UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006 Commission file number 001-15985
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
20 LOWER MAIN STREET
MORRISVILLE, VT 05661-0667
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Securities registered pursuant to section 12(b) of the Act:
Common Stock, $2.00 par value American Stock Exchange
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(Title of class) (Exchanges registered on)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer", in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the registrant on June 30, 2006 was $67,515,992 based on the closing price on the American Stock Exchange on such date of $21.90 per share. For purposes of this calculation, all directors, executive officers, and named executives of the Registrant are assumed to be affiliates. Such assumption, however, shall not be deemed to be an admission of such status as to any such individual.
As of March 14, 2007, there were 4,530,414 shares of the registrant's $2 par value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically designated portions of the following documents are incorporated by reference in the indicated Part of this Annual Report on Form 10-K:
Document Part -------- ---- Annual Report to Shareholders for the year ended December 31, 2006 I, II Proxy Statement for the 2007 Annual Meeting of Shareholders III |
UNION BANKSHARES, INC.
Table of Contents
Part I
Item 1--Business 3
Item 1A--Risk Factors 11
Item 1B--Unresolved Staff Comments 14
Item 2--Properties (a) 14
Item 3--Legal Proceedings 15
Item 4--Submission of Matters to a Vote of Security Holders 15
Part II
Item 5--Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities (a) 15
Item 6--Selected Financial Data 16
Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations (a) 17
Item 7A--Quantitative and Qualitative Disclosures about Market Risk (a) 17
Item 8--Financial Statements and Supplementary Data (a) 17
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 17
Item 9A--Controls and Procedures (a) 17
Item 9B--Other Information 17
Part III
Item 10--Directors, Executive Officers and Corporate Governance (b) 17
Item 11--Executive Compensation (b) 18
Item 12--Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters (b) 18
Item 13--Certain Relationships and Related Transactions, and
Director Independence (b) 18
Item 14--Principal Accountant Fees and Services (b) 18
Part IV
Item 15--Exhibits, Financial Statement Schedules 19
Signatures 20
Exhibit Index 21
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(a) The information required by Part I, Item 2 and Part II, Items 5, 7, 7A,
and 8 is incorporated herein by reference, in whole or in part, from the
2006 Annual Report to Shareholders.
(b) The information required by Part III Items 10, 11, 12, 13 and 14 is
incorporated herein by reference, in whole or in part, from the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May
16, 2007. The incorporation by reference herein of portions of the Proxy
Statement shall not be deemed to specifically incorporate by reference the
information referred to in Items 407(d)(1)-(3), 201(f) and 407(e)(5) of
Regulation S-K.
Part I--Item 1 Business
General: Union Bankshares, Inc. ("Company") is a one-bank holding company whose subsidiary is Union Bank ("Union"). It was incorporated in the State of Vermont in 1982. Union Bank was organized and chartered as a State bank in 1891 and became a wholly owned subsidiary of the Company in 1982 upon its formation. Both Union Bankshares, Inc. and Union Bank are headquartered in Morrisville, Vermont.
The Company has one definable business segment, Union Bank, which is a commercial bank operating in northern Vermont and New Hampshire. Union is a community bank that provides a full range of commercial and retail banking services. The purpose of Union is to make a profit for the Company while competitively serving the financial needs of the communities, the businesses, and the citizens within its service area. The Company's business is that of a community bank in the financial services industry and no lines of financial products are beyond its purview as long as the Company is equipped and capable of delivering the products efficiently and effectively within the regulated environment in which it operates.
Union has 162 full time equivalent employees and considers its employee relations to be satisfactory. The Company, itself, does not have any paid employees.
The Company's income is derived principally from interest on loans and earnings on other investments. Its primary expenses arise from interest paid on deposits and borrowings and general overhead expenses. The consolidated assets of the Company have grown from $337 million to $381 million over the last five years or 13.1% while consolidated deposits have grown from $286 million to $320 million or 11.9% during that same period. Please refer to the schedule of "Selected Financial Data", which has been restated for applicable periods for the 3 for 2 stock split in 2003, at Part II-Item 6 of this annual report for further details.
Description of Services: The Company offers full retail and commercial banking services to its customers. The Company primarily emphasizes providing retail banking services to individuals living within its market area and commercial banking services to small and medium-sized corporations, partnerships, and sole proprietorships, as well as nonprofit organizations, local municipalities and school districts. The Company's lending activities are targeted at increasing residential mortgage and construction loan originations, and expanding commercial and municipal lending including the commercial real estate market. The Company works with customers and its business partners and government agencies to design financing that best meets our customers' needs, which might include involvement of the Vermont Housing Finance Agency, the Small Business Administration, ("SBA") or the Federal Home Loan Bank ("FHLB") of Boston, to name a few. The Company utilizes its lending activities to develop broader customer relationships in areas served by its network of branches as a means to augment deposits. The Company produces loans primarily for its portfolio although it periodically sells or participates out a portion of the loans produced to mitigate interest rate or credit risk. See "Discussion of Financial Condition" in Part II-Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") for information on the composition of the Company's loan portfolio by type of loan including loans held for sale and on asset quality.
The Company's retail loan portfolio consists primarily of mortgage loans, construction (B.U.I.L.D.) loans, home equity loans and lines of credit, traditional installment loans and personal lines of credit. The Company's commercial loan portfolio consists of term loans, lines of credit and commercial real estate loans provided to primarily locally based borrowers. The municipal loan portfolio consists of term loans and construction financing.
Services offered to our customers include, but are not limited to, the following:
o Commercial loans for business purposes to business owners and
investors for plant and equipment, lines of credit, working capital,
real estate renovation, and other sound business purposes;
o Commercial real estate loans on income producing properties, including
commercial construction loans;
o SBA guaranteed loans;
o Cash Management services, including account reconciliation, credit
card depository, Automated Clearing House origination, wire transfers
and night depository;
o Municipal term loans and construction financing;
o Merchant credit card services for the deposit and immediate credit of
sales drafts from retail merchants, restaurants, professionals and the
local tourism industry;
o Debit MasterCard and VISA credit cards;
o Business checking accounts;
o Other services based on the individual needs of the customer including
standby letters of credit, travelers or bank checks, and safe deposit
boxes;
o Automated Teller Machine ("ATM") services and cards;
o Telephone and Internet banking services, including bill pay;
o Home improvement loans, home equity lines of credit, and overdraft
checking privileges against preauthorized lines of credit;
o Residential mortgage loans;
o B.U.I.L.D. loans for residential construction;
o Retail depository services including personal checking accounts, NOW
accounts, savings accounts, money market accounts, certificates of
deposit, and IRA/SEP/KEOGH accounts;
o The deposits of Union are insured by the Deposit Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") up to legal limits
(generally $100,000 per depositor) with higher levels of insurance
coverage available for certain retirement accounts and through Union's
participation in the Certificate of Deposit Account Registry Service
("CDARS") of Promontory Interfinancial Network; and
o Asset Management services to individuals and organizations.
Consistent with the objective of the Company to serve the needs of individuals, businesses and others within the communities served, the Company seeks to concentrate its assets in loans. To be consistent with the requirements of prudent banking practices, adequate assets are invested in high-grade securities to provide liquidity, diversification of income sources and safety. See "Discussion of Financial Condition" in Part II-Item 7, "MD&A" for information on the composition of Union's investment portfolio by type and maturity as well as other sources of liquidity.
The risk of nonpayment (or deferred payment) of loans is inherent in commercial banking. The Company's marketing focus on individuals and small- to medium-sized businesses may result in the assumption by it of certain lending risks. Management carefully evaluates all loan applications and attempts to minimize credit risk exposure by use of thorough loan application, approval and monitoring procedures, however, there can be no assurance that such procedures will entirely reduce such lending risks. See Part I, Item 1A "Risk Factors" for additional information about the risks inherent in the Company's business.
Source of Business: Management believes that the market segments targeted, individuals, small to medium sized businesses, and municipalities in the Company's market area, demand the convenience and personal service that a smaller, independent financial institution can offer. It is these themes of convenience and personal service that form the basis of the Company's business development strategies. At December 31, 2006, Union maintained 13 branch offices, a loan production office in St. Albans, Vermont, and 30 ATMs, and also provided many of its services via the telephone and the Internet.
Management's operational strategy includes continued evaluation of changing market needs and design and implementation of products and services to meet those needs, as well as the establishment and maintenance of necessary infrastructure necessary to deliver those products and services effectively and efficiently. Measures taken by management in recent years to implement this approach have included the opening of a new loan production office in St. Albans, Vermont in January 2005, which represented a further westward expansion in Franklin County of the Company's service area; the renovation and expansion of the Portland Street, St. Johnsbury branch; and the redesign of Union's personal deposit products to become more competitive in the market. The strategies for 2006 included the expansion to a full service branch location in Littleton, New Hampshire in March 2006; the introduction of a new, more competitive small business checking account; the introduction of tiered variable-rate certificates of deposit which also allow additional deposits and limited withdrawals; and the addition of another ATM location. Strategies for 2007 include the expansion of the Company's Main Office; the addition of at least one additional ATM to the network; the exploration of additional branch locations; the installation of new "platform" software to streamline new deposit processing, document imaging, Check 21 imaging, remote image capture; and a new internal computer network. The directors and management of the Company intend to continue to offer products and services that will allow the Company to manage responsibly the growth of its assets, while building and enhancing stockholder value, preserving Union Bank's image as a premier Vermont community bank and building that reputation in the northern New Hampshire market.
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.
Competition: The Company and Union face substantial competition for loans and deposits in their market area from local 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. The Company anticipates continued strong competition from such financial institutions for the foreseeable future. Within the Company's market area are branches of several commercial and savings banks that are substantially larger than the Company. Union focuses on its community banking niche and on providing convenient locations, hours and modes of delivery to provide superior customer service. 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 competes for checking, savings, money market accounts and other deposits by offering depositors competitive products and rates, personal service, local area expertise, convenient locations and access, and an array of financial services and products.
The competition in originating real estate and other loans comes principally from commercial banks, mortgage banking companies and 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 attempts to promote 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 competes for personal and institutional trust business with trust companies, commercial banks having trust departments, investment advisory firms, brokerage firms, mutual funds and insurance companies.
The competitive environment for financial institutions has undergone significant change in recent years and that trend is likely to continue in light of changes in applicable law (see "Financial Services Modernization" below) which permit the integration of the historically separate banking, insurance and securities industries. Tax-exempt credit unions are becoming an increasingly significant source of competition. Credit union common bond requirements and the definition of a credit union "member" have been interpreted liberally by federal and state credit union regulators while at the same time, the scope of products credit unions are permitted to offer has steadily expanded, resulting in greater penetration of this tax-advantaged segment of the financial services industry into traditional banking markets. In February of 2003, the SBA expanded the eligibility of certain lenders programs to include all credit unions. In addition, during 2005, Vermont's credit union statute was comprehensively updated, granting state-chartered credit unions significantly expanded powers to offer financial products and services beyond those traditionally offered by credit unions.
Competitive change is also occurring due to rapid technological advances which increasingly permit the delivery of financial products and services without the need for a physical presence in the market area served and which also are likely to diminish the importance of traditional "bricks and mortar" in market presence and reduce the role of financial intermediaries, such as banks, in the transfer of funds between parties. As a result, the Company's future success will depend in part on its ability to address customers' needs by using technology.
Regulation and Supervision: The following discussion describes certain material elements of an extensive regulatory framework applicable to bank holding companies and their subsidiaries and provides certain information specific to the Company. This regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole, and not for the protection of security holders. To the extent that this information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions.
As a Vermont-chartered commercial bank, Union is subject to regulation, examination, and supervision by the Vermont Banking Department and the FDIC. Regular examinations of Union by the Vermont Banking Department and the FDIC include examination of the bank's financial condition and operations, including but not limited to its capital adequacy, loan reserves, loans, investments, earnings, liquidity, compliance with laws and regulations, record of performance under the federal Community Reinvestment Act of 1997 ("CRA"), and the performance of its management.
In addition the Company, as a bank holding company, is subject to regulation, examination and supervision by the Federal Reserve Board ("FRB"). The regulations of these authorities govern certain of the operations of the Company and its subsidiary. The following discussion summarizes the material aspects of various federal and state banking laws and regulations that apply to the Company and Union.
The Company is also under the jurisdiction of the Securities and Exchange Commission ("SEC") for matters relating to the offering 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 American Stock Exchange ("AMEX") under the trading symbol "UNB" and accordingly, the Company is subject to the rules of AMEX for listed companies.
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 through the Federal Reserve System's open-market operations in United States government securities, regulation of the discount rate on bank borrowings from Federal Reserve Banks and regulation of non-earning 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 non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a noninterest bearing account at the Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the amount of Union's interest-earning assets. As of December 31, 2006, Union's reserve requirement was approximately $2.3 million which was satisfied by vault cash.
Bank Holding Company Acquisitions and Activities. As a bank holding company, the Company is subject to supervision and regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC Act, the activities of bank holding companies, such as Union Bankshares, 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. As described below, a bank holding company that has elected to become a "financial holding company" under the federal Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Gramm-Leach-Bliley Act") may engage in certain additional activities. Bank holding companies such as Union Bankshares that have not elected to become financial holding companies, are required to obtain the prior approval of the FRB to engage in any new activity or to acquire more than 5% of any class of voting stock of any bank or other company. Satisfactory capital ratios, CRA ratings and anti-money laundering policies are generally prerequisites to obtaining Federal regulatory approval to make acquisitions.
The FRB has authority to issue cease and desist orders to prevent or terminate unsafe or unsound banking practices or violations of law or regulations and to assess civil money penalties against bank holding companies and their subsidiaries and other affiliates. The FRB also has the authority to remove officers, directors and other institution-affiliated parties.
The FRB has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding 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.
Financial Services Modernization. The Gramm-Leach-Bliley Act permits eligible bank holding companies to elect to become financial holding companies and thereby engage in a broader range of financial and other activities than is permitted to bank holding companies generally. Under the Gramm-Leach-Bliley Act, a financial holding company may engage in activities that are not traditionally encompassed within the business of banking but that are "financial in nature," including securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting, merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, or incident or complementary to such financial activities, provided that such activities do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act effectively permits the integration, under a financial holding company umbrella, of firms engaged in banking, insurance and securities activities, and preempts state laws that purport to limit or prohibit such affiliations. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in permitted activities.
In order to become a financial holding company, all of the bank holding company's bank subsidiaries must be well-capitalized and well-managed under applicable regulatory guidelines, and each of such banks must have been rated "Satisfactory" or better in its most recent evaluation under the federal CRA. Once a bank holding company has elected to be treated as a financial holding company, it may face significant consequences if it subsequently fails to meet one or more of the criteria for eligibility. For example, it may be required to enter into an agreement with the FRB imposing limitations on its operations and requiring divestitures. In addition, the need to maintain eligibility could hamper a financial holding company's ability to expand or to acquire financial institutions that do not meet the required criteria.
As of the date of this report, the Company had not elected to become a financial holding company.
Source of Strength. Under FRB policy, bank holding companies, such as Union Bankshares Inc., are expected 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.
Interstate Banking. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 an adequately capitalized and managed bank holding company is permitted to acquire banks based outside its home state, generally without regard to whether the state's law would permit the acquisition. This Act also authorizes banks to merge across state lines thereby creating interstate branches. In addition, this Act permits 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. None of the states contiguous to Vermont (New Hampshire, New York and Massachusetts) has in effect any statute which would substantially impede the ability of a Vermont bank to acquire or create interstate branches directly or through an interstate merger. Similarly, Vermont law does not limit the ability of out-of-state banks to acquire or create branches in Vermont. Although interstate banking and branching may result in increased competitive pressures in the markets in which the Company operates, interstate branching may also present competitive opportunities for locally-owned and managed banks, such as Union, that are familiar with the local markets and that emphasize personal service and prompt, local decision-making. The ability to branch interstate has also benefited Union, as it has permitted the expansion of its banking operations into New Hampshire, with the opening of a branch in Littleton in March of 2006.
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. Generally, loans or extensions 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 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 furnishing of property or services to third parties. The Company and Union are subject to these restrictions in their intercompany transactions.
Bank. The various laws and regulations applicable to Union that are administered by the FDIC and the Vermont Banking Commissioner affect Union's corporate practices, such as payment of dividends, incurring of debt and acquisition of financial institutions and other companies. These laws also affect its business practices, such as payment of interest on deposits, guidelines on concentrations in commercial real estate lending, limitations on loans to one borrower, the charging of interest on loans, privacy issues and the location of offices. There are no outstanding regulatory orders resulting from regulatory examinations of the Company or Union.
