities without those deposits being treated as brokered for regulatory purposes.
At December 31, 2020, there were $15.0 million in retail brokered deposits issued under a master certificate of deposit program with a deposit broker for the purpose of providing a supplemental source of funding and liquidity. These deposits mature in February and May 2021. There were $12.0 million of retail brokered deposits at December 31, 2019.
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, 2020, the Company had deposit accounts with less than the maximum FDIC insured deposit amount of $250 thousand totaling $700.9 million, or 70.5% of total deposits. An additional $23.0 million of municipal deposits were over the FDIC insurance coverage limit at December 31, 2020 and were collateralized under applicable state regulations by letters of credit issued by the FHLB.
The following table provides a maturity distribution of the Company’s time deposits in amounts of $100 thousand and over at December 31:
2020 2019
(Dollars in thousands)
Three months or less $ 22,722 $ 27,376
Over three months through six months 15,828 7,351
Over six months through twelve months 22,629 20,160
Over twelve months 9,194 18,161
$ 70,373 $ 73,048
The Company's time deposits in amounts of $100 thousand and over decreased $2.7 million, or 3.7%, between December 31, 2019 and December 31, 2020, resulting primarily from the maturity, without renewal, of customer time deposits originated during 2019 when promotions were offered.
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, 2020 were comprised of borrowings from the FHLB of $7.2 million, at a weighted average rate of 3.07%. At December 31, 2019, borrowed funds were comprised of FHLB advances of $47.2 million, at a weighted average rate of 2.01%. The Company had no overnight federal funds purchased on December 31, 2020 or 2019. Average borrowings outstanding for 2020 were $24.0 million, compared to average borrowings outstanding for 2019 of $39.3 million, with the weighted average interest rate on the Company's borrowings decreasing from 2.20% for 2019 to 1.52% for 2020. The decrease in FHLB borrowings reflects the net maturity of $40.0 million in advances during 2020. In anticipation of cash flow needs resulting from COVID-19, $30.0 million in advances were taken at the end of the first quarter of 2020. Due to excess liquidity on hand from customer deposits of PPP loan proceeds and stimulus payments, these advances were prepaid during the second quarter of 2020, resulting in penalties paid of $66 thousand which are included in Other expenses on the Company's consolidated statement of income for the year ended December 31, 2020.
The Company has the authority, up to its available borrowing capacity with the FHLB, to collateralize public unit deposits with letters of credit issued by the FHLB. FHLB letters of credit in the amount of $23.6 million and $24.8 million were utilized as collateral for these deposits at December 31, 2020 and December 31, 2019, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $30 thousand and $27 thousand for the years ended December 31, 2020 and 2019, respectively.
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 or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company’s exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
The following table details the contractual or notional amount of financial instruments that represented credit risk at December 31, 2020:
Contract or Notional Amount
2021 2022 2023 2024 2025 Thereafter Total
(Dollars in thousands)
Commitments to originate loans $ 61,431 $ - $ - $ - $ - $ - $ 61,431
Unused lines of credit 107,137 15,882 8,760 670 37 16 132,502
Standby and commercial letters of credit 698 152 255 599 14 1,397 3,115
Credit card arrangements 308 - - - - - 308
MPF credit enhancement obligation, net 728 - - - - - 728
Commitment to purchase investment in
a real estate limited partnership 2,000 - - - - - 2,000
Total $ 172,302 $ 16,034 $ 9,015 $ 1,269 $ 51 $ 1,413 $ 200,084
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. The unused lines of credit total includes $12.5 million of lines available under the overdraft privilege program and is included in the 2020 funding period. Approximately $38.6 million of the unused lines of credit 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 $28.9 million, or 27.9%, from $103.6 million at December 31, 2019 to $132.5 million at December 31, 2020. 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 $25.7 million, or 72.1%, from $35.7 million at December 31, 2019 to $61.4 million at December 31, 2020.
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, 2020, the Company had binding commitments to sell residential mortgage loans at fixed rates totaling $18.3 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, 2020, the Company had $31.6 million in loans sold through the MPF program with an outstanding balance of $10.4 million and a contract for the potential delivery of an additional $9.0 million of future loan sales. The volume of loans sold to the MPF program and the corresponding Credit Enhancement Obligation are closely monitored by management. As of December 31, 2020, the notional amount of the maximum contingent contractual liability related to this program was $747 thousand, of which $19 thousand was recorded as a reserve through Other liabilities. Since inception of the Company's MPF participation in 2015, the Company has not experienced any losses under this program.
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; wholesale funding options including purchased deposits, amortization, prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities AFS and loans; 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 are less predictable and can be significantly influenced by market interest
rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.
At December 31, 2020, Union, as a member of FHLB, had access to unused lines of credit of $112.2 million, over and above the $21.9 million in combined outstanding borrowings and other credit subject to collateralization, subject to the purchase of required FHLB Class B common stock and evaluation by the FHLB of the underlying collateral available. This line of credit can be used for either short-term or long-term liquidity or other funding needs.
Union also maintains an IDEAL Way Line of Credit with the FHLB. The total line available was $551 thousand at December 31, 2020. There were no borrowings against this line of credit as of such date. Interest on this line is chargeable at a rate determined by the FHLB and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.
In addition to its borrowing arrangements with the FHLB, Union maintains a pre-approved Federal Funds line of credit totaling $15.0 million with an upstream correspondent bank, a master brokered deposit agreement with a brokerage firm, one-way buy options with CDARS and ICS as well as access to the FRB discount window, which would require pledging of qualified assets. In addition to the funding sources available to Union, the Company maintains a $5.0 million revolving line of credit with a correspondent bank. At December 31, 2020 there were no purchased CDARS or ICS deposits, $15.0 million in retail brokered deposits issued under a master certificate of deposit program with a deposit broker, and no outstanding advances on the Federal Funds line or at the FRB discount window, or under the Company's $5.0 million line of credit.
Additionally, during 2020 Congress authorized the PPPLF, which provides funding through the FRB to facilitate lending by eligible borrowers to small businesses under the PPP. Under the PPPLF, the FRB lends to banks and other eligible institutional borrowers on a non-recourse basis, taking PPP loans, including purchased loans, as collateral. Union was approved by the FRB to participate in the PPPLF and, as of December 31, 2020, there were no outstanding advances under this program. Union also has qualifying investment securities that are available to be pledged as collateral to the FRB to have access to the discount window borrowing facility. As of December 31, 2020, there were no outstanding advances from the discount window.
Union's investment and residential loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also have additional contingent liquidity sources with access to the brokered deposit market, the FRB discount window and the PPPLF. These sources are considered as liquidity alternatives in our contingent liquidity plan. 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 due to factors outside the Company's control.
Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management’s internal assessment of economic capital, funds the Company’s business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments, maintain required regulatory capital levels and provide continued support for deposits. The Company and Union continue to satisfy all capital adequacy requirements to which they are subject and Union is considered well capitalized under the FDIC's Prompt Corrective Action framework. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions. The dividend payouts and stock repurchases during the last few years reflect the Board’s desire to utilize our capital for the benefit of the stockholders.
Stockholders’ equity increased from $71.8 million at December 31, 2019 to $80.9 million at December 31, 2020, reflecting net income of $12.8 million for 2020, an increase of $1.7 million in accumulated OCI due to an increase in the fair market value of the Company's AFS securities, an increase of $236 thousand from stock based compensation, a $22 thousand increase due to the issuance of 1,000 shares of common stock from the exercise of incentive stock options and a $38 thousand increase due to the issuance of common stock under the DRIP. These increases were partially offset by cash dividends declared of $5.7 million. There were no stock repurchases during 2020.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of December 31, 2020, the Company had 4,954,732 shares issued, of which 4,480,100 were outstanding and 474,632 were held in treasury. Following stockholder approval in 2014, the Company adopted the 2014 Equity Plan which replaced the 2008 ISO Plan. As of December 31, 2020, there were outstanding employee incentive stock options with respect to 4,500 shares, all of which were issued under the 2014 Equity Plan and exercisable. Also as of December 31, 2020, there were outstanding RSUs issued under the 2014 Equity Plan with respect to 500 shares granted in 2019 and 5,139 shares granted in 2020 as to which vesting requirements had not yet been met.
In January 2020, the Company's Board reauthorized for 2020 the limited stock repurchase plan that was initially established in May of 2010. The limited stock repurchase plan allows the repurchase of up to a fixed number of shares of the Company's common stock each calendar quarter 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 (currently 2,500 shares) expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The Company had no repurchases under this program during 2020. Since inception, as of December 31, 2020, the Company had repurchased 17,693 shares under the program, for a total cost of $472 thousand.
The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of December 31, 2020, 4,139 shares of stock had been issued from treasury stock since inception of the DRIP, including 1,636 shares in 2020.
The Company's total capital to risk weighted assets increased to 13.9% at December 31, 2020, from 13.0% at December 31, 2019. Tier I capital to risk weighted assets increased to 12.6% at December 31, 2020, from 12.0% at December 31, 2019, while Tier I capital to average assets decreased to 7.3% at December 31, 2020 from 8.1% at December 31, 2019. Union is categorized as well capitalized under the Prompt Corrective Action regulatory framework and the Company is well over applicable minimum capital adequacy requirements. There were no conditions or events between December 31, 2020 and the date of this report that management believes have changed either the Company’s or Union's regulatory capital category. See Note 22 for additional discussion of the Company's and Union's regulatory capital ratios.
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. On March 3, 2020, the Federal Open Market Committee (FOMC) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. Recent FOMC meetings indicate this low target range will remain in effect until members of the FOMC are confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals, which may not be until late in 2021 or beyond. Prolonged reductions in interest rates and other effects of the COVID-19 outbreak may continue to adversely affect the Company’s net interest income. Through December 31, 2020 the decreases in the target federal funds rate have also had a direct impact on the rates paid on customer deposit accounts. Customer deposit balances have increased as spending habits changed due to COVID-19 resulting in excess levels of on balance sheet liquidity. Further decreases in the target federal funds rate in 2021 may result in less than expected interest income on loans and investments. Further relief on the Company's cost of funds is expected to occur in 2021 as high rate paying time deposit accounts renew into lower rate instruments. Market rates are out of the Company's control but can 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 timely loan payments. The Company is aware of and evaluates this risk along with others in making business decisions. The levels of deficit spending by federal, state and local governments and control of the money supply by the FRB 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 (effective September 10, 2018).