Dividend Limitations. As a holding company, the Company's ability to pay dividends to its stockholders is largely dependent on the ability of its subsidiary to pay dividends to it. Payment of dividends by Vermont-chartered banks, such as Union, is subject to applicable state and federal laws. Under Vermont banking laws, a Vermont-chartered bank may not authorize dividends or other distributions which would reduce the bank's capital below the amount of capital required in the bank's Certificate of General Good or under any capital or surplus standards established by the Vermont Banking Commissioner. Union does not have any capital restrictions in its Certificate of General Good and, to date, the Vermont Banking Commissioner has not adopted capital or surplus standards. Nevertheless, the capital standards established by the FDIC, described below under "Capital Requirements," 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 Vermont Banking Commissioner are authorized under applicable federal and state laws to prohibit payment of dividends that they determine would be an unsafe or unsound practice. Payment of dividends that 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.
Loans to Related Parties. The Company's and Union's authority to extend credit to their directors, executive officers and 10 percent stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the Federal Reserve Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based in part, on the amount of the bank's capital. Under AMEX guidelines, any related party transaction including loans must be reviewed by the Company's Audit Committee. In addition, under the federal Sarbanes-Oxley Act of 2002 (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 which incorporates applicable regulatory guidelines and requirements and is administered by the Company's Board of Directors.
Capital Adequacy Guidelines. The FRB, the FDIC and other federal banking regulators have issued substantially similar risk based and leverage capital guidelines for United States banking organizations. Those regulatory agencies are also authorized to require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The FRB's risk based capital guidelines define a three-tier capital framework and specify three relevant capital ratios: Tier 1 Capital Ratio, a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of common and qualifying preferred shareholders' equity, plus or minus certain intangibles and other adjustments. The remainder (Tier 2 and Tier 3 Capital) consists of subordinate and other qualifying debt, preferred stock that does not qualify as Tier 1 Capital, and the allowance of credit losses up to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 Capital, less investments in unconsolidated subsidiaries, represents qualifying "Total Capital," at least 50% of which must consist of Tier 1 Capital. Risk-based capital ratios are calculated by dividing Tier 1 Capital and Total Capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories or risk weights, based primarily on relative credit risk. The minimum Tier 1 Capital Ratio is 4% and the minimum Total Capital Ratio is 8%. The Leverage Ratio is determined by dividing Tier 1 Capital by adjusted average total assets. Although the minimum Leverage Ratio is 3%, most banking organizations are required to maintain Leverage Ratios of at least 1 to 2 percentage points above 3%.
Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other bank holding companies, as the agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization's risk-based capital ratio. Neither the Company nor Union is currently subject to this special capital charge.
FRB policy provides that banking organizations generally, and, in particular, those that are experiencing rapid internal growth or actively making acquisitions, will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets, such as goodwill. Furthermore, the capital guidelines indicate that the FRB will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is calculated
by dividing a banking organization's Tier 1 Capital less all intangible assets by its total consolidated quarterly average assets less all intangible assets.
The FRB's capital adequacy guidelines generally provide that bank holding companies with a ratio of intangible assets to tangible Tier 1 Capital in excess of 25% will be subject to close scrutiny for certain purposes, including the FRB's evaluation of acquisition proposals. The Company does not have a material amount of intangibles in its capital base.
The FRB's capital adequacy guidelines exempt certain "small bank holding companies" from its risk-based capital requirements. Although the Company meets the consolidated assets test of under $500 million, it does not qualify for this regulatory relief because it does not meet the separate requirement that the small bank holding company not have a material amount of its securities registered with the Securities and Exchange Commission.
At December 31, 2006, the Company's consolidated Total and Tier I Risk-Based Capital Ratios were 17.44% and 16.16%, respectively, and its Leverage Capital Ratio was 11.29%, and it is considered well-capitalized under the above regulatory guidelines. In addition, Union is considered well-capitalized under such guidelines.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 Total Capital, Tier 1 Ratio and the Leverage Ratio 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, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases.
Safety and Soundness Standard. FDICIA, as amended, directs each Federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset-quality, earnings and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing Federal banking regulators to publish guidelines rather than regulations concerning safety and soundness.
FDICIA also contains a variety of other provisions that may affect Union's operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.
Community Reinvestment Act. 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 the low and moderate income residents in the local communities. The FDIC conducts examinations of insured banks' compliance with CRA requirements and rates institutions as "Outstanding," "Satisfactory," "Needs to Improve," and "Substantial Non-Compliance." Failure of an institution to receive at least a "Satisfactory" CRA rating could adversely affect its ability to undertake certain activities, such as 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 Gramm-Leach-Bliley Act. (See "Financial Modernization" above.) At its last CRA compliance examination by the FDIC, Union received a rating of "Outstanding."
Deposit Insurance Premium Assessments. The deposits of Union are insured under the Deposit Insurance Fund ("DIF") maintained by the FDIC. 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. The DIF was created by the merger of the Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") provided for in the Federal Deposit Insurance Reform Act of 2005 ("FDIRA"), as enacted in February 2006. This legislation also increased insurance coverage for retirement accounts to $250,000 and indexed the insurance levels for inflation, among other changes. In addition, as a result of the FDIRA, the FDIC has adopted a revised,
risk-based assessment system to determine assessment rates to be paid by member institutions, such as Union. Under this revised 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. The annual risk based assessment rates for 2007 range from $0.05 to $0.43 per $100 of insured deposits. The FDIRA also provided for a one-time assessment credit, to be allocated among member institutions. The FDIC one-time assessment credit may be used to offset future deposit insurance assessments beginning in 2007.
In addition to DIF assessments, beginning in 1997 the FDIC assessed BIF-assessable and SAIF-assessable deposits to fund the repayment of debt obligations of the Financing Corporation. The Financing Corporation is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution of Trust Corporation. As of January 1, 2007, the annualized rate of risk-adjusted deposits, established by the FDIC for all DIF-assessable deposits, was 1.22 basis points (hundredths of 1%). For the year ended December 31, 2006, the Bank's insurance assessment expense was $39 thousand.
Brokered Deposits. 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 has accepted brokered deposits through its membership with the Certificate of Deposit Account Registry Service ("CDARS") of the Promontory Interfinancial Network.
Consumer Protection Laws. In connection with its lending activities, Union is subject to a variety of federal and state laws designed to protect borrowers and to promote lending to various sectors of the economy and population. In addition to the provisions of the CRA (discussed above), Union is subject to, among other laws, the federal Home Mortgage Disclosure Act, the federal Real Estate Settlement Procedures Act, the federal Truth-in-Lending Act, the federal and Vermont Equal Credit Opportunity Acts, the federal Bankruptcy Abuse Prevention and Consumer Protection Act, and the federal and Vermont Fair Credit Reporting Acts. The Vermont Banking Department has the authority to enforce directly certain of these federal statutes.
Union is subject to the provisions of Title V of the Gramm-Leach-Bliley Act, which requires it to notify consumer customers of its information collection and sharing practices and restrict those practices in certain respects. In addition, Union is subject to similar but more restrictive, requirements of the Vermont Banking Department. Generally those Vermont requirements prohibit the disclosure of consumer information to nonaffiliated third parties without the express written consent of the consumer, except for disclosures permitted under specified regulatory exceptions.
The deposit-taking activities of Union are subject to various federal and state requirements, including those mandating uniform disclosures to depositors with respect to rates of interest, fees, electronic fund transfers and other terms of consumer deposit accounts, and disclosure of its policy on the availability of deposited funds.
In connection with its new Littleton, New Hampshire branch, Union is subject to certain consumer protection laws of New Hampshire and to limited oversight by the New Hampshire Commissioner of Banks.
Bank Secrecy Act. Union is subject to federal laws establishing certain record keeping, customer identification and reporting requirements pertaining to large cash transactions, sales of travelers checks and other monetary instruments and the international transfer of cash or monetary instruments. 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. The act requires banks to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-U.S. persons or their representatives.
The Department of Treasury has issued regulations implementing the due diligence requirements. These regulations require minimum standards to verify customer identity and maintain accurate records, encourages information-sharing cooperation among financial institutions, federal banking agencies and law enforcement authorities regarding possible money laundering or terrorist activities, prohibits the anonymous use of "concentration accounts" and requires 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 Act also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering program when reviewing an application under these acts.
Sarbanes-Oxley Act of 2002. This federal far-reaching legislation was generally intended to protect investors by strengthening corporate governance and improving the accuracy and reliability of corporate disclosures made pursuant to securities law. The Sarbanes-Oxley Act provides for, among other things:
o a prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank
subject to Regulation O);
o independence requirements for audit committee members;
o corporate governance requirements;
o independence requirements for company auditors that restrict non-audit
services that accountants may provide to their audit clients;
o enhanced disclosure requirements pertaining to corporate operations
and internal controls;
o certification of financial statements on Forms 10-K and 10-Q reports
by the chief executive officer and the chief financial officer;
o the forfeiture by the chief executive officer and the chief financial
officer of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by such officers in the twelve
month period following initial publication of any financial statements
that later require restatement due to corporate misconduct;
o disclosure of off-balance sheet transactions;
o two-business day filing requirements for insiders filing reports on
Form 4 of transactions in the issuer's securities;
o accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers;"
o disclosure of a code of ethics for principal financial officers and
filing a Form 8-K for a change in or waiver of such code;
o the reporting of securities violations "up the ladder" by both
in-house and outside attorneys;
o restrictions on the use of non-GAAP financial measures in press
releases and SEC filings;
o the formation of a public accounting oversight board; and
o various increased criminal penalties for violations of securities
laws.
Not all of the final rules under the Act have gone into effect for the Company since it is not an accelerated filer. In particular, the Company is not subject for 2006 to Section 404 of Sarbanes-Oxley, relating to certification and attestation of internal controls. In order to be considered an accelerated filer under the Sarbanes-Oxley Act, the market value of the Company's outstanding class of stock registered under the Exchange Act as of June 30 which is held by non-affiliates (so-called "public float") must exceed $75,000,000.
AMEX. In response to the Sarbanes-Oxley Act, the AMEX, where the Company's common stock is listed, has implemented new corporate governance listing standards, including rules strengthening director independence requirements for boards and committees of the board, the director nomination process and shareholder communication avenues. These rules require the Company to annually certify to the AMEX, after each annual meeting, that the Company is in compliance and will continue to comply with AMEX 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 2005 and will do the same for 2006. No tax return is currently being examined or audited by any taxing authority.
Other Proposals. Certain legislative and regulatory proposals that could affect the Company or Union and the financial services business in general are periodically introduced before the United States Congress, the Vermont State Legislature and federal and state government agencies. It is not known to what extent, if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. Such legislation could subject the Company and Union to increases in regulation, disclosure and reporting requirements, competition and the cost of doing business.
In addition to legislative changes, the various federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. Management cannot predict whether or in what form any such rules or regulations will be enacted or the effect that such enactment may have on the Company or Union.
Available Information: The Company files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that Union Bankshares, Inc. has filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Union Bankshares, that file electronically with the SEC. The public can obtain any documents that the Company has filed with the SEC at http://www.sec.gov.
Part I--Item 1A Risk Factors
Each direct lending activity in which the Company engages carries the risk that some borrowers will be unable to perform on their obligations. As such, the monetary and fiscal policies of the Federal Reserve Board and general economic conditions, nationally, regionally and in the Company's primary market area have a significant impact on the Company and its results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Company in full, in a timely manner, resulting in decreased earnings or losses to the Company. To the extent that loans are secured by real estate, adverse conditions in the real estate market may reduce the borrower's ability to generate the necessary cash flow for repayment of the loan, and reduce the Company's ability to collect the full amount of the loan upon a default. To the extent the Company makes fixed-rate loans, general increases in interest rates will tend to reduce the Company's spread as the interest rates it must pay for deposits increase while interest income is flat. Economic conditions and interest rates may also adversely affect the value of property pledged as security for loans.
Whenever appropriate and available, the Company seeks federal and state loan guarantees, such as the SBA "7A" and "504" loan programs to reduce risks. Union is a preferred SBA lender. The Company generally requires personal guarantees on all commercial loans. The majority of commercial borrowers are required to forward annual business and personal financial statements to comply with bank policy. Interest rate risk to the Company is mitigated by using either variable interest rates, by fixing rates for a short period of time, or selling/participating a portion of loans originated.
These are general risk factors affecting Union Bankshares, Inc. that you should carefully consider:
CREDIT RISK
Credit risk is the risk of loss due to adverse changes in the borrower's or other counter parties ability to meet its financial obligations under agreed upon terms.
The Company's exposure to credit risk is increased by its commercial real estate, commercial business and construction lending. Commercial real estate, commercial business and construction lending generally involve higher credit risk than single-family residential lending. Such loans involve larger loan balances to a single borrower or groups of related borrowers.
Economic events and changes in government regulations, which we and our borrowers cannot control, could have an adverse impact on the cash flows generated by properties securing our construction and commercial real estate loans and on the values of the properties securing those loans. These loans also involve greater risk because they are not all fully amortizing over the loan period, but may have a balloon payment due at maturity. A borrower's ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.
Repayment of both secured and unsecured commercial business loans depends substantially on the borrowers' underlying business, financial condition and cash flows. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is solely dependent upon the success of the borrowers' business or personal guarantee. Secured commercial business loans are generally collateralized by equipment, leases, inventory and accounts receivable. Compared to real estate, that type of collateral is more difficult to monitor, it may depreciate more rapidly, and it may be difficult to appraise and liquidate if repossessed.
Risk of loss on a construction loan depends largely upon whether the initial estimate of the property's value at completion of construction equals or exceeds the cost of the property construction (including interest) and the availability of permanent takeout financing. If the estimate of value is inaccurate, there are delays or if actual construction costs exceed estimates, the value of the property securing the construction loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.
Commercial real estate, commercial business and construction loans are more susceptible to a risk of loss during a downturn in the business cycle. The underwriting, review and monitoring performed by our officers and directors cannot eliminate all of the related risks.
An inadequate allowance for loan losses would reduce earnings. Although our portfolio composition, with loans primarily secured by real estate, mitigates loss exposure, volatility and deterioration in regional or local economies may increase our risk for credit losses. Management and the Board of Directors assess the adequacy of the allowance for loan losses based upon, but not limited to, such factors as:
o the risk characteristics of various classifications of loans;
o previous loan loss experience;
o delinquency trends and specific loans that have loss potential;
o current economic conditions including the estimated fair market value
of the collateral; and
o geographic and industry loan concentrations.
If for any reason the quality of the portfolio should weaken, including but not limited to a cooling housing market, natural disaster or slumping economy, the allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially and adversely affect financial results.
An increase in loan prepayments or on prepayment of loans underlying mortgage-backed securities may adversely affect profitability. Prepayment rates are affected by consumer behavior, conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate loans. Changes in prepayment rates are therefore difficult to predict. We may not be able to reinvest loan and security prepayments at rates comparable to the prepaid instrument particularly in periods of declining interest rates.
Negative events in Northern Vermont or New Hampshire could adversely affect the Company. Negative conditions in Northern Vermont or New Hampshire real estate markets where the majority of the collateral for the Company's mortgage, construction, home equity and commercial real estate loans are located could adversely affect the borrower's ability to repay and the value of the collateral. Real estate values are affected by various factors, including changes in general, regional or local economic conditions, tourism/industry changes, governmental rules or policies and natural disasters. These events could also have a negative impact on loan demand and deposit growth.
MARKET RISK
Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, and equity prices.
Changes in the domestic interest rate environment could negatively affect the Company's net interest income. Net interest income is our largest source of revenue and is highly dependent on achieving a positive spread between the interest earned on assets and the interest paid on liabilities. Changes in interest rates could negatively impact the ability to attract deposits, make loans, and achieve a positive spread resulting in compression of the net interest margin. A flat or inverted yield curve over an extended period of time also could impact our ability to maintain a strong interest margin.
Management believes we have implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations. However, interest rates are highly sensitive to many factors beyond our control, including general economic conditions such as inflation, recession, and unemployment. Monetary and fiscal policies of various governmental and regulatory agencies may also adversely affect the interest rate environment.
Certain adjustable-rate loans and variable-rate deposits reprice based on lagging interest rate indices. The effect of this lag may also negatively affect net interest income when general interest rates change.