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
2020 2019
Assets (Dollars in thousands)
Cash and due from banks $ 5,413 $ 5,405
Federal funds sold and overnight deposits 117,358 45,729
Cash and cash equivalents 122,771 51,134
Interest bearing deposits in banks 12,699 6,565
Investment securities available-for-sale 105,763 87,393
Other investments 1,047 690
Total investments 106,810 88,083
Loans held for sale 32,188 7,442
Loans 771,169 670,244
Allowance for loan losses (8,271) (6,122)
Net deferred loan (fees) costs (146) 1,043
Net loans 762,752 665,165
Premises and equipment, net 20,039 20,923
Goodwill 2,223 2,223
Company-owned life insurance 12,640 12,322
Other assets 21,432 19,055
Total assets $ 1,093,554 $ 872,912
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing $ 215,245 $ 136,434
Interest bearing 637,369 458,940
Time 141,688 148,653
Total deposits 994,302 744,027
Borrowed funds 7,164 47,164
Accrued interest and other liabilities 11,221 9,878
Total liabilities 1,012,687 801,069
Commitments and Contingencies (Notes 9, 15, 16, 18, 19 and 22)
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,954,732 shares
issued at December 31, 2020 and 4,948,245 shares issued at December 31, 2019
9,910 9,897
Additional-paid-in capital 1,393 1,124
Retained earnings 71,097 64,019
Treasury stock at cost; 474,632 shares at December 31, 2020 and 476,268 shares
at December 31, 2019
(4,169) (4,183)
Accumulated other comprehensive income 2,636 986
Total stockholders' equity 80,867 71,843
Total liabilities and stockholders' equity $ 1,093,554 $ 872,912
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2020 and 2019
2020 2019
Interest and dividend income (Dollars in thousands, except per share data)
Interest and fees on loans $ 34,435 $ 33,209
Interest on debt securities:
Taxable 1,329 1,615
Tax exempt 635 518
Dividends 97 143
Interest on federal funds sold and overnight deposits 92 190
Interest on interest bearing deposits in banks 162 195
Total interest and dividend income 36,750 35,870
Interest expense
Interest on deposits 4,776 4,725
Interest on short-term borrowed funds 2 16
Interest on long-term borrowed funds 369 859
Total interest expense 5,147 5,600
Net interest income 31,603 30,270
Provision for loan losses 2,200 775
Net interest income after provision for loan losses 29,403 29,495
Noninterest income
Trust income 707 692
Service fees 5,924 6,108
Net gains on sales of investment securities available-for-sale 11 25
Net gains on sales of loans held for sale 8,168 2,895
Net gain on other investments 240 132
Other income 953 603
Total noninterest income 16,003 10,455
Noninterest expenses
Salaries and wages 13,220 11,821
Employee benefits 4,580 4,210
Occupancy expense, net 1,805 1,806
Equipment expense 3,057 2,475
Other expenses 7,520 7,160
Total noninterest expenses 30,182 27,472
Income before provision for income taxes 15,224 12,478
Provision for income taxes 2,419 1,830
Net income $ 12,805 $ 10,648
Basic Earnings per common share $ 2.86 $ 2.38
Diluted earnings per common share $ 2.85 $ 2.38
Dividends per common share $ 1.28 $ 1.24
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020 and 2019
2020 2019
(Dollars in thousands)
Net income $ 12,805 $ 10,648
Other comprehensive income, net of tax:
Investment securities available-for-sale:
Net unrealized holding gains arising during the year on investment securities available-for-sale 1,659 2,029
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income (9) (20)
Total other comprehensive income 1,650 2,009
Total comprehensive income $ 14,455 $ 12,657
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2020 and 2019
Common Stock
Shares,
net of
treasury Amount Additional
paid-in
capital Retained
earnings Treasury
stock Accumulated
other
comprehensive
(loss) income Total
stockholders’
equity
(Dollars in thousands, except per share data)
Balances, December 31, 2018 4,466,679 $ 9,888 $ 894 $ 58,911 $ (4,179) $ (1,023) $ 64,491
Net income - - - 10,648 - - 10,648
Other comprehensive income - - - - - 2,009 2,009
Dividend reinvestment plan 1,042 - 30 - 9 - 39
Cash dividends declared
($1.24 per share)
- - - (5,540) - - (5,540)
Stock based compensation
expense 2,556 5 160 - - - 165
Exercise of stock options 2,000 4 40 - - - 44
Purchase of treasury stock (300) - - - (13) - (13)
Balances, December 31, 2019 4,471,977 9,897 1,124 64,019 (4,183) 986 71,843
Net income - - - 12,805 - - 12,805
Other comprehensive income - - - - - 1,650 1,650
Dividend reinvestment plan 1,636 - 24 - 14 - 38
Cash dividends declared
($1.28 per share)
- - - (5,727) - - (5,727)
Stock based compensation
expense 5,487 11 225 - - - 236
Exercise of stock options 1,000 2 20 - - - 22
Balances, December 31, 2020 4,480,100 $ 9,910 $ 1,393 $ 71,097 $ (4,169) $ 2,636 $ 80,867
See accompanying notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020 and 2019
2020 2019
Cash Flows From Operating Activities (Dollars in thousands)
Net income $ 12,805 $ 10,648
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation 1,891 1,567
Provision for loan losses 2,200 775
Deferred income tax (benefit) provision (777) 438
Net amortization of premiums on investment securities 554 490
Equity in losses of limited partnerships 935 745
Stock based compensation expense 236 165
Net decrease (increase) in unamortized loan costs 1,189 (105)
Proceeds from sales of loans held for sale 271,362 161,162
Origination of loans held for sale (287,940) (162,810)
Net gains on sales of loans held for sale (8,168) (2,895)
Net gains on sales of investment securities available-for-sale (11) (25)
Net gain on other investments (240) (132)
Increase in accrued interest receivable (1,196) (122)
Amortization of core deposit intangible 171 171
Increase in other assets (897) (110)
Increase in other liabilities 824 1,682
Net cash (used in) provided by operating activities (7,062) 11,644
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions 3,578 2,984
Purchases (9,711) (249)
Investment securities available-for-sale
Proceeds from sales 3,076 10,335
Proceeds from maturities, calls and paydowns 22,076 11,485
Purchases (41,978) (33,730)
Net purchases of other investments (117) (2)
Net decrease (increase) in nonmarketable stock 1,457 (231)
Net increase in loans (101,055) (28,185)
Recoveries of loans charged off 29 10
Purchases of premises and equipment (1,007) (6,417)
Investments in limited partnerships (2,257) (1,929)
Purchase of Company-owned life insurance - (3,000)
Net cash used in investing activities
(125,909) (48,929)
Cash Flows From Financing Activities
Repayment of long-term debt - (20,287)
Net (decrease) increase in short-term borrowings outstanding (40,000) 39,630
Net increase in noninterest bearing deposits 78,811 3,463
Net increase in interest bearing deposits 178,429 14,218
Net (decrease) increase in time deposits (6,965) 19,576
Issuance of common stock 22 44
Purchase of treasury stock - (13)
Dividends paid (5,689) (5,501)
Net cash provided by financing activities 204,608 51,130
Net increase in cash and cash equivalents 71,637 13,845
Cash and cash equivalents
Beginning of year 51,134 37,289
End of year $ 122,771 $ 51,134
Supplemental Disclosures of Cash Flow Information
Interest paid $ 5,712 $ 5,146
Income taxes paid $ 1,350 $ 800
Supplemental Schedule of Noncash Investing and Financing Activities
Other real estate acquired in settlement of loans $ 50 $ -
Investment in limited partnerships acquired by capital contributions payable $ 2,722 $ 493
Right-of-use operating lease assets obtained in exchange for operating lease liabilities $ - $ 2,002
Dividends paid on Common Stock:
Dividends declared $ 5,727 $ 5,540
Dividends reinvested (38) (39)
$ 5,689 $ 5,501
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 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.
The Company is a “smaller reporting company” and as permitted under the rules and regulations of the SEC, has elected to provide its audited 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 Annual Report on Form 10-K, as permitted for smaller reporting companies.
Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the current year presentation.
The acronyms, abbreviations and capitalized terms identified below are used throughout this Annual Report on Form 10-K, including Parts I, II and III. The following is provided to aid the reader and provide a reference page when reviewing this Annual Report:
AFS: Available-for-sale ICS: Insured Cash Sweeps of the Promontory Interfinancial Network
ALCO: Asset Liability Management Committee IRS: Internal Revenue Service
ALL: Allowance for loan losses MBS: Mortgage-backed security
ASC: Accounting Standards Codification MPF: Mortgage Partnership Finance Program
ASU: Accounting Standards Update MSRs: Mortgage Servicing rights
BHCA: Bank Holding Company Act of 1956 NASDAQ: NASDAQ Global Security Market
Board: Board of Directors OAO: Other assets owned
bp or bps: Basis point(s) OCI: Other comprehensive income (loss)
Branch Acquisition: The acquisition of three New Hampshire branches in May 2011 OFAC: U.S. Office of Foreign Assets Control
CARES Act: Coronavirus Aid, Relief and Economic Security Act OREO: Other real estate owned
CDARS: Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network OTTI: Other-than-temporary impairment
CFPB: Consumer Financial Protection Bureau OTT: Other-than-temporary
COLI: Company-Owned Life Insurance PPP: Paycheck Protection Program
Company: Union Bankshares, Inc. and Subsidiary PPPLF: PPP Liquidity Facility of the FRB
COVID-19: Novel Coronavirus RD: USDA Rural Development
DFR: Vermont Department of Financial Regulation RSU: Restricted Stock Unit
Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 SBA: U.S. Small Business Administration
DRIP: Dividend Reinvestment and Stock Purchase Plan SEC: U.S. Securities and Exchange Commission
EPS: Earnings per share SOX Act: Sarbanes Oxley Act of 2002
FASB: Financial Accounting Standards Board Tax Act: Tax Cut and Jobs Act
FDIC: Federal Deposit Insurance Corporation TDR: Troubled-debt restructuring
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 Union: Union Bank, the sole subsidiary of Union Bankshares, Inc
FHA: U.S. Federal Housing Administration USDA: U.S. Department of Agriculture
FHLB: Federal Home Loan Bank of Boston VA: U.S. Veterans Administration
FRB: Federal Reserve Board WHO: World Health Organization
Fannie Mae: Federal National Mortgage Association 2008 Plan: 2008 Amended and Restated Nonqualified Deferred Compensation Plan
FHLMC/Freddie Mac: Federal Home Loan Mortgage Corporation 2008 ISO Plan: 2008 Incentive Stock Option Plan of the Company
GAAP: Generally accepted accounting principles in the United States 2014 Equity Plan: 2014 Equity Incentive Plan
GLBA: Gramm-Leach-Bliley Financial Modernization Act of 1999 2017 Tax Act: Tax Cuts and Jobs Act of 2017
HTM: Held-to-maturity 2020 Plan: 2020 Amended and Restated Nonqualified Excess Plan
HUD: U.S. Department of Housing and Urban Development
Nature of operations
The Company provides a variety of financial services to individuals, municipalities, commercial businesses and nonprofit customers through its branches, ATMs, telebanking, mobile and internet banking systems in northern Vermont and 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 accounts, savings accounts, 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.
Significant concentration of credit risk
The Company grants loans primarily to customers in Vermont and New Hampshire. Although it has a diversified loan portfolio, a large portion of the Company's loans are secured by commercial or residential real estate located in Vermont and New Hampshire, resulting in exposure to volatility with each state's real estate market. Additionally, the ability of borrowers to repay loans is highly dependent upon other economic factors throughout Vermont and New Hampshire. The Company typically requires the principals of any commercial borrower to obligate themselves personally on the loan.
Operating, Accounting and Reporting Considerations related to COVID-19
The outbreak of COVID-19 during 2020 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread operating issues for the Company.
The CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also included extensive emergency funding for small businesses, hospitals and health care providers.
In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief have impacted the Company's operations, accounting, and reporting. The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due at December 31, 2019. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreements.
The CARES Act also established the PPP, an expansion of the SBAs Section 7(a) loan program and the Economic Injury Disaster Loan Program, also administered by the SBA. With the passage of the PPP, the Company assisted its customers with applications for resources through the program. PPP loans bear a mandated annual interest rate of 1.0%. The PPP was initially launched with loans having a two-year term, but subsequent revisions to the PPP currently allow the maximum term to be extended to five years. The majority of the Company's PPP loans were originated with the two-year term and have not been extended to five years. The Company believes that a significant amount of these loans will ultimately be forgiven by the SBA during 2021 in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. Government. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional credit loss expense charged to earnings.
Use of estimates in preparation of consolidated 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, valuation of deferred tax assets, and asset impairment judgments, including OTTI of investment securities. 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.
Asset management 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 measurement
The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•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
Debt securities the Company has the positive intent and ability to hold to maturity are classified as HTM and reported at amortized cost. Debt securities not classified as either HTM or trading are classified as AFS and reported at fair value. Debt 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. The Company does not generally hold any securities classified as trading.
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 the call date. 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 debt securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if an OTTI exists. A debt security is considered impaired if the fair value is lower than its amortized cost basis at the report date. If impaired, management then assesses whether the unrealized loss is OTT.
An unrealized loss on a debt security is generally deemed to be OTT and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI write-down is recorded, net of tax effect, through net income as a component of net OTTI 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.
Management considers the following factors in determining whether an OTTI exists and the period over which the security is expected to recover:
•The length of time, and extent to which, the fair value has been less than the amortized cost;
•Adverse conditions specifically related to the security, industry, or geographic area;
•The historical and implied volatility of the fair value of the security;
•The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;
•Failure of the issuer of the security to make scheduled interest or principal payments;
•Any changes to the rating of the security by a rating agency;
•Recoveries or additional declines in fair value subsequent to the balance sheet date; and
•The nature of the issuer, including whether it is a private company, public entity or government-sponsored enterprise, and the existence or likelihood of any government or third party guaranty.
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. 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.
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 loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. A TDR classification may result from the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments), or a combination. A specific reserve amount is allocated to the ALL for individual loans that have
been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. Management has established the threshold for individual impairment evaluation for commercial loans with balances greater than $500 thousand, based on an evaluation of the Company's historical loss experience on substandard commercial loans.
The general component represents the level of ALL allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:
•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. 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 credit quality of this segment. Loans originated under the PPP are also included in the this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans.
•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.
An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the ALL reflects management's estimate of 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.
Mortgage Banking
Residential real estate mortgages are originated by the Company both for its portfolio and for sale into the secondary market. The transfer of these financial assets is accounted for as a sale when control over the asset has been surrendered. Control is deemed to be surrendered when (i) the asset has been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset, and (iii) the Company does not maintain effective control over the transferred asset through an agreement to repurchase it before its
maturity. The Company records the gain on sale of the financial asset within net gains on sales of loans held for sale, net in the consolidated statements of income.
Servicing assets are recognized as separate assets when servicing rights are acquired through the sale of residential mortgage loans with servicing rights retained. Capitalized servicing rights, which are reported in other assets on the consolidated statements of condition, are initially recorded at fair value and are amortized in proportion to, and over the period of, the estimated future servicing of the underlying mortgages (typically, the contractual life of the mortgage). The amortization of mortgage servicing rights is recorded as a reduction of loan servicing fee income within noninterest income on the consolidated statements of income.
Servicing assets are evaluated for impairment regularly 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 is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment of the servicing assets is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. If it is later determined that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as non-interest income up to, but not in excess of, the prior impairment.
Servicing fee income is recorded for fees earned for servicing loans for investors. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income within noninterest income in the consolidated statements of income when earned.
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 10). 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 $100 par value stock of the FHLB in an amount to satisfy unpaid principal balances on qualifying loans, plus an amount to satisfy an activity based requirement. The stock is nonmarketable, and is redeemable by the FHLB at par value. 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 $1.0 million and $2.5 million at December 31, 2020 and 2019, respectively.
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 15% of the sum of Tier 1 Capital and allowable Tier 2 capital.
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 northern Vermont or in New Hampshire. GAAP permits an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. There were no impairment losses during the year resulting from the forfeiture or ineligibility of tax credits related to qualified affordable housing project investments. (See Note 11.)
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
Basic EPS is calculated based on the weighted average number of shares of common stock issued during the period, including DRIP shares issuable upon reinvestment of dividends, retroactively adjusted for stock splits and stock dividends, if any, and reduced for shares held in treasury. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potential dilutive common shares outstanding during the period. (See Note 17.)
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. A change in enacted federal income tax rates for future periods requires revaluation of deferred taxes. (See Note 14.)
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. (See Notes 18 and 19.) Such financial instruments are recorded in the financial statements when they become fixed and certain.
Comprehensive income (loss)
Accounting principles generally require that 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 debt securities AFS that are not OTTI, 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) (See Note 24). 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
Under the Company's 2014 Equity Plan approved by the stockholders, 50,000 shares of the Company’s common stock were authorized 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. (See Note 16.)
Segment Reporting
Operating segments are the components of an entity for which separate financial information is available and evaluated regularly by the chief operating decision-maker in order to allocate resources and assess performance. The Company's chief operating decision-maker assesses consolidated financial results to make operating and strategic decisions, assess performance, and allocate resources. Therefore, the Company has determined that its business is conducted in one reportable segment and represents the consolidated financial statements of the Company.
Recent accounting pronouncements
The Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU was effective for the Company on January 1, 2020 and did not have a material impact on the Company's consolidated financial statements.
The Company also adopted ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance, which is a part of the FASB’s disclosure framework project to improve disclosure effectiveness, eliminates certain disclosure requirements for fair value measurements regarding the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities regarding changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. In addition, this guidance modifies certain requirements regarding the disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This ASU was effective for the Company on January 1, 2020 and did not have a material impact on the Company's financial statement disclosures.
In March 2020, various financial institution regulatory agencies, including the FRB and the FDIC (“the agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The guidance was subsequently amended following passage of the CARES Act, which included a provision for addressing certain COVID-19 related loan modifications. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC No. 310-40, Receivables - Troubled Debt Restructurings by Creditors, a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., up to 12 months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The agencies supplemented their interagency guidance on August 3, 2020 to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers near the end of their initial loan accommodation period. The interagency guidance is not expected to have a material impact on the Company’s financial statements nor is it expected that adoption of the ASU will have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model ("CECL"), 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. As initially proposed, the ASU was to become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. In October 2019, the FASB approved amendments to delay the effective date of the ASU to fiscal years beginning after December 31, 2022, including interim periods within those fiscal years, for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. As the Company is a smaller reporting company, the delay is applicable to the Company and the Company does not intend to early adopt the ASU at this time. The Company has established a CECL implementation team and developed a transition project plan. The Company utilizes a software package for its current calculation of the allowance for loan losses that will also be utilized for CECL implementation. Historical data has been compiled and training on utilizing the software for the existing incurred loss model has been completed. The Company continues the collection of historical data and training is ongoing surrounding CECL implementation and methodologies. This will facilitate the eventual implementation process and management's evaluation of the potential impact of the ASU on the Company's consolidated financial statements.
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:
2020 2019
(Dollars in thousands)
Noninterest bearing accounts $ 190 $ 365
Federal Reserve Bank of Boston 117,225 45,638
FHLB of Boston 1,578 1,125
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, 2020 or 2019. 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. Prior to March 26, 2020, all banks, including the Company's subsidiary, were required to maintain vault cash or a noninterest bearing reserve balance under FRB regulations. The reserve requirement was eliminated effective March 26, 2020. The Bank had an average total required reserve of $1.8 million for the 14 day maintenance period that included December 31, 2019, which was 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. As of December 31, 2020, the Company held $12.7 million in certificates with rates ranging from 0.15% to 3.55% and various maturity dates through 2026, with $5.7 million scheduled to mature in 2021.
Note 4. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
December 31, 2020 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Available-for-sale (Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises $ 6,462 $ 137 $ (51) $ 6,548
Agency MBS 61,123 1,307 (78) 62,352
State and political subdivisions 27,025 1,439 (3) 28,461
Corporate 7,817 660 (75) 8,402
Total $ 102,427 $ 3,543 $ (207) $ 105,763
December 31, 2019 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Available-for-sale (Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises $ 6,349 $ 19 $ (76) $ 6,292
Agency MBS 45,503 602 (81) 46,024
State and political subdivisions 26,489 515 (39) 26,965
Corporate 7,804 378 (70) 8,112
Total $ 86,145 $ 1,514 $ (266) $ 87,393
At December 31, 2020 and December 31, 2019, there were no investment securities HTM and no investment securities pledged as collateral.