Additionally, changes in applicable law, if enacted, including those that would permit banks to pay interest on demand deposit accounts, could have a significant negative effect on results of operations as a substantial portion of our deposits are noninterest bearing demand deposits.
The volume of trading in the Company's common stock has been light. As a result, shareholders may not be able to quickly and easily sell their common stock and the stock price may fluctuate significantly. Union Bankshares, Inc. common stock currently trades on the AMEX and trading volume has been light, averaging fewer than 1,000 shares per week over the past year, and there can be no assurance that an active and liquid market for the common stock will develop. In addition, the absence of an active and liquid trading market could result in greater volatility in the price of our stock.
The number of shares owned by the Company's directors and executive officers could make it more difficult, or impossible, to obtain approval for some matters submitted to shareholder vote, including mergers and acquisitions. Your interests may not be the same as those of the Board and management. Directors, executive officers, named executives and their affiliates own approximately 32.2% of the outstanding common stock as of December 31, 2006. By voting against a proposal submitted to shareholders, our directors and officers, as a group, may be able to block, or make approval more difficult to obtain, for proposals requiring the vote of shareholders, such as some mergers, share exchanges, asset sales and amendments to the Articles of Incorporation.
Changes in accounting standards or in income tax laws or interpretations could materially affect the Company's financial condition or results of operations. Our accounting policies and methods are fundamental in how we report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results. Periodically, new accounting standards are issued or revisions made to existing standards that may change the methods governing the preparation of our financial statements. Similarly, new tax legislation could be enacted or interpretations of existing tax laws could change causing an adverse effect to our financial condition or results of operations.
LIQUIDITY RISK
Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external market issues, investor or depositor perception of financial strength, and events unrelated to the Company such as war, terrorism, or local market issues at a reasonable cost.
The Company maybe unable to attract deposit growth to the same extent as loan growth. Our primary source of liquidity is through the growth of deposits. If we are unable to attract enough deposits to fund loan growth, than we may be forced to borrow through the Federal Home Loan Bank of Boston or in the capital markets. Nondeposit funds would tend to be more expensive and therefore could have a negative impact on our results of operations.
If the Company is unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors and borrowers or make strategic acquisitions or investments. Our liquidity is used to make loans and to repay deposit liabilities as they become due or are demanded by customers. Liquidity polices and limits are established by the Board of Directors. Our Asset/Liability Committee regularly monitors the overall liquidity position to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. The Asset/Liability Committee also establishes policies and monitors guidelines to diversify the Bank's wholesale funding sources to avoid concentrations in any one market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, and non-core deposits including deposits purchased through the Certificate of Deposit Account Registry Service. Union is also a member of the FHLB of Boston , which provides funding through advances to members that are collateralized with mortgage-related assets.
There are other sources of liquidity available should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of trust preferred, preferred or common securities in public or private transactions. Union could also borrow through the Federal Reserve's discount window.
If we were unable to access funding sources when needed, we might be unable to meet customers' needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the "Liquidity" section of Part II-Item 7A "Quantitative and Qualitative Disclosures About Market Risk".
OPERATIONAL RISK
Operational risk arises from the inherent day-to-day operations of the Company that could result in losses due to human error, inadequate or failed internal systems and controls and external events.
The Company relies heavily on the proper functioning of its technology. We rely on our computer systems, and outside servicers providing technology, for much of our business, including recording financial transactions. If our computer systems or outside technology sources fail, are not reliable or there is a breach of security, our ability to maintain accurate financial records may be impaired, which could materially affect results of operations and financial condition.
The Company is dependent upon the services of its management team. The Company is dependent upon the ability and experience of a number of key management personnel who have substantial experience with our operations, the financial services industry and the markets in which we offer services. It is possible that the loss of the services of one or more of our senior executives or key managers would have an adverse effect on results of operations. Our success also depends on our ability to continue to attract, manage and retain other qualified senior and middle management personnel.
Terrorist activities could cause reductions in investor confidence and substantial volatility in real estate and securities markets. It is impossible to predict the extent to which terrorist activities may occur in the United States or other regions, or their effect on a particular security issue. It is also uncertain what effects any past or future terrorist activities and/or any consequent actions on the part of the United States government and others will have on the United States and world financial markets, local, regional and national economics, and real estate markets across the United States. Among other things, reduced investor confidence could result in substantial volatility in securities markets, a decline in general economic conditions and real estate related investments and an increase in loan defaults. Such unexpected losses and events could materially affect our results of operations. Tourism and the travel industry are important factors to the general economy of much of our target market, which could be adversely affected by terrorism.
Internal controls and procedures may fail or be circumvented. Management regularly reviews and updates internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
Competition with other financial institutions could adversely affect the Company's profitability. The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete. Consolidation among financial service providers has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation of assets, having significantly greater resources, and covering a wider geographic presence. Competition has also grown from the establishment of branches by other banks and financial service providers in our market area that target our existing or potential customers, and from tax-advantaged credit unions that have been permitted to expand their fields of membership significantly and to offer many traditional commercial banking products and services.
Technological developments have allowed even out-of-market competitors including some non-depository institutions, to compete very effectively in local markets and have expanded the range of financial products, services and capital available to our target customers. If we are unable to implement, maintain and use such technologies effectively, we may not be able to offer products or achieve cost-efficiencies necessary to compete.
OTHER RISKS
An investment in the Company's common stock is not an insured deposit. The Company's common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Union Bankshares, Inc.'s articles of incorporation as well as certain banking laws may have an anti-takeover effect. Our articles of incorporation provide that certain business combinations with a substantial shareholder or its affiliates require approval by the affirmative vote of the holders of at least 67% of the outstanding common stock. A substantial shareholder is one who together with its affiliates owns 5% of more of the Company's outstanding common stock. Our Board of Directors has the right to override the 67% vote requirement in any particular transaction. These provisions as well as certain federal banking laws, including regulatory approval requirements for control acquisitions, could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the shareholders. The combination of these provisions may inhibit a nonnegotiated merger, tender offer or other business combination, which, in turn, could adversely affect the market price of our common stock.
The Company is subject to extensive financial services industry regulation that could restrict its activities and impose financial requirements or limitations on the conduct of business and limit its ability to receive dividends from Union. Union is subject to extensive regulation, supervision and examination by the Vermont Banking Department as its primary regulator, and by the FDIC, which insures its deposits. As a member of the FHLB of Boston, Union must also comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of our stockholders. Union's activities are also regulated under consumer protection laws applicable to its lending, deposit and other activities. A sufficient claim against Union under these laws could have a material adverse effect on our results, by leading to severe penalties or damage to our reputation.
Proposals for further regulation of the financial services industry are continually being introduced in the United States Congress. The agencies regulating the financial services industry also periodically adopt changes to their regulations. Proposals that are now receiving a great deal of attention include regulation of government sponsored-entities. It is possible that one or more legislative proposals may be adopted or regulatory changes may be made that would have an adverse effect on our business or financial results.
Negative public opinion could damage the Company's reputation and adversely affect its earnings. Reputational risk is the risk to our operations from negative public opinion. Negative public opinion can result from the actual or perceived manner in which we conduct business activities, including sales practices, practices in the loan origination and servicing operations and retail banking operations, management of actual or potential conflicts of interest and ethical issues; and the protection of confidential customer information. Negative public opinion can adversely affect our ability to keep and attract customers and can expose us to litigation.
The Company's reputation and future growth prospects could be impaired if events occurred which breached our customers' privacy. We rely heavily on communications and information systems to conduct our business, and as part of our business we maintain significant amounts of data about our customers and the products they use. While we have policies and procedures designed to prevent or limit the effect of failure, interruption or security breach of our information systems, there can be no assurances that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. Should any of these systems become compromised, our reputation could be damaged, relationships with existing customers impaired and result in lost business and incur significant expenses trying to recover. Our customers' privacy might also be breached through an outside party or government agency over which we have no control.
The risks are further described in Part I-Item 1. "Business", Part II-Item 7 "Management's Discussion and Analysis" and Part II-Item 7a "Quantitative and Qualitative Disclosures About Market Risk". Additional risks and uncertainties not currently known to us or that are currently deemed to be immaterial also may materially and adversely affect our business operations. Any of these risks could materially and adversely affect our business, financial condition or results of operations, as well as the value of our common stock. Many of these risks are outside of the Company's direct control, though efforts are made to manage those risks while optimizing returns. Potential risk concerns are shared with our Board of Directors, as appropriate.
Part I--Item 1B Unresolved Staff Comments
None
Part I--Item 2 Properties
As of December 31, 2006, Union operated 12 community-banking locations in Lamoille, Caledonia and Franklin counties of Vermont, one in Littleton, New Hampshire and a loan production office in St. Albans, Vermont. Union also operates 30 ATMs in northern Vermont and one in Littleton, New Hampshire. Union owns, free of encumbrances, ten of its branch locations and its operations center and leases three branch locations, the loan production office and certain ATM premises from third parties under terms and conditions considered by management to
be favorable to Union. On March 20, 2006, a full-service, community banking location was opened in Littleton, New Hampshire, and the pre-existing Littleton loan production office opened in 2001 was incorporated into the branch. On December 18, 2006, Union purchased an office building in Morrisville, Vermont, which is adjacent to its current main office and operations center.
Additional information relating to the Company's properties as of December 31, 2006, is set forth in Note 8 to the consolidated financial statements contained in Exhibit 13 to this report, and incorporated herein by reference.
Part I--Item 3 Legal Proceedings
There are no known pending legal proceedings to which the Company or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability will not have a material effect on the consolidated financial position of the Company and its subsidiary.
Part I--Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders through a solicitation of proxies or otherwise during the fourth quarter of 2006.
Part II--Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
For information regarding the market for the Company's stock, trading prices, dividends and number of record holders, please refer to page 70 of the Company's 2006 Annual Report to Shareholders, contained in Exhibit 13 to this report, which information is incorporated herein by reference.
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of Shares Maximum Number of Shares that
Total Number of Average Price Purchased as Part of Publicly May Yet Be Purchased Under the
Period Shares Purchased Paid per Share Announced Plans or Programs (1) Plans or Programs.
October, 2006 2,300 $21.06 2,300 80,777
November, 2006 6,300 $21.14 6,300 74,477
December, 2006 163 $21.85 163 74,314
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(1) On November 18, 2005, the Company announced a stock repurchase program. The Board of Directors has authorized the
repurchase of up to $2.15 million or 100,000 shares of common stock, or approximately 2.2% of the Company's outstanding
shares. Shares may be repurchased in the open market or in negotiated transactions. The repurchase program is open for
an unspecified period of time. Through December 31, 2006, the total number of shares purchased under the plan is 25,686
at a cost of $542,250.
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During the quarter ended December 31, 2006, no incentive stock options previously granted pursuant to the Company's 1998 Incentive Stock Option Plan ("Plan") were exercised. Participation in the Plan is limited to those senior officers of the corporation or its subsidiary (currently five active participants) selected by the Board of Directors in its discretion. The exercise price of all options granted under the Plan represents the fair market value of the shares on the date of grant. There were 3,250 options granted under the Plan during 2006 at an option price of $22.50 per share. The shares issued to Plan participants upon exercise of incentive stock options have not been registered with the Securities and Exchange Commission. Such shares are restricted securities, issued under statutory exemptions available under the Securities Act of 1933, including Section 4(2) thereof, for offers and sales not involving a public offering.
Part II--Item 6 Selected Financial Data
At or For The Years Ended December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Balance Sheet Data (Dollars in thousands except per share data)
Total assets $381,149 $374,746 $359,529 $356,650 $343,492
Investment securities 23,675 32,408 40,966 44,370 45,824
Loans held for sale 3,750 6,546 8,814 18,524 17,139
Loans, net of unearned income 313,702 300,525 271,255 253,037 238,768
Allowance for loan losses (3,338) (3,071) (3,067) (3,029) (2,908)
Total nonperforming loans 4,751 4,607 5,295 3,305 2,272
Total nonperforming assets 5,150 4,607 5,330 3,315 3,074
Other real estate owned 399 - 35 10 784
Deposits 319,822 313,299 306,598 305,379 293,004
Borrowed funds 14,596 16,256 7,934 7,223 7,536
Stockholders' equity (1) 41,923 41,603 42,403 40,987 39,169
Income Statement Data
Interest income $ 25,197 $ 22,249 $ 20,172 $ 20,368 $ 22,167
Interest expense 6,821 4,499 3,311 4,209 6,364
Net interest and dividend income 18,376 17,750 16,861 16,159 15,803
Provision for loan losses 180 60 30 114 356
Noninterest income 4,058 4,063 3,781 3,607 3,562
Noninterest expenses 13,814 13,056 12,319 12,060 11,761
Net income 6,255 6,237 5,835 5,387 5,180
Per Common Share Data
Net income (2)(3) $ 1.38 $ 1.37 $ 1.28 $ 1.18 $ 1.14
Cash dividends paid(3) 1.06 1.38 0.90 0.82 0.76
Book value (1)(3) 9.25 9.16 9.31 9.01 8.62
Selected Ratios
Return on average assets (ROA) 1.67% 1.71% 1.65% 1.56% 1.52%
Return on average equity (ROE) 14.96% 15.23% 14.17% 13.50% 13.74%
Dividend payout ratio (4)(5) 76.81% 100.73% 70.31% 69.49% 66.67%
Interest rate spread (6) 4.86% 4.99% 4.98% 4.91% 4.72%
Net interest margin (7) 5.35% 5.33% 5.24% 5.20% 5.14%
Operating expenses to average assets 3.68% 3.58% 3.48% 3.49% 3.46%
Efficiency ratio (8) 60.89% 59.42% 59.02% 60.19% 60.73%
Average interest earning assets to
average interest bearing liabilities 125.37% 125.64% 125.73% 121.87% 120.59%
Average stockholders' equity to
average assets 11.14% 11.24% 11.64% 11.56% 11.10%
Tier 1 leverage capital ratio 11.29% 11.10% 11.62% 11.38% 11.03%
Tier 1 risk-based capital ratio 16.16% 15.86% 17.27% 16.70% 16.74%
Total risk-based capital ratio 17.44% 17.08% 18.57% 17.99% 17.99%
Asset Quality Ratios
Nonperforming loans to total loans 1.50% 1.50% 1.89% 1.22% .89%
Nonperforming assets to total assets 1.35% 1.23% 1.48% .93% .89%
Allowance for loan losses to
nonperforming loans 70.26% 66.66% 57.91% 91.65% 127.99%
Allowance for loan losses to
loans not held for sale 1.06% 1.02% 1.13% 1.20% 1.22%
--------------------
(1) Stockholders' equity includes unrealized gains or losses on investment securities classified as
"available-for-sale" and, for 2006 the unfunded liability for the defined benefit pension plan,
both of which are net of applicable income taxes.
(2) Computed using the weighted average number of shares outstanding for the period.
(3) Per common share data for all periods have been restated to reflect the three-for-two stock split
effected in the form of a 50% stock dividend distributed on August 8, 2003 to shareholders of
record on July 26, 2003.
(4) Cash dividend declared and paid per share divided by consolidated net income per share.
(5) Includes a $0.40 per share special cash dividend in 2005.
(6) The difference between the average rate earned on average assets minus the average rate paid on
average liabilities.
(7) The ratio of tax equivalent net interest income to average earning assets.
(8) The ratio of noninterest expense to tax equivalent net interest income and noninterest income
excluding securities gains and losses.
|
Part II--Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Please refer to pages 42 to 68 of the Company's 2006 Annual Report to Shareholders section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in Exhibit 13 to this report, which information is incorporated herein by reference.
Part II--Item 7A Quantitative and Qualitative Disclosures About Market Risk
Please refer to pages 61 to 68 of the Company's 2006 Annual Report to Shareholders section entitled "Other Financial Considerations", contained in Exhibit 13 to this report, and to the information under Part I, Item 1A, which information is incorporated herein by reference.
Part II--Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of Union Bankshares, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2006, together with related notes and the report of UHY LLP independent registered public accounting firm, with respect to the financial statements for the years ended December 31, 2006, 2005 and 2004, all as contained on pages 11 to 41 of the Company's 2006 Annual Report to Shareholders, contained in Exhibit 13 to this report, are incorporated herein by reference.
Part II - Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Part II - Item 9A 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, 2006. 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'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.
There have been no changes in the Company's internal controls or in other factors known to the Company that could significantly affect these controls subsequent to the date of the evaluation referred to above. 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.
Part II - Item 9B Other Information
None
Part III--Item 10 Directors, Executive Officers and Corporate Governance
The following information from the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders is hereby incorporated by reference:
Listing of the names, ages, principal occupations and business experience of the directors under the caption "PROPOSAL I: TO ELECT DIRECTORS"
Listing of the names, ages, titles and business experience of the executive officers and named executives under the caption "EXECUTIVE OFFICERS"
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 under the caption "SHARE OWNERSHIP INFORMATION - Section 16(a) Beneficial Ownership Reporting Compliance"
Information regarding the Company's Audit Committee under the caption "Board Committees"
The Company has adopted a Code of Ethics for Senior Financial Officers and the Chief Executive Officer, previously filed as Exhibit 14.1 to the Company's 2005 Form 10-K and incorporated herein by reference. The Company has adopted a Code of Ethics for all directors, officers and employees, filed as Exhibit 14.2 to this report.
Part III--Item 11 Executive Compensation
The following information from the Company's Proxy Statement for the 2007 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 caption "EXECUTIVE OFFICERS - COMPENSATION DISCUSSION AND ANALYSIS".
Information regarding management interlocks and certain transactions under the caption "PROPOSAL I: TO ELECT DIRECTORS - Compensation Committee Interlocks and Insider Participation".
Information regarding the Compensation Committee under "Board Committees".
Part III--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 2007 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 equity compensation under the Company's Incentive Stock Option Plan, the only equity compensation plan of the company:
Equity Compensation Plan Information as of December 31, 2006:
Number of securities
remaining available for
Number of securities to be Weighted average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
Column a Column b Column c
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 16,075 $22.60 45,450
Equity compensation plans not
approved by security holders - - -
------ ------ ------
Total 16,075 $22.60 45,450
====== ====== ======
|
Part III--Item 13 Certain Relationships and Related Party Transactions, and
Director Independence
The following information from the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding transactions with management under the caption "PROPOSAL I: TO ELECT DIRECTORS - Transactions with Management and Directors"
Part III--Item 14 Principal Accountant Fees and Services
The following information from the Company's Proxy Statement for the 2007 Annual Meeting of Shareholders is hereby incorporated by reference:
Information on fees paid to the Independent Auditors set forth under the caption "Independent Auditors"
Part IV--Item 15 Exhibits, Financial Statement Schedules
Documents Filed as Part of this Report:
(1) The following consolidated financial statements, as included in the
2006 Annual Report to Shareholders, are incorporated herein by
reference (See Exhibit 13.1):
1) Report of Independent Registered Public Accounting Firm
2) Consolidated Balance Sheet at December 31, 2006 and 2005
3) Consolidated Statement of Income for the years ended December
31, 2006, 2005 and 2004
4) Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 2006, 2005 and 2004
5) Consolidated Statement of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
6) Notes to the Consolidated Financial Statements
(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 May 7, 1997), previously filed with the Commission as
Exhibit 3.1 to the Company's Registration Statement on Form S-4
(#333-82709) and incorporated herein by reference.
3.2 Amendment filed May 19, 1998 to Amended and Restated Articles of
Association of Union Bankshares, Inc., adding new sections 8 and 9,
previously filed with the Commission as Exhibit 3.1 to the
Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
3.3 Amendment filed November 24, 1999 to Amended and Restated Articles
of Association of Union Bankshares, Inc. increasing the authorized
common shares to 5,000,000, previously filed with the Commission on
December 10, 1999 as Exhibit 3.3 to the Company's Current Report on
Form 8-K 12g3, and incorporated herein by reference.
3.4 Bylaws of Union Bankshares, Inc., as amended, previously filed with
the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (#333-82709) and incorporated herein by
reference.
10.1 Stock Registration Agreement dated as of February 16, 1999, among
Union Bankshares, Inc., Genevieve L. Hovey, individually and as
Trustee of the Genevieve L. Hovey Trust (U.A. dated 8/22/89), and
Franklin G. Hovey, II, individually, previously filed with the
Commission as Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (#333-82709) and incorporated herein by reference.
10.2 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary, previously filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.*
10.3 Form of Union Bankshares, Inc. Deferred Compensation Plan and
Agreement, previously filed with the Commission as Exhibit 10.3 to
the Company's 2001 Form 10-K and incorporated herein by reference.*
10.4 Union Bankshares, Inc. Executive Nonqualified Excess Plan.*
13 The following specifically designated portions of Union's 2006
Annual Report to Shareholders have been incorporated by reference
in this Report on Form 10-K, is filed herewith: pages 11 to 68.
14.1 Code of Ethics for Senior Financial Officers and the Chief
Executive Officer, previously filed with the Commission as Exhibit
14.1 to the Company's 2005 Form 10-K and incorporated herein by
reference.
14.2 Code of Ethics (for all directors, officers and employees), as
revised, March 21, 2007.
21 Subsidiary of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont.
31.1 Certifications of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certifications 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.
--------------------
|
* denotes compensatory plan or agreement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, as of March 30, 2007.
Union Bankshares, Inc.
By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon
----------------------------- ----------------------------------
Kenneth D. Gibbons Marsha A. Mongeon
President and Chief Executive Treasurer and Chief
Officer Financial/Accounting Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 30, 2007.
Name Title
/s/ Richard C. Sargent Director, Chairman of the Board
---------------------------------
Richard C. Sargent
/s/ Kenneth D. Gibbons Director, President and Chief
--------------------------------- Executive Officer
Kenneth D. Gibbons (Principal Executive Officer)
/s/ Marsha A. Mongeon Treasurer and Chief Financial/
--------------------------------- Accounting Officer
Marsha A. Mongeon (Principal Financial/Accounting Officer)
/s/ Cynthia D. Borck Director and Vice President
---------------------------------
Cynthia D. Borck
/s/ Steven J. Bourgeois Director
---------------------------------
Steven J. Bourgeois
/s/ Franklin G. Hovey II Director
---------------------------------
Franklin G. Hovey II
/s/ Richard C. Marron Director
---------------------------------
Richard C. Marron
/s/ Robert P. Rollins Director
---------------------------------
Robert P. Rollins
/s/ John H. Steele Director
---------------------------------
John H. Steele
|
EXHIBT INDEX **
10.4 Union Bankshares, Inc. Executive Nonqualified Excess Plan.*
13 Union Bankshares, Inc. Annual Report to Shareholders.
14.2 Code of Ethics (for all directors, officers and employees, as revised,
(March 21, 2007).
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certifications 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.
--------------------
|
* denotes compensatory plan or arrangement. ** other than exhibits incorporated by reference to prior filings.
Exhibit 10.4
[LOGO] Principal Life Insurance Company
Raleigh, NC 27612 THE EXECUTIVE
1-800-999-4031 NONQUALIFIED "EXCESS" PLAN(SM)
A member of the Principal Financial Group(R)
ADOPTION AGREEMENT
THIS AGREEMENT is the adoption by Union Bankshares, Inc. (the "Employer") of the Executive Nonqualified Excess Plan ("Plan").
WHEREAS, the Employer desires to adopt the Plan as an unfunded, nonqualified deferred compensation plan; and
WHEREAS, the provisions of the Plan are intended to comply with the requirements of Section 409A of the Code and the regulations thereunder, and shall apply to amounts deferred after January 1, 2005, and to amounts deferred under the terms of any predecessor plan which are not earned and vested before January 1, 2005; and
WHEREAS, the Employer has been advised by Principal Life Insurance Company to obtain legal and tax advice from its professional advisors before adopting the Plan, and Principal Life Insurance Company disclaims all liability for the legal and tax consequences which result from the elections made by the Employer in this Adoption Agreement;
NOW, THEREFORE, the Employer hereby adopts the Plan in accordance with the terms and conditions set forth in this Adoption Agreement:
ARTICLE I
Terms used in this Adoption Agreement shall have the same meaning as in the Plan, unless some other meaning is expressly herein set forth. The Employer hereby represents and warrants that the Plan has been adopted by the Employer upon proper authorization and the Employer hereby elects to adopt the Plan for the benefit of its Participants as referred to in the Plan. By the execution of this Adoption Agreement, the Employer hereby agrees to be bound by the terms of the Plan.
DD 2319-1 2/2006
ARTICLE II
The Employer hereby makes the following designations or elections for the purpose of the Plan:
2.6 Committee: The duties of the Committee set forth in the Plan shall be satisfied by:
___ (a) The administrative committee of at least three individuals
appointed by the Board to serve at the pleasure of the
Board.
___ (b) Employer.
XX (c) Compensation Committee.
___
|
2.7 Compensation: The "Compensation" of a Participant shall mean all of a Participant's:
XX (a) Base salary.
___
XX (b) Service Bonus.
___
___ (c) Performance-Based Compensation earned in a period of 12
months or more.
___ (d) Commissions.
___ (e) Compensation received as an Independent Contractor
reportable on Form 1099.
___ (f) Employer Contributions Only.
XX (g) Compensation derived by being a member of the board of
___ either Union Bankshares or Union Bank.
|
2.8 Crediting Date: The Deferred Compensation Account of a Participant shall be credited with the amount of any Participant Deferral to such account at the time designated below:
___ (a) The last business day of each Plan Year.
___ (b) The last business day of each calendar quarter during the
Plan Year.
___ (c) The last business day of each month during the Plan Year.
___ (d) The last business day of each payroll period during the Plan
Year.
___ (e) Each pay day as reported by the Employer.
XX (f) Any business day on which the Participant Deferral is
___ received by the Provider.
___ (g) Other: ______________________________________________.
|
DD 2319-1 2 2/2006
2.12 Effective Date:
XX (a) This is a newly-established Plan, and the Effective Date of
___ the Plan is December 6, 2006.
___ (b) This is an amendment and restatement of a plan named
_______________________________ with an effective date of
____________. The Effective Date of this amended and
restated Plan is _____________. This is amendment number
___.
|
2.18 Normal Retirement Age: The Normal Retirement Age of a Participant shall be:
___ (a) Age ___.
XX (b) The later of age _55_ or the _5th_ anniversary of the
___ participation commencement date. The participation
commencement date is the first day of the first Plan Year in
which the Participant commenced participation in the Plan.
___ (c) Other: _______________________________________________.
|
2.22 Participating Employer(s): As of the Effective Date, the following Participating Employer(s) are parties to the Plan:
Name of Employer Address Telephone No. EIN
---------------- ------- ------------- ---
20 Lower Main St.,
Union Bankshares, Inc. P.O. Box 667 (802) 888-6600 03-0283552
---------------------- --------------------- -------------- ----------
Morrisville, VT 05661
---------------------
Name of Employer Address Telephone No. EIN
---------------- ------- ------------- ---
20 Lower Main St.,
Union Bank P.O. Box 667 (802) 888-6600 03-0286322
---------------------- --------------------- -------------- ----------
Morrisville, VT 05661
---------------------
|
2.24 Plan: The name of the Plan as applied to the Employer is
DD 2319-1 3 2/2006
2.25 Plan Administrator: The Plan Administrator shall be:
___ (a) Committee. XX (b) Employer. ___ ___ (c) Other: _______ . |
2.27 Plan Year: The Plan Year shall end each year on the last day of the month of December.
2.35 Trust:
___ (a) The Employer does desire to establish a "rabbi" trust for
the purpose of setting aside assets of the Employer
contributed thereto for the payment of benefits under the
Plan.
___ (b) The Employer does not desire to establish a "rabbi" trust
for the purpose of setting aside assets of the Employer
contributed thereto for the payment of benefits under the
Plan.
XX (c) The Employer desires to establish a "rabbi" trust for the
___ purpose of setting aside assets of the Employer contributed
thereto for the payment of benefits under the Plan upon the
occurrence of a Change in Control.
|
4.1 Participant Deferral Credits: Subject to the limitations in Section 4.1 of
the Plan, a Participant may elect to have his Compensation (as selected in
Section 2.7 of this Adoption Agreement) deferred within the annual limits below
by the following percentage or amount as designated in writing to the
Committee:
XX (a) Base salary:
___
maximum deferral: $__________ or ____75____%
XX (b) Service Bonus:
___
maximum deferral: $__________ or ____90____%
___ (c) Performance-Based Compensation:
maximum deferral: $__________ or __________%
XX (d) Directors & Committee fees:
___
maximum deferral: $__________ or __________%
___ (e) Participant deferrals not allowed.
DD 2319-1 4 2/2006
|
4.2 Employer Credits: The Employer will make Employer Credits in the following manner:
___ (a) Employer Discretionary Credits: The Employer may make discretionary credits to the Deferred Compensation Account of each Participant in an amount determined as follows:
___ (i) An amount determined each Plan Year by the Employer.
___ (ii) Other: _________________________________________.
___ (b) Employer Profit Sharing Credits: The Employer may make profit sharing credits to the Deferred Compensation Account of each Participant in an amount determined as follows:
___ (i) An amount determined each Plan Year by the Employer.
___ (ii) Other: _________________________________________.
___ (c) Other: ____________________________________________________.
|
5.3 Death of a Participant: If the Participant dies while in Service, the Employer shall pay a benefit to the Beneficiary in an amount equal to the vested balance in the Deferred Compensation Account of the Participant determined as of the date payments to the Beneficiary commence, plus:
___ (a) An amount to be determined by the Committee. ___ (b) Other: _______________________________________________. XX (c) No additional benefits. ___ |
DD 2319-1 5 2/2006
5.4 In-Service Distributions: In-service accounts are permitted under the Plan:
If applicable, amounts not vested at the specified time of distribution will be:
___ Forfeited
___ Distributed annually when vested
___ (b) No in-service distributions permitted.
5.5 Education Distributions: Education accounts are permitted under the Plan:
Education distributions may be made in the following manner:
If applicable, amounts not vested at the specified time of distribution will be:
___ Forfeited
___ Distributed annually when vested
___ (b) No education distributions permitted.
5.6 Change in Control: Participant may elect to receive distributions under the Plan upon a Change in Control:
___ (a) Yes, Participants may elect upon initial enrollment to have accounts distributed upon a Change in Control.
XX (b) Participants may not elect to have accounts distributed upon ___ a Change in Control.
DD 2319-1 6 2/2006
6.1 Payment Options: Any benefit payable under the Plan upon a Qualifying Distribution Event may be made to the Participant or his Beneficiary (as applicable) in any of the following payment forms, as selected by the Participant in the Participant Deferral Agreement:
1. Separation from Service other than Retirement (Retirement is defined by the Employer)
XX (a) A lump sum in cash as soon as practicable following the date
___ of the Qualifying Distribution Event.
XX (b) Approximately equal annual installments over a term certain
___ as elected by the Participant upon his entry into the Plan
not to exceed _5_ years.
___ (c) Other: _______________________________________________.
|
2. Separation from Service due to Retirement
XX (a) A lump sum in cash as soon as practicable following the date
___ of the Qualifying Distribution Event.
XX (b) Approximately equal annual installments over a term certain
___ as elected by the Participant upon his entry into the Plan
not to exceed _15_ years.
___ (c) Other: _______________________________________________.
3. Death
XX (a) A lump sum in cash upon the date of the Qualifying
___ Distribution Event.
XX (b) Approximately equal annual installments over a term certain
___ as elected by the Participant upon his entry into the Plan
not to exceed _5_ years.
___ (c) Other: _______________________________________________.
|
DD 2319-1 7 2/2006
4. Disability
XX (a) A lump sum in cash upon the date of the Qualifying
___ Distribution Event.
XX (b) Approximately equal annual installments over a term certain
___ as elected by the Participant upon his entry into the Plan
not to exceed _5_ years.
___ (c) Other: _______________________________________________.
|
5. Change in Control
___ (a) A lump sum in cash upon the date of the Qualifying
Distribution Event.
___ (b) Approximately equal annual installments over a term certain
as elected by the Participant upon his entry into the Plan
not to exceed _____ years.
___ (c) Other: _______________________________________________.
XX (d) Not applicable (if not permitted in 5.6)
___
|
6.2 De Minimis Amounts. Notwithstanding any payment election made by the Participant, the vested balance in the Deferred Compensation Account of the Participant will be distributed in a single lump sum payment if the payment accompanies the termination of the Participant's entire interest in the Plan and the amount of such payment does not exceed $10,000.