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:
December 31, 2020 Less Than 12 Months 12 Months and Over Total
Number of Securities Fair
Value Gross
Unrealized
Loss Number of Securities Fair
Value Gross
Unrealized
Loss Number of Securities Fair
Value Gross
Unrealized
Loss
(Dollars in thousands)
Debt securities:
U.S. Government-
sponsored enterprises 15 $ 2,005 $ (16) 8 $ 1,661 $ (35) 23 $ 3,666 $ (51)
Agency MBS 19 21,698 (78) - - - 19 21,698 (78)
State and political
subdivisions 1 575 (3) - - - 1 575 (3)
Corporate - - - 3 1,424 (75) 3 1,424 (75)
Total 35 $ 24,278 $ (97) 11 $ 3,085 $ (110) 46 $ 27,363 $ (207)
December 31, 2019 Less Than 12 Months 12 Months and Over Total
Number of Securities Fair
Value Gross
Unrealized
Loss Number of Securities Fair
Value Gross
Unrealized
Loss Number of Securities Fair
Value Gross
Unrealized
Loss
(Dollars in thousands)
Debt securities:
U.S. Government-
sponsored enterprises 4 $ 2,376 $ (22) 8 $ 2,772 $ (54) 12 $ 5,148 $ (76)
Agency MBS 8 6,193 (38) 8 4,861 (43) 16 11,054 (81)
State and political
subdivisions 9 3,813 (38) 1 304 (1) 10 4,117 (39)
Corporate - - - 3 1,430 (70) 3 1,430 (70)
Total 21 $ 12,382 $ (98) 20 $ 9,367 $ (168) 41 $ 21,749 $ (266)
The Company has the ability to hold the investment securities that had unrealized losses at December 31, 2020 for the foreseeable future. The decline in fair value is the result of market conditions and not attributable to credit quality in the investment securities and no declines were deemed by management to be OTT at December 31, 2020 and 2019.
The following table presents the proceeds, gross gains and gross losses from sales of AFS securities:
For The Years Ended December 31,
2020 2019
(Dollars in thousands)
Proceeds $ 3,076 $ 10,335
Gross gains 32 62
Gross losses (21) (37)
Net gains $ 11 $ 25
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of December 31, 2020, were as follows:
Amortized
Cost Fair
Value
Available-for-sale (Dollars in thousands)
Due in one year or less $ 260 $ 261
Due from one to five years 6,862 7,273
Due from five to ten years 13,202 13,856
Due after ten years 20,980 22,021
41,304 43,411
Agency MBS 61,123 62,352
Total $ 102,427 $ 105,763
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, 2020 and 2019, loans held for sale consisted of conventional residential mortgages originated for subsequent sale, with an estimated fair value in excess of their carrying value. Therefore, no valuation reserve was necessary for loans held for sale as of the balance sheet dates.
Commercial and residential mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of commercial and residential mortgage loans serviced for others was $629.5 million and $579.9 million at December 31, 2020 and 2019, respectively.
Loans sold consisted of the following during the years ended December 31:
2020 2019
Loans Sold Net Gains on Sale Loans Sold Net Gains on Sale
(Dollars in thousands)
Residential loans $ 263,063 $ 8,158 $ 157,952 $ 2,867
Commercial loans 131 10 315 28
Total $ 263,194 $ 8,168 $ 158,267 $ 2,895
There were no obligations to repurchase loans for any amount at December 31, 2020, but there were contractual risk sharing commitments on certain sold loans totaling $747 thousand as of such date. (See Note 19.)
The Company generally retains the servicing rights on loans sold. At December 31, 2020 and 2019, the unamortized balance of servicing rights on loans sold with servicing retained was $2.3 million and $1.7 million, respectively, and is included in Other assets. The estimated fair value of these servicing rights was in excess of their carrying value at December 31, 2020 and 2019, and therefore no impairment reserve was necessary. The net capitalization and amortization of MSRs is included in Other income.
The following table presents the capitalization and amortization of loan servicing rights:
For The Years Ended December 31,
2020 2019
(Dollars in thousands)
Capitalization of servicing rights $ 1,736 $ 862
Amortization of servicing rights 1,194 812
Net capitalization of servicing rights $ 542 $ 50
Note 6. Loans
The composition of Net loans at December 31, was as follows:
2020 2019
(Dollars in thousands)
Residential real estate $ 183,166 $ 192,125
Construction real estate 57,417 69,617
Commercial real estate 320,627 289,883
Commercial 108,861 47,699
Consumer 2,601 3,562
Municipal 98,497 67,358
Gross loans 771,169 670,244
Allowance for loan losses (8,271) (6,122)
Net deferred loan (fees) costs (146) 1,043
Net loans $ 762,752 $ 665,165
There were 679 PPP loans totaling $66.2 million classified as commercial loans as of December 31, 2020. Origination fees received from the SBA on these PPP loans totaled $2.4 million and will be amortized over the lives of the respective loans. PPP loan origination fees of $953 thousand were recognized in earnings during the year ended December 31, 2020.
Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $210.0 million and $207.7 million were pledged as collateral for borrowings from the FHLB under a blanket lien at December 31, 2020 and 2019, respectively.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
December 31, 2020 Current 30-59 Days 60-89 Days 90 Days and over and accruing Nonaccrual Total
(Dollars in thousands)
Residential real estate $ 179,794 $ 2,166 $ 211 $ 368 $ 627 $ 183,166
Construction real estate 57,116 70 67 143 21 57,417
Commercial real estate 317,748 1,130 - - 1,749 320,627
Commercial 108,749 99 - - 13 108,861
Consumer 2,595 6 - - - 2,601
Municipal 98,497 - - - - 98,497
Total $ 764,499 $ 3,471 $ 278 $ 511 $ 2,410 $ 771,169
December 31, 2019 Current 30-59 Days 60-89 Days 90 Days and over and accruing Nonaccrual Total
(Dollars in thousands)
Residential real estate $ 187,022 $ 2,716 $ 1,304 $ 811 $ 272 $ 192,125
Construction real estate 68,731 470 19 368 29 69,617
Commercial real estate 286,795 940 150 - 1,998 289,883
Commercial 47,673 - 5 - 21 47,699
Consumer 3,532 21 6 - 3 3,562
Municipal 67,358 - - - - 67,358
Total $ 661,111 $ 4,147 $ 1,484 $ 1,179 $ 2,323 $ 670,244
There were no residential real estate loans in process of foreclosure at December 31, 2020 and two residential real estate loans totaling $64 thousand in process of foreclosure at December 31, 2019. A moratorium on residential mortgage foreclosures instituted by the State of Vermont in April 2020 related to the COVID-19 pandemic remained in effect as of year end. Aggregate interest not recognized on nonaccrual loans was $420 thousand and $271 thousand for the years ended December 31, 2020 and 2019, respectively.
Note 7. Allowance for Loan Losses and Credit Quality
Changes in the ALL, by class of loans, were as follows for the years ended:
December 31, 2020 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Balance, December 31, 2019 $ 1,392 $ 774 $ 3,178 $ 394 $ 23 $ 76 $ 285 $ 6,122
Provision (credit) for loan
losses 376 (11) 1,075 64 (3) 138 561 2,200
Recoveries of amounts
charged off 28 - - - 1 - - 29
1,796 763 4,253 458 21 214 846 8,351
Amounts charged off (20) - (54) - (6) - - (80)
Balance, December 31, 2020 $ 1,776 $ 763 $ 4,199 $ 458 $ 15 $ 214 $ 846 $ 8,271
December 31, 2019 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Balance, December 31, 2018 $ 1,368 $ 617 $ 2,933 $ 354 $ 23 $ 82 $ 362 $ 5,739
Provision (credit) for loan
losses 150 157 305 239 7 (6) (77) 775
Recoveries of amounts
charged off 5 - - 1 4 - - 10
1,523 774 3,238 594 34 76 285 6,524
Amounts charged off (131) - (60) (200) (11) - - (402)
Balance, December 31, 2019 $ 1,392 $ 774 $ 3,178 $ 394 $ 23 $ 76 $ 285 $ 6,122
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, was as follows:
December 31, 2020 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Individually evaluated
for impairment $ 30 $ - $ 21 $ 7 $ - $ - $ - $ 58
Collectively evaluated
for impairment 1,746 763 4,178 451 15 214 846 8,213
Total allocated $ 1,776 $ 763 $ 4,199 $ 458 $ 15 $ 214 $ 846 $ 8,271
December 31, 2019 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Individually evaluated
for impairment $ 39 $ - $ 149 $ 8 $ - $ - $ - $ 196
Collectively evaluated
for impairment 1,353 774 3,029 386 23 76 285 5,926
Total allocated $ 1,392 $ 774 $ 3,178 $ 394 $ 23 $ 76 $ 285 $ 6,122
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, was as follows:
December 31, 2020 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Total
(Dollars in thousands)
Individually evaluated
for impairment $ 1,782 $ 210 $ 2,422 $ 207 $ - $ - $ 4,621
Collectively evaluated
for impairment 181,384 57,207 318,205 108,654 2,601 98,497 766,548
Total $ 183,166 $ 57,417 $ 320,627 $ 108,861 $ 2,601 $ 98,497 $ 771,169
December 31, 2019 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Total
(Dollars in thousands)
Individually evaluated
for impairment $ 1,515 $ 223 $ 3,204 $ 299 $ - $ - $ 5,241
Collectively evaluated
for impairment 190,610 69,394 286,679 47,400 3,562 67,358 665,003
Total $ 192,125 $ 69,617 $ 289,883 $ 47,699 $ 3,562 $ 67,358 $ 670,244
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 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 by management to the Company's loans by class as of the balance sheet dates:
December 31, 2020 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Total
(Dollars in thousands)
Pass $ 166,119 $ 42,853 $ 172,048 $ 98,314 $ 2,595 $ 98,497 $ 580,426
Satisfactory/Monitor 13,756 14,319 144,784 10,116 6 - 182,981
Substandard 3,291 245 3,795 431 - - 7,762
Total $ 183,166 $ 57,417 $ 320,627 $ 108,861 $ 2,601 $ 98,497 $ 771,169
December 31, 2019 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Total
(Dollars in thousands)
Pass $ 174,798 $ 47,326 $ 168,654 $ 35,625 $ 3,499 $ 67,358 $ 497,260
Satisfactory/Monitor 14,520 21,819 117,004 10,974 57 - 164,374
Substandard 2,807 472 4,225 1,100 6 - 8,610
Total $ 192,125 $ 69,617 $ 289,883 $ 47,699 $ 3,562 $ 67,358 $ 670,244
The following tables provide information with respect to impaired loans by class of loan as of and for the years ended December 31, 2020 and 2019:
December 31, 2020 For The Year Ended December 31, 2020
Recorded Investment
(1) Principal Balance
(1) Related Allowance Average Recorded Investment Interest Income Recognized
(Dollars in thousands)
Residential real estate $ 208 $ 218 $ 30
Commercial real estate 1,634 1,774 21
Commercial 9 11 7
With an allowance recorded 1,851 2,003 58
Residential real estate 1,574 2,182 -
Construction real estate 210 231 -
Commercial real estate 788 890 -
Commercial 198 200 -
With no allowance recorded 2,770 3,503 -
Residential real estate 1,782 2,400 30 $ 1,710 $ 73
Construction real estate 210 231 - 216 4
Commercial real estate 2,422 2,664 21 2,977 70
Commercial 207 211 7 253 17
Total $ 4,621 $ 5,506 $ 58 $ 5,156 $ 164
December 31, 2019 For The Year Ended December 31, 2019
Recorded Investment
(1) Principal Balance
(1) Related Allowance Average Recorded Investment Interest Income Recognized
(Dollars in thousands)
Residential real estate $ 218 $ 228 $ 39
Commercial real estate 1,762 1,783 149
Commercial 11 12 8
With an allowance recorded 1,991 2,023 196
Residential real estate 1,297 1,832 -
Construction real estate 223 241 -
Commercial real estate 1,442 1,539 -
Commercial 288 290 -
With no allowance recorded 3,250 3,902 -
Residential real estate 1,515 2,060 39 $ 1,625 $ 149
Construction real estate 223 241 - 159 4
Commercial real estate 3,204 3,322 149 2,382 110
Commercial 299 302 8 322 23
Total $ 5,241 $ 5,925 $ 196 $ 4,488 $ 286
____________________
(1)Does not reflect government guaranties on impaired loans as of December 31, 2020 and 2019 totaling $514 thousand and $587 thousand, respectively.