DD 2319-1 8 2/2006
7. Vesting: An Active Participant shall be fully vested in the Employer Credits made to the Deferred Compensation Account upon the first to occur of the following events:
___ (a) Normal Retirement Age. ___ (b) Death. ___ (c) Disability. ___ (d) Change in Control. ___ (e) Other: _______________________________________________. ___ (f) Satisfaction of the vesting requirement specified below: |
___ Employer Discretionary Credits:
___ (i) Immediate 100% vesting.
___ (ii) 100% vesting after _________ Years of Service.
___ (iii) 100% vesting at age ____.
___ (iv) Number of Years Vested
of Service Percentage
--------------- ----------
Less than 1 ___%
1 ___%
2 ___%
3 ___%
4 ___%
5 ___%
6 ___%
7 ___%
8 ___%
9 ___%
10 or more ___%
|
For this purpose, Years of Service of a Participant shall be calculated from the date designated below:
___ (1) First Day of Service.
___ (2) Effective Date of the Plan Participation.
___ (3) Each Crediting Date. Under this option (3),
each Employer Credit shall vest based on the
Years of Service of a Participant from the
Crediting Date on which each Employer
Discretionary Credit is made to his or her
Deferred Compensation Account. Notwithstanding
the vesting schedule elected above, all
Employer Discretionary Credits to the Deferred
Compensation Account shall be 100% vested upon
the following event(s): ______________________.
|
DD 2319-1 9 2/2006
___ Employer Profit Sharing Credits:
___ (i) Immediate 100% vesting.
___ (ii) 100% vesting after _________ Years of Service.
___ (iii) 100% vesting at age ____.
___ (iv) Number of Years Vested
of Service Percentage
--------------- ----------
Less than 1 ___%
1 ___%
2 ___%
3 ___%
4 ___%
5 ___%
6 ___%
7 ___%
8 ___%
9 ___%
10 or more ___%
|
For this purpose, Years of Service of a Participant shall be calculated from the date designated below:
___ (1) First Day of Service.
___ (2) Effective Date of the Plan Participation.
___ (3) Each Crediting Date. Under this option (3),
each Employer Credit shall vest based on the
Years of Service of a Participant from the
Crediting Date on which each Employer Profit
Sharing Credit is made to his or her Deferred
Compensation Account. Notwithstanding the
vesting schedule elected above, all Employer
Profit Sharing Credits to the Deferred
Compensation Account shall be 100% vested upon
the following event(s): _____________________.
|
DD 2319-1 10 2/2006
___ Other Employer Credits:
___ (i) Immediate 100% vesting.
___ (ii) 100% vesting after _________ Years of Service.
___ (iii) 100% vesting at age ____.
___ (iv) Number of Years Vested
of Service Percentage
--------------- ----------
Less than 1 ___%
1 ___%
2 ___%
3 ___%
4 ___%
5 ___%
6 ___%
7 ___%
8 ___%
9 ___%
10 or more ___%
|
For this purpose, Years of Service of a Participant shall be calculated from the date designated below:
___ (1) First Day of Service.
___ (2) Effective Date of the Plan Participation.
___ (3) Each Crediting Date. Under this option (3),
each Employer Credit shall vest based on the
Years of Service of a Participant from the
Crediting Date on which each Employer Credit
is made to his or her Deferred Compensation
Account. Notwithstanding the vesting schedule
elected above, all other Employer Credits to
the Deferred Compensation Account shall be
100% vested upon the following event(s):
_________________________________.
|
14. Amendment and Termination of Plan: Notwithstanding any provision in this Adoption Agreement or the Plan to the contrary, Section 13 of the Plan shall be amended to read as provided in attached Exhibit A.
DD 2319-1 11 2/2006
17.9 Construction: The provisions of the Plan and Trust (if any) shall be construed and enforced according to the laws of the State of Vermont, except to the extent that such laws are superseded by ERISA and the applicable provisions of the Code.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year stated below.
Date: __________________________________
Date:___________________________________
NOTE: Execution of this Adoption Agreement creates a legal liability of the Employer with significant tax consequences to the Employer and Participants. The Employer should obtain legal and tax advice from its professional advisors before adopting the Plan. Principal Life Insurance Company disclaims all liability for the legal and tax consequences which result from the elections made by the Employer in this Adoption Agreement.
DD 2319-1 12 2/2006
Exhibit A
The Participant's beneficiary shall be the person or persons designated by the Participant on the beneficiary designation form provided by and filed with the Committee or its designee. If the Participant does not designate a beneficiary, the beneficiary shall be his Surviving Spouse or Civil Union Partner as defined by the state of Vermont. If the Participant does not designate a beneficiary and has no Surviving Spouse/Civil Union Partner, the beneficiary shall be the Participant's estate. The designation of a beneficiary may be changed or revoked only by filing a new beneficiary designation form with the Committee or its designee. If a beneficiary (the "primary beneficiary") is receiving or is entitled to receive payments under the Plan and dies before receiving all of the payments due him, the balance to which he is entitled shall be paid to the contingent beneficiary, if any, named in the Participant's current beneficiary designation form. If there is no contingent beneficiary, the balance shall be paid to the estate of the primary beneficiary. Any beneficiary may disclaim all or any part of any benefit to which such beneficiary shall be entitled hereunder by filing a written disclaimer with the Committee before payment of such benefit is to be made. Such a disclaimer shall be made in a form satisfactory to the Committee and shall be irrevocable when filed. Any benefit disclaimed shall be payable from the Plan in the same manner as if the beneficiary who filed the disclaimer had predeceased the Participant.
DD 2319-1 13 2/2006
Exhibit 13
2006 Annual Report
Union Bankshares, Inc. Earnings Per Share & Dividends Paid to Stockholders by Year
[GRAPH]
*2000 *2001 *2002 *2003 2004 2005 2006
Dividends $0.65 $0.71 $0.76 $0.82 $0.90 $1.38** $1.06
EPS $1.05 $1.06 $1.14 $1.18 $1.28 $1.37 $1.38
|
* Dividend amounts have been adjusted for 2003 stock split ** Includes a $.040 per share special dividend
Working for the Common Cause
3 Photos
Charitable giving at
Union Bank extends beyond pure financial support to the active volunteer participation of our entire Team.
From events to raise funds for cancer research, to our United Way donations, our support of local hospitals, cultural events and athletic endeavors, to our sponsorship of community facilities, we continue to be an active participant in the life of the neighborhoods we serve.
Top to Bottom:
St. Johnsbury Foliage Parade
Northeastern Vermont
Regional Hospital
Meeting Room Dedication
March of Dimes
Achievement Award
Letter to Shareholders
Dear Shareholder, March 30, 2007
We are pleased to provide you our 2006 Annual Report to Shareholders with audited financial statements and other pertinent information about your company and its activities.
In 2006 the Federal Reserve increased the short-term interest rates four times, with the last increase on June 30th. This resulted in a prime rate of 8.25% which has remained unchanged through today. While short term rates have increased, long term rates have not, leaving us with an inverted yield curve. For example, the recent 13 week Treasury bill yielded 5.16%, while the 10 year Treasury note yielded 4.52%. While the prime rate today is 8.25%, a home mortgage loan for 30 years could be as low as a fixed rate of 6.75%. As you can imagine, managing the interest margin has, and will continue to be, of significant importance.
Earnings for 2006 slightly exceeded 2005. We plan to closely monitor the interest margin and also work diligently on growing the loan portfolio, increasing deposits and aggressively work on controlling and reducing overhead costs. In previous communications with you we discussed the challenges community banks face in the area of increasing deposits. During the last two years, we revamped much of our deposit product line to ensure our offerings are very competitive and offer value to the customer. Competition from other banks, money funds, brokerage houses and credit unions will continue to put pressure on attracting deposits.
In 2006 we engaged outside expertise to assist us in developing a comprehensive Information Technology Strategic Plan. We have already implemented some of the efficiencies identified and during the next 12 months will install new "platform" software, document imaging, Check 21 imaging, remote image capture and a new internal computer network. A number of staff have been working diligently to implement these various enhancements as we believe these efforts will add substantially to our productivity and information security.
In late 2005 we reopened the renovated Portland Street office in St. Johnsbury and in March 2006 opened our newest full-service office in Littleton, NH. We are pleased with the performance and growth of both these offices. Part of our strategic plan has been, and will continue to be, to identify areas which offer opportunity for a branch office.
Although nationally the banking industry has seen a decline in banks from 17,325 in 1987 to 8,832 at the end of 2005, branch offices have increased from 80,340 in 1987 to 93,542 in 2005. Clearly there continues to be consolidation within the industry; however, the demand for branch offices, in spite of the proliferation of electronic banking options, is important to note. Clearly, delivery of our services must continue as a three pronged approach: bricks and mortar, electronic banking AND the right people.
On November 25th we lost one of our greatest assets when Bill Costa passed away. Bill became a director of Citizens Savings Bank and Trust in 1972 and of Union Bankshares in 1999 after the acquisition of Citizens. Bill was very active in the St. Johnsbury area, serving on numerous boards and organizations as well as operating a number of successful business entities. His insight into this market, institutional knowledge, mentoring and ability to work with everyone will be difficult to replace.
We would like to take this opportunity to thank each of our shareholders, customers and our employees for contributing to the continued success of Union Bankshares.
Sincerely,
/s/ Richard C. Sargent /s/ Kenneth D. Gibbons Richard C. Sargent Kenneth D. Gibbons Chairman President & CEO |
Union Bankshares Board of Directors
[Photos]
Cynthia D. Borck Steven J. Bourgeois Kenneth D. Gibbons
Franklin G. Hovey II Richard C. Marron Robert P. Rollins
Richard C. Sargent John H. Steel
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Helping Neighborhoods Succeed
"Working with the Commercial Lending team at Union Bank proved to be a very positive experience. Everyone involved showed a sincere interest to better understand our business and its needs. With the Bank's support, we have been able to meet the growing demand for our specialized products & services."
- Michael Boudreau Sterling Technologies, Inc.
"Union Bank was a godsend for Waterville Fire District #1. When our water system (which serves forty families) began to fail, we needed to replace our entire distribution system by State order. Union Bank was instrumental in providing the short-term financing that we required in this $400,000 project. We now have a clean, safe and plentiful drinking water supply; in no small part thanks to the caring folks at Union Bank."
- Susan Chamberlain Clerk/Treasurer Waterville Fire District #1
Sterling Technologies brings the cutting edge to Lamoille County
Sterling Technologies, Inc. a manufacturing/engineering/service provider was established in January 2005 in co-founder Jeff Walker's home, located in Morrisville, Vermont. In the spring of 2006, Sterling Technologies was awarded a substantial contract. As a result, the company needed to move quickly to identify a new facility and relocate while minimizing impact on current production capacity. Ideally this transition would allow Sterling to remain in the area while further investing in the local community.
Union Bank's Commercial Team helped Sterling identify a suitable space to lease within the former Cabot Creamery Building on Wilkins Street in Morrisville. A lease arrangement for the 3,500 sq.ft. facility was soon negotiated. The Bank was instrumental in providing the financing for renovating and equipping the newly leased space, creating a complete manufacturing facility. The Bank also provided a line of credit to finance the raw materials required by Sterling's new contract as well as assisting in carrying the resulting accounts receivable. Using the Bank's SBA Preferred Lender Status, the Commercial Team worked with the SBA to provide the financing needed by Sterling to move quickly into a new facility and fulfill its contractual commitments. Sterling's continued success has allowed for an increase in the company's talented workforce with additional employment opportunities in the immediate future.
[Photo]
Bob Jones, Jeff Walker and Mike Boudreau of Sterling Technologies
Waterville installs new Water Systems Upgrade
Waterville had a real problem. Their existing municipal water system didn't meet State and Federal safe drinking water regulations. The solution was to install a 9,000 gallon concrete water storage tank, approximately 3,100 feet of new distribution lines, disinfection and corrosion control measures, and a brand new control facility. Union Bank provided both interim financing and working capital in order for the needed improvements to be made. The project was approved for long-term financing through the Municipal Bond Bank and the Agency of Natural Resources, which will administer the funds. The Bank will be repaid from funds the Waterville Fire District receives from the Vermont State Agency of Natural Resources.
St. Albans gets advanced Water Metering systems
The City of St. Albans, Vermont now has advanced metering systems that improve the municipality's efficiency. Union Bank provided funding for the City to replace all metering devices in its water system and to install new radio equipment and computers that measure water usage. The new equipment will also generate monthly bills for water users.
Helping Neighborhoods Succeed
New Home Ownership Education Programs
Union Bank is an active partner with the NeighborWorks Home Ownership Center (NWHOC) in Lyndonville. The Bank sponsors two annual seminars in Lyndonville that are, in essence, a "home buyer's workshop." The seminars prepare future homeowners and aid in their understanding of the home buying process. Participants learn how to qualify for a loan, and identify what further steps they need to take in order to be ready to purchase a home.
Union Bank lenders attend the seminars, introducing participants to different types of mortgages, land loans, and construction loan programs. The Bank's lenders also answer numerous participant questions during the interactive presentations.
In addition, the Bank also partners with NWHOC in providing the community with Individual Development Accounts (IDA). An IDA is a matched savings account. Every dollar a customer saves towards buying a home is matched by a $2 deposit provided jointly by the Vermont Housing Finance Agency, the U.S. Department of Health and Human Services and Central Vermont Community Action Council. The IDA program helps provide many prospective home buyers with funds needed to purchase their own home.
[Photo]
Lyndonville with Burke Mountain in background
Little Dippers Doodle Daycare
Betsy Bailey had an idea. If she could expand her existing daycare center to accommodate a wider range of work schedules, she could not only grow her business, she could provide a much needed service to the Northeast Kingdom communities. With her current facility serving 53 families (and employing nine individuals) she started discussing this idea with her Union Bank Commercial Lender. After conferring with Kingdom Child Care Connection, it was determined that there was significant demand for a 24 hour daycare service-a facility and program that would accommodate parents working second and third shifts, as well as those working past the typical 6:00 PM child pick-up time. Working with the Bank, a financing package was created, and included Vermont Community Loan Fund and Northern Community Investment Corporation as funding partners.
The new facility has been designed for 150 children and to fulfill the 24 hour operational goal. The completion of the project will have a significant, positive effect in the community. First, it allows parents to work second and third-shift jobs; work that may not have been available to them due to child care needs. Second, the new daycare will increase the size of the late-shift labor pool available to local employers. Finally, the new facility is projected to create 30 new jobs when operating at full capacity.
With construction moving forward, Little Dippers Doodle Daycare anticipates opening its new facility in May 2007. The project was aided greatly by the assistance of USDA Rural Development and by exclusively using local contractors.
"The support of Gilman Housing Trust's NeighborWorks Home Ownership Center by Union Bank--in both money and personal commitment--is critical to the continuance of these programs; educating hundreds and sustaining housing for hundreds more each year."
- George Mathias, Manager, Gilman Housing Trust
"My project wouldn't have been possible if it wasn't for Union Bank. They kept me going in the right direction and have been a great source in helping find money from other sources. Union Bank has always been there for me--from my first business loan in 1997 to start my business -- and now with my dream daycare center. Thank you!"
- Betsy Bailey, Owner Little Dippers Doodle Daycare
Helping Neighborhoods Succeed
"An important part of our strategic plan was accomplished with Union Bank acting as Agent in the private placement of a tax exempt bond issue which included three other local banks. This transaction could not have been completed in the timely and cost effective manner that was achieved without the professional advice and counsel of Union Bank's commercial lending team. They were truly our partners throughout a long and complex process."
- W. Page Dame, Assistant Head for Finance Lyndon Institute
"As a parent volunteer I love working with the young students in Union Bank's Save for Success program. It's fun watching their excitement as they drop a large pile of change in front of us to deposit with a big smile on their faces. We know our regulars but every week we seem to be adding students who feel they are 'missing some fun.' They show up and want part of the action. I am surprised at how much fun I have doing this--it's such a great program and I love being a part of it."
- Anita B. Lotto, Parent
Local Banks close Financing Package For Lyndon Institute Expansion
Union Bank led a consortium of local community banks in arranging and
completing a financing package for the long term expansion of Lyndon Institute
(L.I.), a private, preparatory school serving the towns of Lyndon, Lyndonville
and many surrounding towns. The project consists of constructing a new 26-bed
dormitory which will include a multi-function common area, a physical exercise
room, two faculty apartments and will allow L.I. to increase the maximum
capacity of boarding students from 45 to 80 over a several year period. To
finance the project, a municipal bond was created through the assistance of
Vermont Economic Development Authority (VEDA). In the spirit of community
commitment, the bond was then divided equally among Community National Bank,
LyndonBank, Passumpsic Savings Bank, and Union Bank. The new construction is to
be completed in August 2007.
[Photo]
Left to Right:
Kristine Lepine, Lyndon Institute; Tracey Holbrook,
Union Bank; W. Page Dame, Lyndon Institute.
Union Bank's Save For Success program helps youngsters learn to save
The Bank's Save for Success (SFS) program, an in-school banking program run by adult volunteers, is aimed at teaching youth the value of saving for the future. The program continues to be a terrific opportunity for children (and their parents/care givers) to discuss the importance of saving. It teaches youngsters the life-long skill of saving and the benefits of personal thrift.
With SFS, students can open a savings account with "kid-friendly" requirements:
* $1.00 minimum balance
* The Bank gives each student one dollar to start an account
* no minimum deposit required
* no service charges
These minimal requirements provide every child an opportunity to save.
Participating schools host a weekly "banking day" at which students (with the assistance of adult volunteers) make deposits to their savings account. This banking day is usually held before school and does not interfere with instructional hours.
As of December 31, 2006, there was a total of 2,973 SFS student savings and CD accounts representing a total savings investment of $1,168,072 from the student participants of the 27 local schools which SFS serves. Over the past two years, Union Bank has had 19 employees provide 24 in-class presentations for the national Teach Children to Save day.
Helping Neighborhoods Succeed
Mansfield Orthopaedics builds state-of-the-art Treatment Facility
In July of 2006, doctors Glen Neale, Bryan Huber, Eric Mullins, Richard James and Certified Physician Assistant Nella Wennberg started operating from a brand new medical facility located at 555 Washington Highway in Morrisville, Vermont. Relocating to the new facility has allowed the practice to expand services in combination with physical therapy. Many high tech features have been built into the new facility, including on-site digital radiology (which allows the treating provider to see x-rays within minutes) and additional clinic rooms to reduce the wait time for patients. In addition to physical and occupational therapy, the facility offers aquatic (pool) therapy, due to the generosity of the Freeman Foundation. Union Bank worked with Mansfield Orthopaedics to develop a funding package for the construction and furnishing of the facility, which offers north-central Vermont communities the very latest in Orthopedic Treatment, Sports Medicine and Physical Therapy options.
[Photo]
Union Bank's Peter Jones and Ken Gibbons listen as Dr. Bryan Huber explains the wireless communication systems of the new Mansfield Orthopaedics facility in Morrisville
Vermont Milk Company aims to provide better returns to Family Farmers
Union Bank created a financing package to assist the new Vermont Milk Company (VMC). VMC recently purchased an existing cheese making facility in the Hardwick Industrial Park. VMC is a stock company formed to execute a specific business model based on making Vermont farmers the sole source of milk, as well as paying those farmers a livable wage for the milk. Vermont Milk Company has supply contracts with value-added fluid milk processors. These processors will pay a premium for Vermont Milk's product, enabling VMC to pass along that premium and pay dairy farmers at rates substantially higher than market norms. The creative loan package includes a USDA Rural Development guaranty of its real estate loan, together with participation of VEDA and the Vermont Community Loan Fund.
Housing Partnerships work for the Community
Union Bank helps support the communities it serves by investing in several affordable housing partnerships. These partnerships include Highland Hills Housing Partnership of Hardwick, Portland & Main Housing LP of Morrisville, Jeffersonville Bond Housing LP of Jeffersonville, Cabot Commons LP of Cabot, and Mountainview-St. Jay Housing LP of St. Johnsbury. These partnerships are formed with the express purpose of developing, owning, and operating affordable housing for low and moderate income Vermonters. Currently, Union Bank has a financial interest in housing partnerships in Lamoille, Washington, and Caledonia counties. The Bank's recorded investment in these projects is over $2 Million. Union Bank has committed to investing in the Bemis Block Housing LP of Hardwick in 2007.
"Union Bank did more than lend us money, they really made the project happen. All banks 'talk' about supporting the Vermont economy. Union Bank is the real thing. I don't know if we would be in business today without the Bank's commitment to their local community and rural economy."
- Anthony Pollina, Vermont Milk Company - Dairy Farmers of Vermont
"It's rare when you are able to describe buying a business as a completely smooth and swift transition. It's even rarer to be able to say you are thrilled with the bank you chose. Shanon and I chose Union Bank for its strong community presence and personal customer service. We can be sure they will offer unmatched support and longevity for Great Big Graphics over the next few decades, not only the next few years."
- Julie Ruth, Great Big Graphics
Union Bankshares, Inc. and Subsidiary
Selected Financial Information
At or For The Years Ended December 31
-----------------------------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------------
(Dollars in thousands, except per share data)
Balance Sheet Data
Total assets $ 381,149 $ 374,746 $ 359,529 $ 356,557 $ 343,492
Investment securities available-for-sale 23,675 32,408 40,966 44,370 45,824
Loans, net of unearned income 317,452 307,071 280,069 271,561 255,907
Allowance for loan losses (3,338) (3,071) (3,067) (3,029) (2,908)
Deposits 319,822 313,299 306,598 305,381 293,004
Borrowed funds 14,596 16,256 7,934 7,223 7,536
Stockholders' equity (1) 41,923 41,603 42,403 40,987 39,169
Income Statement Data
Total interest income $ 25,197 $ 22,249 $ 20,171 $ 20,368 $ 22,167
Total interest expense (6,821) (4,499) (3,310) (4,209) (6,364)
-----------------------------------------------------------------
Net interest and dividend income 18,376 17,750 16,861 16,159 15,803
Provision for loan losses (180) (60) (30) (114) (356)
Noninterest income 4,058 4,063 3,781 3,607 3,562
Noninterest expenses (13,814) (13,056) (12,319) (12,060) (11,761)
-----------------------------------------------------------------
Income before provision for income taxes 8,440 8,697 8,293 7,592 7,248
Provision for income taxes (2,185) (2,460) (2,458) (2,205) (2,068)
-----------------------------------------------------------------
Net income $ 6,255 $ 6,237 $ 5,835 $ 5,387 $ 5,180
=================================================================
Per Common Share Data
Net income (2)(3) $ 1.38 $ 1.37 $ 1.28 $ 1.18 $ 1.14
Cash dividends paid (3) 1.06 1.38 0.90 0.82 0.76
Book value (1)(3) 9.25 9.16 9.31 9.01 8.62
Weighted average number of shares
outstanding (3) 4,539,641 4,554,055 4,551,469 4,547,366 4,543,113
Number of shares outstanding (3) 4,531,977 4,542,663 4,554,663 4,550,313 4,545,288
--------------------
(1) Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale" and 2006 includes the unfunded liability for pension
benefits, net of taxes for the defined benefit pension plan.
(2) Computed using the weighted average number of shares outstanding for the
period.
(3) Per common share data and number of shares outstanding for all applicable
periods have been restated to reflect the three-for-two stock split
effected in the form of a 50% stock dividend to shareholders of record on
July 26, 2003.
|
Union Bankshares, Inc. and Subsidiary
Management's Responsibility
Union Bankshares, Inc.'s management is responsible for preparation, integrity and fair presentation of the annual consolidated financial statements, Management's Discussion and Analysis ("MD&A") and all other information in the Annual Report. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the requirements of the Securities and Exchange Commission ("SEC"), as applicable. The MD&A has been prepared in accordance with the requirements of securities regulators including Item 303 of Regulation S-K of the Securities Exchange Act, and their related published requirements.
The consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. In addition, in preparing the financial information we must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. The MD&A also includes information regarding the estimated impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.
The financial information presented elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
In meeting our responsibility for the reliability of financial information, we maintain and rely on a comprehensive system of internal control and internal audit, including organizational and procedural controls, internal accounting controls and internal controls over financial reporting. Our system of internal control includes communication of our policies and procedures governing corporate conduct and risk management; comprehensive business planning; effective segregation of duties; delegation of authority and personal accountability; careful selection and training of personnel; and sound and conservative accounting policies which we regularly update. This structure ensures appropriate internal control over transactions, assets and records. We also regularly audit internal controls. These controls and audits are designed to provide us with reasonable assurance that the financial records are reliable for preparing financial statements and other financial information, assets are safeguarded against unauthorized use or disposition, liabilities are recognized, and we are in compliance with all regulatory requirements.
We have established a Disclosure Control Committee to assist us in ensuring that all public disclosures made by us are accurate and complete, and fairly present the Company's financial condition and results of operations. The members of the committee consist of select members of management and the financial expert from the Audit Committee. Representatives from the Company's external independent auditors and legal counsel normally participate. The Disclosure Control Committee shall review each annual and quarterly Exchange Act report prior to the Company filing them with the SEC to assess the quality of the disclosures made in the report, including but not limited to whether the report is accurate and complete in all material respects.
We, as Union Bankshares, Inc.'s Chief Executive Officer and Chief Financial Officer, will be certifying Union Bankshares, Inc.'s annual disclosure document filed with the SEC as required by the federal Sarbanes-Oxley Act of 2002.
In order to provide their report on our consolidated financial statements, the Company's Independent Auditors review our system of internal control and conduct their work to the extent that they consider appropriate.
The Board of Directors is responsible for reviewing and approving the financial information contained in the Annual Report, including the MD&A, and overseeing management's responsibilities for the presentation and preparation of financial information, maintenance of appropriate internal controls, management and control of major risk areas and assessment of significant and related party transactions. The Board delegates these responsibilities to its Audit Committee, comprised solely of non-management, independent directors. The Audit Committee meets periodically with management, internal auditors and the independent public accountants.
The Company's Independent Auditors and the Company's Internal Auditors have direct full and free access to the Board of Directors and its committees to discuss audit, financial reporting and related matters with or without management present.
/s/ Marsha A. Mongeon /s/ Kenneth D. Gibbons Marsha A. Mongeon Kenneth D. Gibbons Chief Financial Officer Chief Executive Officer |
Union Bankshares, Inc. and Subsidiary
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Union Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Union Bankshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ UHY LLP Albany, New York March 27, 2007 VT Reg. No. 092-0000-648 |
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2006 and 2005
2006 2005
-----------------------------
ASSETS
Cash and due from banks $ 11,694,471 $ 14,018,842
Federal funds sold and overnight deposits 9,262,770 189,587
-----------------------------
Cash and cash equivalents 20,957,241 14,208,429
Interest bearing deposits in banks 5,416,961 8,597,835
Investment securities available-for-sale 23,675,261 32,407,973
Loans held for sale 3,750,186 6,546,019
Loans 313,821,920 300,677,096
Allowance for loan losses (3,337,768) (3,071,421)
Unearned net loan fees (120,139) (152,338)
-----------------------------
Net loans 310,364,013 297,453,337
Accrued interest receivable 2,000,719 1,971,924
Premises and equipment, net 6,079,715 5,898,424
Other assets 8,905,107 7,661,722
-----------------------------
Total assets $381,149,203 $374,745,663
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 54,875,163 $ 52,616,912
Interest bearing 264,946,884 260,682,182
-----------------------------
Total deposits 319,822,047 313,299,094
Borrowed funds 14,596,130 16,256,274
Liability for pension benefits 1,317,352 95,405
Accrued interest and other liabilities 3,490,477 3,492,079
-----------------------------
Total liabilities 339,226,006 333,142,852
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2006 and 2005 9,837,222 9,837,222
Paid-in capital 150,146 139,861
Retained earnings 35,202,735 33,760,610
Treasury stock at cost; 386,634 shares in 2006 and 375,948 shares in 2005 (2,264,181) (2,036,931)
Accumulated other comprehensive loss (1,002,725) (97,951)
-----------------------------
Total stockholders' equity 41,923,197 41,602,811
-----------------------------
Total liabilities and stockholders' equity $381,149,203 $374,745,663
=============================
See accompanying notes to consolidated financial statements.
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Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2006, 2005, and 2004
2006 2005 2004
-------------------------------------------
Interest income
Interest and fees on loans $23,459,344 $20,239,924 $17,941,333
Interest on debt securities:
Taxable 941,219 1,261,344 1,692,097
Tax exempt 191,484 191,549 214,449
Dividends 122,806 87,814 68,953
Interest on federal funds sold and overnight deposits 213,662 188,080 47,149
Interest on interest bearing deposits in banks 268,665 280,348 207,163
-------------------------------------------
Total interest income 25,197,180 22,249,059 20,171,144
-------------------------------------------
Interest expense
Interest on deposits 5,906,623 3,984,868 2,948,477
Interest on borrowed funds 914,640 513,951 362,101
-------------------------------------------
Total interest expense 6,821,263 4,498,819 3,310,578
-------------------------------------------
Net interest income 18,375,917 17,750,240 16,860,566
Provision for loan losses 180,000 60,000 30,000
-------------------------------------------
Net interest income after provision for loan losses 18,195,917 17,690,240 16,830,566
-------------------------------------------
Noninterest income
Trust income 304,444 300,491 204,392
Service fees 3,108,720 2,905,235 2,809,062
Net gains on sales of investment securities 134,558 144,673 23,443
Net gains on sales of loans held for sale 288,138 192,073 443,965
Net gains on sales of other real estate owned -- 336,153 90,191
Other income 221,953 183,920 210,387
-------------------------------------------
Total noninterest income 4,057,813 4,062,545 3,781,440
-------------------------------------------
Noninterest expenses
Salaries and wages 6,011,727 5,627,296 5,401,332
Pension and employee benefits 2,344,464 2,044,870 1,972,948
Occupancy expense, net 802,192 788,672 737,386
Equipment expense 1,038,246 1,040,797 930,939
Other expenses 3,617,462 3,554,249 3,276,681
-------------------------------------------
Total noninterest expense 13,814,091 13,055,884 12,319,286
-------------------------------------------
Income before provision for income taxes 8,439,639 8,696,901 8,292,720
Provision for income taxes 2,184,364 2,459,532 2,457,593
-------------------------------------------
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
===========================================
Earnings per common share $ 1.38 $ 1.37 $ 1.28
Dividends per common share $ 1.06 $ 1.38 $ 0.90
|
See accompanying notes to consolidated financial statements.
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2006, 2005, and 2004
Common Stock Accumulated
----------------------- other Total
Shares, net Paid-in Retained Treasury comprehensive stockholders'
of Treasury Amount Capital earnings stock income (loss) equity
-------------------------------------------------------------------------------------------
Balances, December 31, 2003 4,550,313 $9,822,522 $ 54,576 $32,070,843 $(1,721,931) $ 760,654 $40,986,664
Comprehensive income:
Net income -- -- -- 5,835,127 -- -- 5,835,127
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (383,366) (383,366)
-----------
Total comprehensive income 5,451,761
-----------
Cash dividends declared -- -- -- (4,096,514) -- -- (4,096,514)
Exercise of stock options 4,350 8,700 52,413 -- -- -- 61,113
-----------------------------------------------------------------------------------------
Balances, December 31, 2004 4,554,663 9,831,222 106,989 33,809,456 (1,721,931) 377,288 42,403,024
-----------
Comprehensive income:
Net income -- -- -- 6,237,369 -- -- 6,237,369
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (475,239) (475,239)
-----------
Total comprehensive income 5,762,130
-----------
Cash dividends declared -- -- -- (6,286,215) -- -- (6,286,215)
Issuance of stock options -- -- 862 -- -- -- 862
Exercise of stock options 3,000 6,000 32,010 -- -- -- 38,010
Purchase of treasury stock (15,000) -- -- -- (315,000) -- (315,000)
-----------------------------------------------------------------------------------------
Balances, December 31, 2005 4,542,663 9,837,222 139,861 33,760,610 (2,036,931) (97,951) 41,602,811
-----------
Comprehensive income:
Net income -- -- -- 6,255,275 -- -- 6,255,275
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (55,821) (55,821)
-----------
Total comprehensive income 6,199,454
Adjustment to initially apply
SFAS No. 158, net of tax effect
(see Note 1) -- -- -- -- -- (848,953) (848,953)
Cash dividends declared -- -- -- (4,813,150) -- -- (4,813,150)
Issuance of stock options -- -- 10,285 -- -- -- 10,285
Purchase of treasury stock (10,686) -- -- -- (227,250) -- (227,250)
-----------------------------------------------------------------------------------------
Balances, December 31, 2006 4,531,977 $9,837,222 $150,146 $35,202,735 $(2,264,181) $(1,002,725) $41,923,197
=========================================================================================
|
See accompanying notes to consolidated financial statements.