The following is a summary of TDR loans by class of loan as of the balance sheet dates:
December 31, 2020 December 31, 2019
Number of Loans Principal Balance Number of Loans Principal Balance
(Dollars in thousands)
Residential real estate 32 $ 1,782 25 $ 1,515
Construction real estate 2 87 2 100
Commercial real estate 6 788 8 966
Commercial 5 207 5 290
Total 45 $ 2,864 40 $ 2,871
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, 2020 and 2019:
New TDRs During the New TDRs During the
Year Ended December 31, 2020 Year Ended December 31,2019
Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
(Dollars in thousands)
Residential real estate 8 $ 547 $ 549 1 $ 77 $ 79
Commercial - - - 1 15 15
At December 31, 2020, there were no TDR loans modified within the previous twelve months that had subsequently defaulted during the year then ended. At December 31, 2019, there was one residential TDR loan with a recorded investment balance of $79 thousand that had been modified within the previous twelve months that defaulted during the year then ended. TDR loans are considered defaulted at 90 days past due.
In March 2020, the CARES ACT was passed and federal banking agencies issued guidance, confirmed by the FASB, providing that certain short-term modifications made to loans to borrowers affected by the COVID-19 pandemic and government shutdown orders would not be considered TDRs under specified circumstances (See Note 1). During 2020, the Company executed modifications, under this guidance and the CARES ACT, on outstanding loan balances of $175.5 million, with total accrued interest of $1.2 million as of December 31, 2020. Of the total modifications executed, outstanding loan balances of $37.6 million remained subject to modification terms and carried accrued interest of $352 thousand as of December 31, 2020. The Company intends to continue to follow the CARES Act and the guidance of the banking regulators in making TDR determinations with respect to loans to borrowers affected by the COVID-19 pandemic.
At December 31, 2020 and 2019, 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:
2020 2019
(Dollars in thousands)
Land and land improvements $ 4,052 $ 3,922
Building and improvements 18,697 18,490
Furniture and equipment 10,329 10,402
Construction in progress and deposits on equipment 170 91
33,248 32,905
Less accumulated depreciation (13,209) (11,982)
$ 20,039 $ 20,923
Depreciation included in Occupancy and Equipment expenses amounted to $1.9 million and $1.6 million for the years ended December 31, 2020 and 2019, respectively.
Note 9. Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020, the Company had operating real estate leases for two branch locations, one loan production office, land upon which a branch location was constructed and two ATM locations. The lease agreements have maturity dates ranging from October 2021 to September 2047. As of December 31, 2020, the weighted average remaining life of the lease term for the operating leases was 23.07 years.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate as of January 2019 that corresponded to the remaining lease term for each of these leases at adoption of the ASU. As of December 31, 2020, the weighted average discount rate for operating leases was 3.88%.
The right-of-use assets and lease liabilities related to operating leases were as follows at December 31:
2020 2019
(Dollars in thousands)
Right-of-use assets included in Other assets $ 1,732 $ 1,861
Lease liabilities included in Accrued interest and other liabilities 1,789 1,894
Total estimated rental commitments for operating leases were as follows as of December 31, 2020:
(Dollars in thousands)
2021 $ 173
2022 125
2023 115
2024 111
2025 112
Thereafter 2,225
Total $ 2,861
A reconciliation of the operating lease undiscounted cash flows in the maturity analysis above and the operating lease liability recognized in the consolidated balance sheet is shown below:
December 31, 2020
(Dollars in thousands)
Undiscounted cash flows $ 2,861
Discount effect of cash flows (1,072)
Lease liabilities $ 1,789
Operating lease costs, included in Occupancy expenses, net on the consolidated statements of income were $206 thousand and $215 thousand for the years ended December 31, 2020 and 2019, respectively. Occupancy expense is shown in the consolidated statements of income, net of rental income of $230 thousand and $232 thousand for the years ended December 31, 2020 and 2019, respectively.
Note 10. 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 2011 Branch Acquisition, representing the core deposit intangible which is subject to straight-line amortization over the estimated 10 years 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 2020 and 2019. The amortization expense is included in Other expenses in the consolidated statements of income and is deductible for tax purposes. As of December 31, 2020, there is $71 thousand remaining amortization expense related to the core deposit intangible that will be expensed in 2021.
Note 11. Investment in Real Estate Limited Partnerships
The Company has purchased from time to time various interests in limited partnerships established to acquire, own and rent residential housing for elderly, low or moderate income individuals in northern Vermont and New Hampshire. The following is a summary of investments in real estate limited partnerships at December 31:
2020 2019
(Dollars in thousands)
Carrying values of investment carried at equity included in Other assets $ 6,584 $ 4,402
Capital contribution payable included in Accrued interest and other liabilities 1,351 493
The following table presents the net impact on the Provision for income taxes related to investments carried at equity:
For The Years Ended December 31,
2020 2019
(Dollars in thousands)
Provision for undistributed net losses of limited partnership investments $ 935 $ 745
Federal income tax credits related to limited partnership investments (987) (803)
Net effect on Provision for income taxes $ (52) $ (58)
Note 12. Deposits
The following is a summary of interest bearing deposits at December 31:
2020 2019
(Dollars in thousands)
Interest bearing checking accounts $ 231,465 $ 173,406
Savings and money market accounts 405,904 285,534
Time deposits, $100,000 and over 70,373 73,048
Other time deposits 71,315 75,605
$ 779,057 $ 607,593
Included in time deposits are brokered deposits of $15.0 million and $12.0 million at December 31, 2020 and 2019, respectively. Reciprocal deposits of $160.5 million and $127.3 million at December 31, 2020 and 2019, respectively, are included in deposit balances in the consolidated balance sheets.
The following is a summary of time deposits by maturity at December 31, 2020:
(Dollars in thousands)
2021 $ 114,919
2022 15,640
2023 5,212
2024 3,311
2025 2,606
$ 141,688
Time deposits of $22.9 million and $24.4 million equal or exceed the FDIC insurance limit of $250 thousand at December 31, 2020 and 2019, respectively.
Note 13. Borrowed Funds
Borrowed funds included option advance borrowings from the FHLB of $7.2 million and $47.2 million at December 31, 2020 and 2019, respectively. The FHLB option advance borrowings are a mix of straight bullets, balloons and amortizers with contractual maturities through 2023. All of the FHLB borrowings had interest rates ranging from 0.00% to 3.09% at December 31, 2020 and 2019. The weighted average interest rates on the borrowings were 3.07% and 2.01% at December 31, 2020 and 2019, respectively.
The contractual payments due for FHLB option advance borrowings, as of December 31, 2020, were as follows:
(Dollars in thousands)
2021 $ 164
2022 -
2023 7,000
$ 7,164
The Company has established both overnight and longer term lines of credit with the FHLB. These borrowings are secured by a blanket lien on qualified collateral consisting of loans with first mortgages secured by one-to-four family properties and certain commercial real estate loans. At December 31, 2020, pledged loans with a carrying value of $210.0 million provided a borrowing capacity of $134.1 million at the FHLB, less outstanding borrowings and other credit subject to collateralization of $21.9 million, resulting in remaining year-end borrowing capacity of $112.2 million. At December 31, 2019, pledged loans with a carrying value of $207.7 million provided a borrowing capacity of $127.5 million at the FHLB, less outstanding borrowings and other credit subject to collateralization of $61.7 million, resulting in remaining year-end borrowing capacity of $65.8 million.
A separate agreement has been established with the FHLB under which the Company has the authority, up to its available borrowing capacity, to collateralize public unit deposits with letters of credit issued by the FHLB. FHLB letters of credit in the amount of $23.6 million and $24.8 million were utilized as collateral for these deposits at December 31, 2020 and 2019, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $30 thousand and $27 thousand for the years ended December 31, 2020 and 2019, respectively.
In addition to its borrowing arrangements with the FHLB, Union maintains a preapproved Federal Funds line of credit with a correspondent bank totaling $15.0 million. Interest on advances under this line is payable daily and charged at the Federal Funds rate at the time of the borrowing. There were no outstanding borrowings on the Federal Funds purchase line at December 31, 2020 or 2019. In addition to the funding sources available to Union, the Company maintains a $5.0 million revolving line of credit with a correspondent bank. There were no outstanding borrowings on the line at December 31, 2020 or 2019.