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004
2006 2005 2004
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 781,717 772,971 696,686
Provision for loan losses 180,000 60,000 30,000
(Credit) provision for deferred income taxes (21,433) 93,290 197,939
Net amortization of investment securities 59,665 135,638 205,571
Equity in losses of limited partnerships 297,209 221,884 140,104
Issuance of stock options 10,285 862 --
Net gains on sales of investment securities (134,558) (144,673) (23,443)
Net gains on sales of loans held for sale (288,138) (192,073) (443,965)
Net gains on sales of other real estate owned -- (336,153) (90,191)
Net gains on disposals of premises and equipment (12,475) (1,995) (7,395)
Write-down of impaired investment securities -- 47,500 41,501
Decrease in unamortized loan fees (32,199) (13,316) (19,542)
Proceeds from sales of loans held for sale 18,047,445 15,208,927 26,269,537
Origination of loans held for sale (14,963,474) (12,748,963) (16,115,144)
(Increase) decrease in accrued interest receivable (28,795) (444,116) 123,698
(Increase) decrease in other assets (427,661) (135,134) 90,814
(Decrease) increase in income taxes (79,203) 7,742 4,653
Increase (decrease) in accrued interest payable 417,747 200,046 (51,046)
(Decrease) increase in other liabilities (57,038) 81,661 (326,142)
----------------------------------------------
Net cash provided by operating activities 10,004,369 9,051,467 16,558,762
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits in banks
Maturities and redemptions 3,971,874 5,374,868 3,562,529
Purchases (791,000) (6,464,000) (4,551,539)
Investment securities available-for-sale
Sales 7,823,788 2,453,236 1,761,346
Maturities, calls and pay downs 3,848,588 15,245,085 13,161,672
Purchases (2,949,349) (9,898,930) (12,323,253)
Net purchase of Federal Home Loan Bank stock (226,400) -- --
Net increase in loans (13,642,749) (29,624,052) (18,259,344)
Recoveries of loans charged off 170,454 54,972 124,164
Purchase of premises and equipment (965,809) (1,551,164) (1,377,719)
Investments in limited partnerships (347,454) (640,107) (100)
Proceeds from sales of premises and equipment 15,276 2,810 14,548
Proceeds from sales of other real estate owned -- 615,552 --
Proceeds from sales of repossessed property 14,815 11,370 12,684
----------------------------------------------
Net cash used in investing activities (3,077,966) (24,420,360) (17,875,012)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in borrowings outstanding (1,660,144) 8,322,622 711,122
Proceeds from exercise of stock options -- 38,010 61,113
Net increase (decrease) in noninterest bearing deposits 2,258,251 (4,604,277) 8,855,595
Net increase (decrease) in interest bearing deposits 4,264,702 11,305,230 (7,638,873)
Purchase of treasury stock (227,250) (315,000) --
Dividends paid (4,813,150) (6,286,215) (4,096,514)
----------------------------------------------
Net cash (used in) provided by financing activities (177,591) 8,460,370 (2,107,557)
----------------------------------------------
Increase (decrease) in cash and cash equivalents 6,748,812 (6,908,523) (3,423,807)
Cash and cash equivalents:
Beginning 14,208,429 21,116,952 24,540,759
----------------------------------------------
Ending $ 20,957,241 $ 14,208,429 $ 21,116,952
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 6,403,516 $ 4,298,773 $ 3,361,624
==============================================
Income taxes paid $ 2,285,000 $ 2,186,544 $ 2,283,094
==============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING & FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 399,254 $ 243,665 $ 319,368
==============================================
Repossessed property acquired in settlement of loans $ 14,564 $ 13,500 $ 8,916
==============================================
Loans originated to finance the sale of other real estate owned $ -- $ -- $ 283,634
==============================================
Investment in limited partnerships acquired by capital
contributions payable $ -- $ 703,817 $ --
==============================================
Change in unrealized losses on investment securities available-for-sale $ (84,577) $ (720,059) $ (580,858)
==============================================
Unrealized loss on defined benefit pension plan, adjustment to initially
apply SFAS No. 158, (See Note 1) $ 1,286,293 $ -- $ --
==============================================
Transfer of loans held for sale to portfolio $ -- $ 1,983,458 $ --
==============================================
|
See accompanying notes to consolidated financial statements.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
The accounting and reporting policies of Union Bankshares, Inc. and Subsidiary (the "Company") are in conformity with U.S. generally accepted accounting principles (GAAP) and general practices within the banking industry. The following is a description of the more significant policies.
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Union Bankshares, Inc., and its wholly owned subsidiary, Union Bank ("Union") 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.
Nature of operations
The Company provides a variety of financial services to individuals, municipalities, commercial and nonprofit customers through its branches, ATMs, telebanking, and internet banking systems in northern Vermont and Littleton, New Hampshire and its loan production office in St. Albans, Vermont. This market area encompasses primarily retail consumers, small businesses, municipalities, agricultural producers, and the tourism industry. The Company's primary deposit products are checking, savings, money market accounts, and certificates of deposit and its primary lending products are commercial, real estate, municipal, and consumer loans.
Concentration of risk
The Company's operations are affected by various risk factors, including interest rate risk, credit risk, and risk from geographic concentration of lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities/ repricing of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to credit-worthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although the Company has a diversified loan portfolio and economic conditions are relatively stable and a substantial portion of the Company's loans are secured by real estate and/or are Small Business Administration ("SBA") guaranteed, most of its lending activities are conducted within the Northern Vermont and New Hampshire market area where it is located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy and real estate market conditions. Note 6 discusses the types of lending which the Company engages in.
Use of estimates
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 materially differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, deferred tax assets, judgments regarding impairment of assets and pension plan accounting. These estimates involve a significant degree of complexity and subjectivity and the amount of the change that is reasonably possible, should any of these estimates prove inaccurate, cannot be estimated.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods), and overnight deposits.
Trust operations
Assets held by the Trust & Asset Management Division of Union 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.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Investment securities
Investment securities purchased and held primarily for resale in the near future are classified as trading securities and are carried at fair value with unrealized gains and losses included in earnings. Debt securities the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Debt and equity securities not classified as either held-to-maturity or trading are classified as available- for-sale. Investments classified as available-for-sale are carried at fair value.
Accretion of discounts and amortization of premiums arising at acquisition are included in income using the effective interest method over the life of the securities. Unrealized gains and losses are excluded from earnings and reported in other comprehensive income, 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.
Declines in the fair value of held-to-maturity and available-for-sale investment securities below their cost that are deemed by management to be other-than-temporary are reflected in earnings as realized losses in other expenses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition and near and medium-term prospects of the issuer, (3) whether the decline is attributable to changes in interest rates or credit quality and (4) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
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. Loans transferred from held for sale to portfolio are transferred at the lower of cost or market 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 pay-off are reported at their unpaid principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. Delinquency status is determined based on contractual terms. The accrual of interest is discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrowers' financial condition is such that collection of interest is doubtful. Normally, any unpaid-interest previously accrued on those loans is reversed against interest income. A loan may be restored to accrual status when its financial status has been significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is placed back in accrual status or after all principal has been collected. Interest income generally is not recognized on impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount 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 contractual life of the related loans.
Allowance for loan losses
The allowance for loan losses is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the allowance.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
The allowance for loan losses is maintained at a level which, by management's best estimate, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management's periodic evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. The ultimate collectibility of a substantial portion of the Company's loan portfolio is dependent upon general economic and real estate market conditions in Northern Vermont. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as economic conditions change.
Other real estate owned
Real estate properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at the lesser of the recorded loan or estimated fair value at the date of acquisition establishing a new carrying basis. Thereafter, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value, less cost to sell. Revenue and expenses from operations and changes in valuation are included in other income and expenses.
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 allowance for depreciation is eliminated from the accounts and the resulting gains or losses are reflected in the income statement. Maintenance and repairs are charged to current expense as incurred and the costs of major renewals 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.
Federal Home Loan Bank stock
As a member of the Federal Home Loan Bank ("FHLB") of Boston, Union is required to invest in common stock of the FHLB of Boston. Effective April 19, 2004, to comply with the Gramm-Leach-Bliley Act, the FHLB of Boston adopted a capital plan that redeemed its Class A common stock and issued Class B common stock in its place. While there was no change in the dollar value of Union's investment upon conversion, the Class B common stock has a five year notice requirement for redemption and there is no guarantee of future redemption. Also, there is the possibility of future capital calls by the FHLB of Boston on member banks to ensure compliance with its capital plan. FHLB of Boston stock is reported in Other Assets at its par value of $1,466,500 at December 31, 2006 and $1,240,500 at December 31, 2005. The stock is nonmarketable, and if redeemed, Union would receive from the FHLB of Boston an amount equal to the par value of the stock.
Company-owned life insurance
Company-owned life insurance ("COLI") represents life insurance on the lives of certain 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 financing for the benefit obligations to its employees and directors, including obligations under one of the Company's nonqualified deferred compensation plans. See Note 14. Since the Company is the primary beneficiary of the insurance policies, increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income, and are not 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 COLI is reflected as an Other asset in the accompanying consolidated balance sheets. The Company reviews the financial
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
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 to 10% of capital plus reserves.
Servicing
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of loans with servicing rights retained. Capitalized servicing rights are reported in other assets and are amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value of a stratum is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.
Investments carried at equity
The Company has purchased various limited partnership interests in low income housing partnerships. These partnerships were established to acquire, own and rent residential housing for low and moderate income Vermonters located in Northern Vermont. The investments are accounted for under a method approximating the equity method of accounting. These equity investments, which are included in other assets, are recorded at cost and adjusted for the Company's proportionate share of the partnerships' undistributed earnings or losses.
Pension plans
Union maintains a noncontributory defined benefit pension plan covering all eligible employees who meet certain service requirements. The costs of this plan, based on actuarial computations of current and estimated future benefits for employees, are charged to pension and other employee benefits as a current operating expense. The Company adopted the Financial Accounting Board's (FASB) Statement of Financial Accounting Standard (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and other Post retirement Plans-an Amendment of SFAS Statements No. 87, 88, 106 and 132R in 2006. The Statement requires the Company to recognize the funded status of the Defined Benefit Pension Plan, which is the difference between the fair value of the plan assets and the projected benefit obligation as of the period end. The following is the incremental effect of applying SFAS No. 158 on individual line items in the Consolidated Balance Sheet as of December 31, 2006:
Before After
Application Application of
of SFAS No. 158 Adjustments SFAS No. 158
--------------------------------------------------
Other Assets (Deferred tax assets) $ 1,020,576 $ 437,340 $ 1,457,916
Total assets 380,711,863 437,340 381,149,203
Liability for pension benefits 31,059 1,286,293 1,317,352
Total liabilities 337,939,713 1,286,293 339,226,006
Accumulated other comprehensive loss (153,772) (848,953) (1,002,725)
Total stockholders' equity 42,772,150 (848,953) 41,923,197
Total liabilities and stockholders' equity 380,711,863 437,340 381,149,203
|
Union also has a contributory 401(k) pension plan covering all employees who meet certain service requirements. The plan is voluntary, and Union, through the discretionary matching component of the plan, contributed fifty cents for every dollar contributed by participants, up to six percent of each participant's salary in 2006, 2005 and 2004.
Advertising costs
The Company expenses advertising costs as incurred.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Earnings per common share
Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period, retroactively adjusted for stock splits and stock dividends and reduced for shares held in treasury. The weighted average shares outstanding were 4,539,641, 4,554,055 and 4,551,469 for the years ended December 31, 2006, 2005 and 2004, respectively.
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 included in the Company's consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. Low income housing tax credits and historic rehabilitation credits are recognized as a reduction of income tax expense in the year they are earned.
Off-balance-sheet financial instruments
In the ordinary course of business, the Company is a party to off-balance- sheet financial instruments consisting of commitments to originate credit, unused lines of credit, commitments under credit card arrangements, commitments to purchase investment securities, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on investment securities available-for-sale and the unfunded liability for the defined benefit pension plan, are not included in net income, the cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the balance sheet as Accumulated other comprehensive income loss. Such items, along with net income, are components of comprehensive income.
Other comprehensive income (loss) components and related tax effects at December 31 are as follows:
Unrealized gains and losses on investment securities available-for-sale:
2006 2005 2004
--------------------------------------
Unrealized holding gains (losses) on investment
securities available-for-sale $ 49,980 $(622,886) $(598,916)
Reclassification adjustment for (gains) losses
realized in income (134,558) (97,173) 18,058
--------------------------------------
Net unrealized losses (84,578) (720,059) (580,858)
Tax effect 28,757 244,820 197,492
--------------------------------------
Net of tax amount $ (55,821) $(475,239) $(383,366)
======================================
|
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Items not yet recognized as a component of net periodic pension cost:
2006
-----------
Prior service cost $ (40,767)
Net actuarial loss (1,245,526)
-----------
Total (1,286,293)
-----------
Tax effect 437,340
-----------
Net of tax amount $(848,953)
===========
|
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.
Segment reporting
The Company's operations are solely in the commercial banking industry and consist of providing traditional banking and trust services to its customers. The Company operates primarily in the geographical regions of northern Vermont and New Hampshire. Management makes operating decisions and assesses performance based on an ongoing review of its traditional banking operations, which constitute the Company's only reportable segment.
Stock option plan
In December 2005 the Company adopted the FASB's SFAS No. 123R Share Based Payment, using the modified prospective application. Under SFAS No. 123R, the Company must recognize as compensation expense the grant date fair value of stock based awards over the vesting period of the awards. Under the modified prospective application, SFAS No. 123R applies to new awards and to awards modified, repurchased or cancelled after the application date. Prior to the adoption of SFAS No. 123R the Company had accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees as allowed under SFAS No. 123 Accounting for Stock Based Compensation. Under APB Opinion No. 25 the Company has provided pro forma net income disclosures for employee stock based awards granted on or after January 1, 1995 as if the fair value based method defined in SFAS No. 123 had been applied, along with related pro forma disclosures of net income, earnings per share and other disclosures. The pro forma effects on net income and earnings per share were not material in 2004. See Note 19--Stock Option Plan for additional information.
Recent accounting pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This Statement does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense. This Statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. This Statement is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
evaluating the impact of this new standard on the Company's consolidated financial statements but does not expect that such impact will be material.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans-an Amendment of SFAS Statements No. 87, 88, 106 and 132R. This Statement requires the Company to (1) recognize the funded status of a benefit plan--measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation--in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation. (2) Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS Statement No. 87, Employers' Accounting for Pensions. Amounts recognized in accumulated other comprehensive income, including the gains or losses and prior service costs or credits, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements. (3) Measure defined benefit plan assets and obligations as of the date of the employer's fiscal year-end statement of financial position (with limited exceptions). (4) Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses and prior service costs or credits. The Company adopted SFAS No. 158 in 2006 and was required to initially recognize the funded status of the defined benefit pension plan and to provide the required disclosures. See Notes 1 and 14 to these financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this new standard to determine its effects on the Company's consolidated financial statements but does not expect that such impact will be material.
In September 2006, the Securities and Exchange Commission (SEC) issued SEC Staff Accounting Bulletin (SAB) No. 108--Financial Statements--Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 addresses the diversity in practice of evaluating and quantifying financial statement misstatements and the related accumulation of such misstatements. SAB No.108 states that both a balance sheet and an income statement approach should be used when quantifying and evaluating the materiality of a potential misstatement and contains guidance for correcting errors under this dual approach. SAB No. 108 was adopted for the Company's 2006 financial statements and there was no material impact on the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 will be adopted for 2007 and there will be no impact from this new standard on the Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. It requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable. It permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and liabilities and requires additional disclosures in the financial statements under the fair value measurement method. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
does not expect the adoption of SFAS No. 156 to have a material impact on the Company's financial position or results of operations as the Company will continue with the amortization method.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Statements, an amendment of SFAS Statements No. 133 and 140. This
Statement permits but does not require fair value measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation and clarifies which interest only strips and principal only
strips are not subject to the requirements of SFAS No. 133. The Statement also
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are free standing derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation
and clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. However, in January 2007, the FASB issued
interpretive guidance in SFAS No. 133, Derivatives Implementation Group (DIG)
Issue B40, Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets. In DIG Issue B40, the FASB concluded that a
securitized interest in prepayable financial assets was not subject to the
bifurcation requirements of SFAS No. 155 provided that the interest met both
the following criteria: (1) the right to accelerate the settlement of the
securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which
bifurcation would be required other than an embedded derivative that results
solely from the embedded call options in the underlying financial assets. The
guidance in DIG issue B40 is effective upon the adoption of SFAS No. 155. SFAS
No. 155 is effective for all financial instruments acquired or issued after
December 31, 2006 as well as to those hybrid financial instruments that had
been previously bifurcated under SFAS No. 133. As of December 31, 2006, the
Company did not have any hybrid financial instruments which were previously
bifurcated under SFAS No. 133. Furthermore the guidance provided for in DIG
issue B40 is expected to allow the Company to continue to purchase mortgage-
backed securities without applying the bifurcation requirements of SFAS No.