Note 14. Income Taxes
The components of the provision for income taxes for the years ended December 31, were as follows:
2020 2019
(Dollars in thousands)
Current federal tax provision $ 3,134 $ 1,351
Current state tax provision 62 41
Deferred tax (benefit) provision (777) 438
$ 2,419 $ 1,830
The total provision for income taxes differs from the amounts computed at the statutory federal income tax rate of 21% primarily due to the following for the years ended December 31:
2020 2019
(Dollars in thousands)
Computed “expected” tax expense $ 3,197 $ 2,620
State taxes 49 32
Tax exempt interest (555) (513)
Increase in cash surrender value of COLI (67) (59)
Tax credits (1,013) (857)
Equity in losses of limited partnerships 788 640
Non-deductible expenses 44 46
Other (24) (79)
$ 2,419 $ 1,830
Listed below are the significant components of the net deferred tax liability at December 31:
2020 2019
(Dollars in thousands)
Components of the deferred tax asset
Bad debts $ 1,798 $ 1,329
Deferred compensation 300 227
Loans held for sale 271 32
Core deposit intangible 119 106
Other 55 37
Total deferred tax asset 2,543 1,731
Components of the deferred tax liability
Depreciation (1,254) (1,402)
Mortgage servicing rights (490) (371)
Limited partnership investments (86) (50)
Unrealized gain on investment securities available-for-sale (701) (262)
Goodwill (309) (276)
Prepaid expenses (132) (136)
Total deferred tax liability (2,972) (2,497)
Net deferred tax liability $ (429) $ (766)
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, 2020 will be realized and therefore no valuation allowance is warranted.
The net deferred income tax liability is included in Accrued interest and other liabilities in the consolidated balance sheets at December 31, 2020 and 2019.
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, 2020 and 2019. The Company is subject to income tax at the federal level and in the state of New Hampshire. Although the Company is not currently the subject of an examination by taxing authorities, the Company's tax years ended December 31, 2017 through 2019 are open to examination under the applicable statute of limitations. The 2020 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
401(k) Plan: Union maintains a tax-qualified 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. The 401(k) plan includes "Safe Harbor" provisions requiring annual nondiscretionary minimum contributions to the plan for all eligible participants in an amount equal to 3% of eligible earnings of each eligible participant. Additionally, in 2020 and 2019 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, 2020 and 2019:
2020 2019
(Dollars in thousands)
Employer matching $ 318 $ 270
Profit sharing $ 339 $ 280
Safe harbor $ 382 $ 336
Total $ 1,039 $ 886
Nonqualified Deferred Compensation Plans: The Company and Union have two nonqualified deferred compensation plans for directors and certain key officers, referred to in this Note as the 2008 Plan and the 2020 Plan. The Company accrued an expense of $8 thousand in 2020 and 2019, 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 $327 thousand and $359 thousand at December 31, 2020 and 2019, 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 $1.1 million and $1 million at December 31, 2020 and 2019, respectively, and are included in Company-owned life insurance in the Company's consolidated balance sheets.
The 2020 Plan, which amended and restated an earlier plan adopted in 2006, 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. As originally the Plan did not allow for employer contributions, the Board subsequently determined that employer contributions may be appropriate in certain circumstances and accordingly amended and restated the plan effective February 1, 2020. 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 2020 Plan is unfunded, representing general unsecured obligations of the Company of $1.1 million and $699 thousand as of December 31, 2020 and 2019, respectively, and are included in accrued interest and other liabilities in the consolidated balance sheets, including employer contributions of $24 thousand accrued as of December 31, 2020.
Note 16. Stock Based Compensation
The Company's stock-based compensation plan is the Union Bankshares, Inc. 2014 Equity Incentive Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock are available 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 December 31, 2020, there were outstanding grants under the plan of RSUs and incentive stock options as noted in the tables below.
RSUs. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. For each of the awards granted in 2020 and 2019, 50% of the RSUs awarded were in the form of Time-Based RSUs, which vest over three years, approximately one-third per year on the anniversary of the earned date; and 50% of the RSUs awarded were in the form of Performance-Based RSUs, which are subject to both performance and time based vesting conditions, with vesting of awards over two years, approximately one-half per year on the anniversary of the earned date. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.
The following table presents a summary of RSUs from the respective Award Plan Summaries as of December 31, 2020:
Number of RSUs Granted Weighted-Average Grant Date Fair Value Number of Unvested RSUs
2019 Award 3,734 $ 47.75 500
2020 Award 8,918 36.26 5,139
Total 12,652 5,639
Unrecognized compensation expense related to the unvested RSUs was $209 thousand and $492 thousand, as of December 31, 2020 and 2019, respectively.
On May 22, 2020, the Company's board of directors, as a component of total director compensation, granted an aggregate of 2,152 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 2021, 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. Director compensation expense related to this award is estimated to be $41 thousand of which $25 thousand has been recorded for the year ended December 31, 2020.
Incentive stock options. The 2014 Equity Plan replaced the Company's 2008 ISO Plan. There were no options granted in 2020 or 2019 under the 2014 Equity Plan. As of December 31, 2020, there were 4,500 incentive stock options outstanding under the 2014 Equity Plan, all of which were exercisable.
The exercise price of outstanding options under the 2014 Equity Plan 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 outstanding options have a one year requisite service period, vest after one year, and have a seven year contractual term. There was no compensation cost charged against income in 2020 or 2019 for stock options issued under the 2014 Equity Plan or the 2008 ISO Plan.
The following summarizes the stock option activity under the 2014 Equity Plan for the year ended December 31, 2020:
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Term Period
End
Aggregate
Intrinsic
Value
(Dollars in thousands, except per share data)
Outstanding at January 1, 2020 4,500 $ 24.00
Exercised - -
Forfeited/expired - -
Outstanding at December 31, 2020 4,500 $ 24.00 0.96 $ 8
Exercisable at December 31, 2020 4,500 $ 24.00 0.96 $ 8
The following summarizes the stock option activity under the 2008 ISO Plan for the year ended December 31, 2020:
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Term Period
End
Aggregate
Intrinsic
Value
(Dollars in thousands, except per share data)
Outstanding at January 1, 2020 1,000 $ 22.00
Exercised (1,000) $ 22.00
Forfeited/expired - -
Outstanding at December 31, 2020 -
Exercisable at December 31, 2020 -
The following summarizes information regarding the proceeds received by the Company from the exercise of stock options during the years ended December 31:
2020 2019
(Dollars in thousands, except per share data)
Proceeds received $ 22 $ 44
Number of shares exercised 1,000 2,000
Weighted average price per share $ 22.00 $ 22.00
Total intrinsic value of options exercised $ 14 $ 30
As of December 31, 2020, there was no unrecognized compensation cost as all outstanding options were fully vested and exercisable.
Note 17. Earnings Per Share
The following table presents the reconciliation between the calculation of basic EPS and diluted EPS for the years ended December 31, 2020 and 2019:
2020 2019
(Dollars in thousands, except per share data)
Net income $ 12,805 $ 10,648
Weighted average common shares outstanding for basic EPS 4,474,649 4,468,336
Dilutive effect of stock-based awards (1) 18,508 12,856
Weighted-average common and potential common shares for diluted EPS 4,493,157 4,481,192
Earnings per common share:
Basic EPS $ 2.86 $ 2.38
Diluted EPS $ 2.85 $ 2.38
____________________
(1)Dilutive effect of stock based awards represents the effect of the assumed exercise of stock options and vesting of restricted stock units. Unvested awards do not have dividend or dividend equivalent rights.
Note 18. 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, 2020 and 2019, the Company had binding loan commitments to sell residential mortgage loans at fixed rates totaling $18.3 million and $7.1 million, respectively. The fair value adjustment 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:
Contract or
Notional Amount
2020 2019
(Dollars in thousands)
Commitments to originate loans $ 61,431 $ 35,689
Unused lines of credit 132,502 103,623
Standby and commercial letters of credit 3,115 2,308
Credit card arrangements 308 311
MPF credit enhancement obligation, net (See Note 19) 728 687
Commitment to purchase investment in a real estate limited partnership 2,000 3,000
Total $ 200,084 $ 145,618
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 creditworthiness 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, 2020 and 2019.
Note 19. Commitments and Contingencies
Contingent Liabilities: The Company sells 1-4 family residential mortgage loans under the MPF program with FHLB (See Note 18). Under this program, the Company shares in the credit risk of each mortgage loan, 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 loan 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, 2020, the Company had sold $31.6 million in loans through the MPF program since inception of its participation in the program, with an outstanding principal balance of $10.4 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, 2020 and 2019, the notional amount of the maximum contingent contractual liability related to this program was $747 thousand and $705 thousand, respectively, of which $19 thousand and $18 thousand had been recorded as a reserve through Accrued interest and other liabilities at December 31, 2020 and 2019, 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 20. Fair Value Measurement
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: The Company’s AFS investment 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 December 31, 2020 and 2019, segregated by fair value hierarchy level, are summarized below:
Fair Value Measurement
Fair
Value Quoted Prices in Active Markets for
Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2020: (Dollars in thousands)
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises $ 6,548 $ - $ 6,548 $ -
Agency MBS 62,352 - 62,352 -
State and political subdivisions 28,461 - 28,461 -
Corporate 8,402 - 8,402 -
Total debt securities $ 105,763 $ - $ 105,763 $ -
Other investments:
Mutual funds $ 1,047 $ 1,047 $ - $ -
December 31, 2019:
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises $ 6,292 $ - $ 6,292 $ -
Agency MBS 46,024 - 46,024 -
State and political subdivisions 26,965 - 26,965 -
Corporate 8,112 - 8,112 -
Total debt securities $ 87,393 $ - $ 87,393 $ -
Other investments:
Mutual funds $ 690 $ 690 $ - $ -
There were no transfers in or out of Levels 1 and 2 during the years ended December 31, 2020 and 2019, nor were there any Level 3 assets at any time during those 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 impaired loans and MSRs, were not considered material at December 31, 2020 or 2019. 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.
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
December 31, 2020
Fair Value Measurement
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 $ 122,771 $ 122,771 $ 122,771 $ - $ -
Interest bearing deposits in banks 12,699 12,699 - 12,699 -
Investment securities 106,810 106,810 1,047 105,763 -
Loans held for sale 32,188 33,437 - 33,437 -
Loans, net
Residential real estate 181,355 185,890 - - 185,890
Construction real estate 56,643 56,882 - - 56,882
Commercial real estate 315,522 324,085 - - 324,085
Commercial 108,382 106,358 - - 106,358
Consumer 2,586 2,557 - - 2,557
Municipal 98,264 98,973 - - 98,973
Accrued interest receivable 4,129 4,129 - 446 3,683
Nonmarketable equity securities 1,150 N/A N/A N/A N/A
Financial liabilities
Deposits
Noninterest bearing 215,245 215,245 215,245 - -
Interest bearing 637,369 637,369 637,369 - -
Time 141,688 142,605 - 142,605 -
Borrowed funds
Long-term 7,164 7,585 - 7,585 -
Accrued interest payable 108 108 - 108 -
December 31, 2019
Fair Value Measurement
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 $ 51,134 $ 51,134 $ 51,134 $ - $ -
Interest bearing deposits in banks 6,565 6,671 - 6,671 -
Investment securities 88,083 88,083 690 87,393 -
Loans held for sale 7,442 7,587 - 7,587 -
Loans, net
Residential real estate 191,032 192,955 - - 192,955
Construction real estate 68,951 68,381 - - 68,381
Commercial real estate 286,871 288,931 - - 288,931
Commercial 47,379 45,872 - - 45,872
Consumer 3,545 3,483 - - 3,483
Municipal 67,387 67,103 - - 67,103
Accrued interest receivable 2,702 2,702 - 435 2,267
Nonmarketable equity securities 2,607 N/A N/A N/A N/A
Financial liabilities
Deposits
Noninterest bearing 136,434 136,434 136,434 - -
Interest bearing 458,940 458,940 458,940 - -
Time 148,653 148,542 - 148,542 -
Borrowed funds
Short-term 40,000 40,000 40,000 - -
Long-term 7,164 7,416 - 7,416 -
Accrued interest payable 673 673 - 673 -
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.
Note 21. Transactions with Related Parties
The Company has had, and is 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). In the opinion of management, these transactions were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and 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:
2020 2019
(Dollars in thousands)
Balance, January 1, $ 1,300 $ 749
New loans and advances on lines 1,632 1,045
Repayments (1,222) (690)
Other, net (979) 196
Balance, December 31, $ 731 $ 1,300
Balance available on lines of credit or loan commitments $ 1,123 $ 1,153
There were no loans to related parties that were past due, in nonaccrual status or that had been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower, or that were considered classified at December 31, 2020 or 2019.
Deposit accounts with related parties were $1.1 million and $1.3 million at December 31, 2020 and 2019, respectively. Union's Asset Management Group also invested $266 thousand and $348 thousand in certificates of deposit with Union at December 31, 2020 and 2019, respectively.
Note 22. 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 the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier I risk-based capital ratio of 6.0%, a minimum common equity Tier I risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a 2.5% capital conservation buffer consisting of common Tier I equity, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to risk-weighted assets they must maintain to avoid limits on capital distributions and certain bonus payments to executive officers and similar employees.
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 directed the federal banking regulators to adopt rules providing for a simplified regulatory capital framework for qualifying community banking organizations. In September 2019, the banking regulators finalized a rule that introduced the community bank leverage ratio (CBLR) framework as an optional simplified measure of capital adequacy for qualifying institutions. Beginning with the March 31, 2020 regulatory capital calculation, a banking organization with a Tier I leverage ratio greater than 9.0%, less than $10 billion in average consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities may opt into the CBLR framework and will be deemed "well capitalized" and will not be required to report or calculate risk-based capital. A community banking organization that does not meet the requirements for use of the simplified CBLR framework will continue to calculate its regulatory capital ratios under existing guidelines. A provision of the CARES Act temporarily lowers the minimum Tier 1 leverage ratio to 8.0% for a banking organization to elect to use the CBLR framework, with a phased increase back to 9.0% by the end of 2021. As of December 31, 2020, the Tier I leverage ratio was 7.31% and 7.26% for the Company and Union, respectively.
The Company and Union's risk-based capital ratios exceeded regulatory guidelines at December 31, 2020 and 2019, and, specifically, Union was "well capitalized" under Prompt Corrective Action provisions for each period. There were no conditions or events that occurred subsequent to December 31, 2020 that would change the Company or Union's regulatory capital categorization.
Union's and the Company's regulatory capital amounts and ratios as of the balance sheet dates are presented in the following tables:
Actual For Capital
Adequacy
Purposes To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
As of December 31, 2020 Amount Ratio Amount Ratio Amount Ratio
Company: (Dollars in thousands)
Total capital to risk weighted assets $ 83,464 13.87 % $ 48,141 8.00 % N/A N/A
Tier 1 capital to risk weighted assets 75,933 12.62 % 36,101 6.00 % N/A N/A
Common Equity Tier 1 to risk weighted assets 75,933 12.62 % 27,076 4.50 % N/A N/A
Tier 1 capital to average assets 75,933 7.31 % 41,550 4.00 % N/A N/A
Union:
Total capital to risk weighted assets $ 82,842 13.79 % $ 48,059 8.00 % $ 60,074 10.00 %
Tier 1 capital to risk weighted assets 75,324 12.54 % 36,040 6.00 % 48,054 8.00 %
Common Equity Tier 1 to risk weighted assets 75,324 12.54 % 27,030 4.50 % 39,044 6.50 %
Tier 1 capital to average assets 75,324 7.26 % 41,501 4.00 % 51,876 5.00 %
Actual For Capital
Adequacy
Purposes To be Well
Capitalized Under
Prompt Corrective
Action Provisions
As of December 31, 2019 Amount Ratio Amount Ratio Amount Ratio
Company: (Dollars in thousands)
Total capital to risk weighted assets $ 74,510 13.02 % $ 45,782 8.00 % N/A N/A
Tier 1 capital to risk weighted assets 68,388 11.95 % 34,337 6.00 % N/A N/A
Common Equity Tier 1 to risk weighted assets 68,388 11.95 % 25,753 4.50 % N/A N/A
Tier 1 capital to average assets 68,388 8.09 % 33,814 4.00 % N/A N/A
Union:
Total capital to risk weighted assets $ 74,167 12.98 % $ 45,715 8.00 % $ 57,139 10.00 %
Tier 1 capital to risk weighted assets 68,045 11.91 % 34,280 6.00 % 45,706 8.00 %
Common Equity Tier 1 to risk weighted assets 68,045 11.91 % 25,710 4.50 % 37,136 6.50 %
Tier 1 capital to average assets 68,045 8.06 % 33,769 4.00 % 42,212 5.00 %
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.
Note 23. 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. The Company maintains 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, which was initially adopted in 2010, was most recently reauthorized in January 2021 and will expire on December 31, 2021 unless reauthorized. The Company repurchased no shares under this program during 2020, while 300 shares, at a total cost of $13 thousand were repurchased under the program during 2019. Since inception, the Company had repurchased 17,693 shares of its common stock as of December 31, 2020, at prices ranging from $17.86 to $48.82 per share and at a total cost of $472 thousand.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan (DRIP) whereby registered stockholders may elect to reinvest cash dividends and optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of December 31, 2020, 4,139 shares of stock had been issued from treasury stock under the DRIP, since inception of the Plan in 2016.
Note 24. Other Comprehensive Income
The components of Accumulated OCI, net of tax, at December 31 were:
2020 2019
(Dollars in thousands)
Net unrealized gain on investment securities available-for-sale $ 2,636 $ 986
The following table discloses the tax effects allocated to each component of OCI for the years ended:
December 31, 2020 December 31, 2019
Before-Tax Amount Tax (Expense) or Benefit Net-of-Tax Amount Before-Tax Amount Tax (Expense) or Benefit Net-of-Tax Amount
(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains arising during the year on investment securities available-for-sale $ 2,099 $ (440) $ 1,659 $ 2,568 $ (539) $ 2,029
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income (11) 2 (9) (25) 5 (20)
Total other comprehensive income $ 2,088 $ (438) $ 1,650 $ 2,543 $ (534) $ 2,009
The following table discloses information concerning the reclassification adjustments from OCI for the years ended December 31:
Reclassification Adjustment Description 2020 2019 Affected Line Item in
Consolidated Statements of Income
(Dollars in thousands)
Investment securities available-for-sale:
Net gains on investment securities available-for-sale $ (11) $ (25) Net gains on sales of investment securities available-for-sale
Tax benefit 2 5 Provision for income taxes
Total reclassifications $ (9) $ (20) Net income
Note 25. Subsequent Events
Events occurring subsequent to December 31, 2020 have been evaluated as to their potential impact on the consolidated financial statements.
On January 20, 2021, the Board of Directors declared a cash dividend of $0.33 per share for the quarter, an increase of 3.1% from the cash dividend of $0.32 paid in recent prior quarters. The dividend is payable February 5, 2021 to shareholders of record as of February 1, 2021.
Note 26. 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, 2020 and 2019
2020 2019
(Dollars in thousands)
ASSETS
Cash $ 93 $ 46
Other investments 60 27
Investment in subsidiary - Union 80,257 71,500
Other assets 869 712
Total assets $ 81,279 $ 72,285
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 412 $ 442
Total liabilities 412 442
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,954,732 shares
issued at December 31, 2020 and 4,948,245 shares issued at December 31, 2019
9,910 9,897
Additional paid-in capital 1,393 1,124
Retained earnings 71,097 64,019
Treasury stock at cost; 474,632 shares at December 31, 2020 and 476,268 shares
at December 31, 2019
(4,169) (4,183)
Accumulated other comprehensive income 2,636 986
Total stockholders' equity 80,867 71,843
Total liabilities and stockholders' equity $ 81,279 $ 72,285
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, 2020 and 2019
2020 2019
Revenues (Dollars in thousands)
Dividends - bank subsidiary - Union $ 6,350 $ 5,925
Other income 28 24
Total revenues 6,378 5,949
Expenses
Interest 18 16
Administrative and other 539 536
Total expenses 557 552
Income before applicable income tax benefit and equity in undistributed
net income of subsidiary 5,821 5,397
Applicable income tax benefit (113) (113)
Income before equity in undistributed net income of subsidiary 5,934 5,510
Equity in undistributed net income - Union 6,871 5,138
Net income $ 12,805 $ 10,648
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020 and 2019
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES (Dollars in thousands)
Net income $ 12,805 $ 10,648
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Union (6,871) (5,138)
(Increase) decrease in other assets (157) 55
Decrease in other liabilities (30) (137)
Net cash provided by operating activities 5,747 5,428
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of other investments - 47
Purchases of other investments (33) (7)
Net cash (used in) provided by investing activities (33) 40
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (5,689) (5,501)
Issuance of common stock 22 44
Purchase of treasury stock - (13)
Net cash used in financing activities (5,667) (5,470)
Net decrease in cash 47 (2)
Cash, beginning of year 46 48
Cash, end of year $ 93 $ 46
Supplemental Disclosures of Cash Flow Information
Interest paid $ 18 $ 16
Dividends paid on Common Stock:
Dividends declared $ 5,727 $ 5,540
Dividends reinvested (38) (39)
$ 5,689 $ 5,501
Note 27. Quarterly Financial Data (Unaudited)
A summary of consolidated financial data for each of the four quarters of 2020 and 2019 is presented below:
Quarters in 2020 Ended
March 31, June 30, Sept. 30, Dec 31,
(Dollars in thousands, except per share data)
Interest and dividend income $ 8,963 $ 9,139 $ 9,343 $ 9,305
Interest expense 1,457 1,361 1,158 1,171
Net interest income 7,506 7,778 8,185 8,134
Provision for loan losses 300 500 800 600
Noninterest income 2,518 2,988 5,508 4,989
Noninterest expenses 7,172 7,111 7,995 7,904
Net income 2,196 2,668 4,147 3,794
Earnings per common share $ 0.49 $ 0.60 $ 0.92 $ 0.85
Quarters in 2019 Ended
March 31, June 30, Sept. 30, Dec 31,
(Dollars in thousands, except per share data)
Interest and dividend income $ 8,592 $ 8,904 $ 9,140 $ 9,234
Interest expense 1,227 1,397 1,493 1,483
Net interest income 7,365 7,507 7,647 7,751
Provision for loan losses 50 150 150 425
Noninterest income 2,232 2,471 2,723 3,029
Noninterest expenses 6,527 6,800 7,005 7,140
Net income 2,621 2,530 2,738 2,759
Earnings per common share $ 0.59 $ 0.56 $ 0.62 $ 0.61
Note 28. Other Noninterest Income and Other Noninterest Expenses
The components of other noninterest income and other noninterest expenses for the years ended December 31, 2020 and 2019 were as follows:
2020 2019
Income (Dollars in thousands)
Income from mortgage servicing rights, net $ 542 $ 50
Other income 411 553
Total other income $ 953 $ 603
Expenses
ATM network and debit card expense $ 800 $ 790
Advertising and public relations 544 555
Vermont franchise tax 759 678
Professional fees 774 701
Director and advisory board fees 505 502
Other expenses 4,138 3,934
Total other expenses $ 7,520 $ 7,160
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Union Bankshares, Inc. and Subsidiary
Opinions on the Financial Statements
We have audited the accompanying consolidated balance sheets of Union Bankshares, Inc. and Subsidiary (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates..
Board of Directors and Stockholders
Union Bankshares, Inc. and Subsidiary
Allowance for Loan Losses
As described in Notes 1, 6 and 7 to the Company's consolidated financial statements, the Company has a gross loan portfolio of $771.1 million and related allowance for loan losses of $8.3 million as of December 31, 2020. The Company's allowance for loan losses is a material and complex estimate requiring significant management judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan portfolio. The level of the allowance for loan losses is based on mangagement’s periodic evaluation of the loan portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. Changes in these assumptions could have a material effect on the Company’s financial results. The allowance for loan losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date.
The general component of the allowance for loan losses is based on historical loss experience, adjusted for qualitative factors, for each class of loans with similar risk characteristics. The Company considers relevant credit quality indicators for each loan class, stratifies loans by risk rating, and estimates losses for each loan class based upon their nature and risk profile. This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. The qualitative factors determined for each loan class are subjectively selected by management using certain objective measurements period over period. The qualitative factors are adjusted based on management’s assessment and include changes in loan underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal and regulatory issues. Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed
The primary procedures we performed to address this critical audit matter included:
•Testing the design of controls relating to management's review of loans, assignment of risk ratings, and consistency of application of accounting policies.
•Evaluating the reasonableness of assumptions and sources of data used by management in forming the qualitative loss factors by performing retrospective review of historic loan loss experience and analyzing data used in developing the assumptions, including assessment of whether there were additional qualitative considerations relevant to the loan portfolio.
•Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used.
•Evaluating the appropriateness of the Company's loan risk rating policy and testing the consistency of its application.
•Evaluating the appropriateness of specific reserves for impaired loans.
•Verifying the mathematical accuracy and computation of the allowance for loan losses by re-performing or independently calculating significant elements of the allowance for loan losses based on relevant source documents.
We have served as the Company's auditor since 2009.
Portland, Maine
March 19, 2021
Vermont Registration No. 92-0000278

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2020. 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, 2020.
This annual report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to permanent relief from such requirement accorded to smaller reporting companies.
There were no changes in the Company's internal controls over financial reporting during the fourth quarter of 2020 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.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The following information from the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders is hereby incorporated by reference:
Listing of the names, ages, principal occupations, business experience and specific qualifications of the directors and nominees 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 - Delinquent Section 16(a) Reports”.
Information regarding the composition and meetings of the Audit Committee, and the Audit Committee financial expert, under the caption "PROPOSAL I: TO ELECT DIRECTORS - Board Committees and Corporate Governance - Audit Committee."
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.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The following information from the Company's Proxy Statement for the 2021 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 is omitted, in accordance with the regulatory relief available to smaller reporting companies in Release Nos. 33-10513 and 34-83550.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 2021 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”.
The following table summarizes certain information regarding securities available for issuance under the Company's equity compensation plans as of December 31, 2020:
Equity Compensation Plan Information as of December 31, 2020:
Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a) (1) (b) (2) (c) (3)
Equity compensation plans approved by security holders 10,139 $ 24.00 11,425
Equity compensation plans not approved by security holders - - -
Total 10,139 $ 24.00 11,425
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(1)Includes 4,500 shares issuable upon exercise of incentive stock options granted under the 2014 Equity Plan, and 5,639 shares issuable upon vesting of restricted stock units (“RSUs”) granted under the 2014 Equity Plan for which performance conditions have been satisfied but which are also subject to time-based vesting conditions.
(2)Calculated solely with respect to outstanding stock options; RSUs not included in calculation.
(3)All of such shares are available for issuance pursuant to future awards under the 2014 Equity Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Party Transactions, and Director Independence
The following information from the Company's Proxy Statement for the 2021 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.”
Information regarding Director independence under the caption "PROPOSAL I: TO ELECT DIRECTORS - Director Independence."

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The following information from the Company's Proxy Statement for the 2021 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 - Audit Fees.”
Description of Audit Committee pre-approval guidelines set forth under the caption “PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS - Audit Committee Preapproval Guidelines.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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, 2020 and 2019
2)Consolidated Statements of Income for the years ended December 31, 2020 and 2019
3)Consolidated Statements of Comprehensive Income for the years ended December 31, 2020 and 2019
4)Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2020 and 2019
5)Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
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:
Item No:
3.1
Amended and Restated Articles of Incorporation of Union Bankshares, Inc. (as of August 1, 2007), previously filed with the Commission as Exhibit 3.1 to the Company's June 30, 2007 Form 10-Q and incorporated herein by reference.
3.2
Bylaws of Union Bankshares, Inc., as amended and restated, previously filed with the Commission on March 18, 2021 as Exhibit 99.1 to Form 8-K and incorporated herein by reference.
4.1
Description of Securities, previously filed as Exhibit 4 to the Company's 2019 Form 10-K and incorporated herein by reference.
10.1
2008 Amended and Restated Nonqualified Deferred Compensation Plan of Union Bankshares, previously filed with the Commission as Exhibit 10.3 to the Company's 2008 Form 10-K and incorporated herein by reference.*
10.2
2020 Amended and Restated Executive Nonqualified Excess Plan of Union Bankshares Inc. and Subsidiary.*
10.3
First Amendment to the Union Bankshares, Inc. Executive Nonqualified Excess Plan, previously filed with the Commission as Exhibit 10.5 to the Company's 2008 Form 10-K and incorporated herein by reference.*
10.4
2008 Incentive Stock Option Plan of Union Bankshares Inc. and Subsidiary, previously filed on April 10, 2008 with the Commission as Exhibit 10.1 to Form 8-K and incorporated herein by reference.*
10.5
Short Term Incentive Performance Plan, previously filed with the Commission on February 9, 2012 as Exhibit 10.1 to Form 8-K and incorporated herein by reference.*
10.6
Union Bankshares, Inc. 2014 Equity Incentive Plan, previously filed with the Commission on April 15, 2014 as Appendix A to the Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders and incorporated herein by reference.*
10.7
Change in Control Agreement dated June 2, 2014, between Union Bank and David S. Silverman, previously filed with the Commission on June 4, 2014 as Exhibit 10.1 to Form 8-K and incorporated herein by reference.*
10.8
Change in Control Agreement dated June 2, 2014, between Union Bank and Karyn J. Hale, previously filed with the Commission on June 4, 2014 as Exhibit 10.2 to Form 8-K and incorporated herein by reference.*
10.9
Change in Control Agreement date June 2, 2014, between Union Bank and Jeffery G. Coslett, previously filed with the Commission as Exhibit 10.10 to the Company's 2014 Form 10-K and incorporated herein by reference.*
10.10
Form of Stock Option Agreement for 2008 Incentive Stock Option Plan of Union Bankshares, Inc. and Subsidiary, previously filed with the Commission as Exhibit 10.11 to the Company's 2014 Form 10-K and incorporated herein by reference.*
10.11
Form of Stock Option Agreement for 2014 Equity Incentive Plan of Union Bankshares, Inc. and Subsidiary, previously filed with the Commission as Exhibit 10.12 to the Company's 2014 Form 10-K and incorporated herein by reference.*
10.12
Form of Restricted Stock Unit Award Certificate under the Company's 2014 Equity Incentive Plan.*
10.13
Supplemental Executive Retirement Agreement dated March 1, 2020 between David S. Silverman and Union Bank.*
21.1
Subsidiaries of the Company.
23.1
Consent of Berry Dunn McNeil & Parker, LLC
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101 The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the audited consolidated balance sheets, (ii) the audited consolidated statements of income for the years ended December 31, 2020 and 2019, (iii) the audited consolidated statements of comprehensive income, (iv) the audited consolidated statement of changes in stockholders' equity, (v) the audited consolidated statements of cash flows and (vi) related notes.
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* 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.