155. The Statement amends SFAS No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. The adoption of SFAS No. 155 will not have a material
impact on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the 2005 and 2004 financial statements have been reclassified to conform to the current year presentation.
Note 2. Restrictions on Cash and Due From Banks
The Company is required to maintain vault cash or noninterest bearing reserve balances with Federal Reserve Bank of Boston. Total reserve balance required at December 31, 2006 was $2,301,000 and $330,000 at December 31, 2005, which were both satisfied by vault cash.
The nature of the Company's business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. The balance in these accounts at December 31, is as follows:
2006 2005
-------------------------
Noninterest bearing accounts $1,399,389 $1,767,171
Federal Reserve Bank of Boston 7,157,918 9,087,433
Federal funds sold 9,213,881 --
Federal Home Loan Bank of Boston 48,889 189,587
|
No losses have been experienced in these accounts. The Company was required to maintain contracted clearing balances of $1,000,000 at both December 31, 2006 and 2005, which are included in the Federal Reserve Bank balances above.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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 maintained at or below the FDIC insurable limits of $100,000. Certificates are held with rates ranging from 2.70% to 6.50% and mature at various dates through 2011, with approximately $2,662,000 scheduled to mature in 2007.
Note 4. Investment Securities
Investment securities available-for-sale consists of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
December 31, 2006:
Debt securities:
U.S. Government sponsored enterprises $ 2,497,084 $ -- $ (43,745) $ 2,453,339
Mortgage-backed 11,658,513 1,097 (276,829) 11,382,781
State and political subdivisions 4,460,491 20,255 (10,425) 4,470,321
Corporate 5,095,769 5,928 (81,667) 5,020,030
---------------------------------------------------------
Total debt securities 23,711,857 27,280 (412,666) 23,326,471
Marketable equity securities 196,392 152,398 -- 348,790
---------------------------------------------------------
Total $23,908,249 $179,678 $(412,666) $23,675,261
=========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
December 31, 2005:
Debt securities:
U.S. Government and agencies $ 500,000 $ -- $ -- $ 500,000
U.S. Government sponsored enterprises 2,495,068 -- (41,568) 2,453,500
Mortgage-backed 15,948,823 3,434 (341,890) 15,610,367
State and political subdivisions 4,742,086 42,283 (14,922) 4,769,447
Corporate 8,329,751 59,472 (155,269) 8,233,954
---------------------------------------------------------
Total debt securities 32,015,728 105,189 (553,649) 31,567,268
Marketable equity securities 540,654 300,051 -- 840,705
---------------------------------------------------------
Total $32,556,382 $405,240 $(553,649) $32,407,973
=========================================================
|
Investment securities with a carrying amount of $2,607,245 and $2,978,647 at December 31, 2006 and 2005, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (Continued)
Information pertaining to investment securities available-for-sale with gross unrealized losses at December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------------
Debt securities:
U.S. Government sponsored
enterprises $ -- $ -- $ 2,453,339 $ (43,745) $ 2,453,339 $ (43,745)
Mortgage-backed 1,937,692 (8,997) 8,723,090 (267,832) 10,660,782 (276,829)
State and political
subdivisions -- -- 1,013,741 (10,425) 1,013,741 (10,425)
Corporate 1,499,442 (3,664) 2,798,770 (78,003) 4,298,212 (81,667)
---------------------------------------------------------------------------------------
Total debt securities $ 3,437,134 $(12,661) $14,988,940 $(400,005) $18,426,074 $(412,666)
=======================================================================================
|
There were no marketable equity securities with unrealized losses at December 31, 2006.
Information pertaining to investment securities available-for-sale with gross unrealized losses at December 31, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------------
Debt securities:
U.S. Government sponsored
enterprises $ 1,477,687 $ (17,381) $ 975,813 $ (24,187) $ 2,453,500 $ (41,568)
Mortgage-backed 6,070,158 (98,130) 8,230,510 (243,760) 14,300,668 (341,890)
State and political
subdivisions 1,009,164 (14,922) -- -- 1,009,164 (14,922)
Corporate 3,469,505 (98,797) 1,461,659 (56,472) 4,931,164 (155,269)
---------------------------------------------------------------------------------------
Total debt securities $12,026,514 $(229,230) $10,667,982 $(324,419) $22,694,496 $(553,649)
=======================================================================================
|
There were no U.S. Government and agency securities or marketable equity securities with unrealized losses at December 31, 2005.
Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation and on a monthly basis for marketable equity securities. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government, its agencies or a government sponsored enterprise, whether downgrades by bond rating agencies have occurred, and industry analysts' reports. Consideration is given to the length of time and the extent to which the fair value has been less than the amortized cost basis, the financial condition and near and medium-term prospects of the issuer, whether the decline is attributable to changes in interest rates or credit quality and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2006, forty-five debt securities had unrealized losses totaling $412,666. This amounts to aggregate depreciation of 1.7% of the Company's amortized cost of the entire portfolio. Thirty-eight of these securities have been in an unrealized loss position for more than twelve months. The primary factor causing the unrealized losses on debt securities is the increase in market interest rates over the last 30 months as the Federal Reserve discount rate and the commercial prime rate rose seventeen times or 425 basis points since June 30, 2004; and not
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (Continued)
from deterioration in the creditworthiness of the issuer. Instances when creditworthiness may be a consideration, an individual analysis of the issuer is performed. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines were deemed by management to be other-than-temporary at December 31, 2006.
During 2005, the Company recognized other-than-temporary impairment on one corporate debt security of $47,500 to its quoted fair market value. The security was sold in 2006 for a small gain.
Proceeds from the sale of securities available-for-sale were $7,823,788, $2,453,236 and $1,761,346 in 2006, 2005, and 2004, respectively. Gross realized gains from sales of investments available-for-sale were $284,668, $160,040 and $35,673 with gross realized losses of $150,110, $15,367 and $12,230 for the years 2006, 2005, and 2004, respectively.
The scheduled maturities of debt securities available-for-sale as of December 31, 2006 were as follows:
Amortized Fair
Cost Value
---------------------------
Due in one year or less $ 1,640,111 $ 1,614,218
Due from one to five years 6,573,061 6,554,318
Due from five to ten years 1,939,642 1,917,316
Due after ten years 1,900,530 1,857,838
---------------------------
12,053,344 11,943,690
Mortgage-backed securities 11,658,513 11,382,781
---------------------------
Total debt securities $23,711,857 $23,326,471
===========================
|
Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid usually without any penalties. Therefore, these securities are not included in the maturity categories in the above maturity summary.
Note 5. Loans Held for Sale and Loan Servicing
At December 31, 2006 and 2005, loans held for sale consisted of conventional residential mortgages and commercial real estate mortgages originated for subsequent sale as well as one commercial loan at December 31, 2005. At December 31, 2006 and 2005, the estimated fair value of these loans was in excess of their carrying value, and therefore no valuation reserve was necessary for loans held for sale. There were no guarantees to repurchase loans for any amount at December 31, 2006.
Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of commercial and mortgage loans serviced for others were $97,741,211 and $85,044,568 at December 31, 2006 and 2005, respectively.
The Company generally retains the servicing rights on loans sold. At December 31, 2006 and 2005, the unamortized balance of servicing rights on loans sold with servicing retained was not material. The estimated fair value of these servicing rights was in excess of their carrying value at both December 31, 2006 and 2005, and therefore no impairment reserve was necessary. Loan servicing rights of $154,855, $112,254 and $194,601 were capitalized in 2006, 2005, and 2004, respectively. Amortization of servicing rights was $139,580, $134,786 and $146,445 for 2006, 2005, and 2004, respectively.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 6. Loans
The composition of net loans at December 31 is as follows:
2006 2005
-----------------------------
Residential real estate $114,138,833 $106,469,996
Construction real estate 22,568,467 18,066,108
Commercial real estate 130,848,192 130,482,781
Commercial 19,252,471 20,650,229
Consumer 7,717,150 7,998,500
Municipal loans 19,296,807 17,009,482
-----------------------------
Gross loans (1) 313,821,920 300,677,096
Deduct:
Allowance for loan losses (3,337,768) (3,071,421)
Net deferred loan fees, premiums,
and discounts (120,139) (152,338)
-----------------------------
Net loans $310,364,013 $297,453,337
=============================
--------------------
|
(1) Includes loans in nonaccrual status of $2,547,346 and $1,269,148 and loans past due 90 days or more and still accruing of $2,203,291 and $3,338,168 as of December 31, 2006 and 2005, respectively.
Residential real estate loans aggregating $14,074,788 and $7,621,904 at December 31, 2006 and 2005, respectively, were pledged as collateral on deposits of municipalities.
Information regarding impaired loans as of or for the years ended December 31 is as follows:
2006 2005 2004
----------------------------------
Impaired loans $234,837 $670,558 $872,829
Total allowance for loan losses related to impaired loans 35,503 81,788 121,108
Interest income recognized on impaired loans 8,506 23,652 46,625
Average investment in impaired loans 360,829 542,699 981,566
|
At December 31, 2006, the Company was not committed to lend any additional funds to borrowers whose loans are nonperforming, impaired or restructured. Aggregate interest on nonaccrual loans not recognized was $370,674, $268,463
and $338,456 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Note 7. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, are
as follows:
2006 2005 2004
----------------------------------------
Balance, beginning $3,071,421 $3,066,871 $3,028,813
Provision for loan losses 180,000 60,000 30,000
Recoveries of amounts charged off 170,453 54,973 124,164
----------------------------------------
3,421,874 3,181,844 3,182,977
Amounts charged off (84,106) (110,423) (116,106)
----------------------------------------
Balance, ending $3,337,768 $3,071,421 $3,066,871
========================================
26
|
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 8. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at December 31 are as follows:
2006 2005
---------------------------
Land and land improvements $ 1,009,473 $ 901,220
Building and improvements 6,106,523 5,387,775
Furniture and equipment 6,603,998 7,684,481
Construction in progress 204,579 363,491
---------------------------
13,924,573 14,336,967
Less accumulated depreciation (7,844,858) (8,438,543)
---------------------------
$ 6,079,715 $ 5,898,424
===========================
|
Depreciation included in occupancy and equipment expenses amounted to $781,717, $772,971 and $696,686 for the years ended December 31, 2006, 2005, and 2004, respectively.
The Company is obligated under noncancelable operating leases for premises that expire in various years through the year 2011. Options to renew for additional periods are available with these leases. Future minimum rental commitments for these leases with original or remaining terms of one year or more at December 31, 2006 were as follows:
2007 $ 95,401
2008 73,951
2009 66,422
2010 47,297
2011 33,297
--------
$316,368
========
|
Rent expense for 2006, 2005, and 2004 amounted to $104,301, $132,050 and $107,841, respectively.
Occupancy expense is shown in the consolidated statements of income net of rental income of $104,688, $97,674 and $73,983 in 2006, 2005 and 2004, respectively.
Note 9. Other Real Estate Owned
There were four properties valued at $399,254 in other real estate owned at December 31, 2006, which were included in Other assets and none at December 31, 2005. There was no allowance for losses on other real estate owned at December 31, 2006.
Note 10. Investments Carried at Equity
The carrying values of investments carried at equity were $2,241,063 and $2,538,272 at December 31, 2006 and 2005, respectively consisting of investments in limited partnerships for low income housing projects. The capital contributions payable related to these investments were $356,363 and $703,817 at December 31, 2006 and 2005, respectively. The provision for undistributed net losses of the partnerships charged to earnings was $297,209, $221,884 and $140,104 for 2006, 2005 and 2004, respectively.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 11. Deposits
The following is a summary of interest bearing deposits at December 31:
2006 2005
-----------------------------
NOW accounts $ 52,957,973 $ 58,279,020
Saving and money market accounts 95,164,005 105,377,154
Time deposits, $100,000 and over 44,238,353 35,581,736
Other time deposits 72,586,553 61,444,272
-----------------------------
$264,946,884 $260,682,182
=============================
|
The following is a summary of time deposits by maturity at December 31, 2006:
2007 $ 97,411,167
2008 10,183,781
2009 7,961,015
2010 1,089,404
2011 179,539
------------
$116,824,906
============
|
Note 12. Borrowed Funds
At December 31, 2006 and 2005, borrowed funds were comprised of option advance borrowings from the FHLB of Boston of $14,596,130, and $16,256,274, respectively. The option advance borrowings are a mix of bullets, balloons and amortizers with maturities through 2026. At both December 31, 2006 and 2005, all of the borrowings had fixed interest rates ranging from 2.22% to 6.06 %. The weighted average interest rates on the borrowings were 4.82% and 4.51% at December 31, 2006 and 2005, respectively.
The contractual payments for borrowed funds as of December 31, 2006 are as follows:
2007 $ 1,966,383
2008 772,151
2009 586,703
2010 615,512
2011 and thereafter 10,655,381
-----------
$14,596,130
===========
|
Additionally, Union maintains an IDEAL Way Line of Credit with the FHLB of Boston. As of December 31, 2006, the total amount of this line approximated $551,000. There were no borrowings outstanding on this line at December 31, 2006. Interest on this line is chargeable at a rate determined by the FHLB of Boston and payable monthly based on daily balances outstanding.
Collateral on these borrowings consists of FHLB of Boston stock purchased by Union, all funds placed on deposit with the FHLB of Boston, and qualified first mortgages held by Union, and any additional holdings which may be pledged as security.
Union also maintains a line of credit with a correspondent bank for the purchase of overnight Federal Funds. As of December 31, 2006, the total amount of this line approximated $7.5 million with no outstanding borrowings. Interest on this borrowing is chargeable at the Federal Funds rate at the time of the borrowing and is payable daily.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 13. Income Taxes
The components of the provision for income taxes for the years ended December 31 were as follows:
2006 2005 2004
-----------------------------------------
Currently paid or payable $2,162,931 $2,552,822 $2,259,654
Deferred 21,433 (93,290) 197,939
-----------------------------------------
$2,184,364 $2,459,532 $2,457,593
=========================================
|
The total provision for income taxes differs from the amounts computed at the statutory federal income tax rate of 34% primarily due to the following at December 31:
2006 2005 2004
-----------------------------------------
Computed "expected" tax expense $2,869,477 $2,956,946 $2,819,525
Tax exempt interest (305,760) (238,456) (203,901)
Increase in cash surrender value life insurance (39,577) (35,988) (36,644)
Tax credits on limited partnership investments (319,921) (243,019) (135,986)
Other (19,855) 20,049 14,599
-----------------------------------------
$2,184,364 $2,459,532 $2,457,593
=========================================
|
Listed below are the significant components of the net deferred tax asset at December 31:
2006 2005
-------------------------
Components of the deferred tax asset
Bad debts $ 907,386 $ 846,186
Mark-to-market loans 16,604 28,755
Nonaccrual loan interest 126,029 91,278
Deferred compensation 393,203 422,798
Unrealized loss on investment securities
available-for-sale 79,216 50,459
Defined benefit pension plan 447,070 32,438
Other 12,770 15,145
-------------------------
Total deferred tax asset 1,982,278 1,487,059
Valuation allowance -- --
-------------------------
Total deferred tax asset, net of valuation
allowance 1,982,278 1,487,059
-------------------------
Components of the deferred tax liability
Depreciation (166,136) (180,131)
Mortgage servicing rights (105,540) (100,346)
Limited partnership investments (251,148) (188,398)
Other (1,538) (47,798)
-------------------------
Total deferred tax liability (524,362) (516,673)
-------------------------
Net deferred tax asset $1,457,916 $ 970,386
=========================
|
Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. 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, 2006 will be realized.
Net deferred income tax assets are included in Other assets on the balance sheet at December 31, 2006 and 2005.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits
Defined Benefit Pension Plan: Union sponsors a noncontributory defined benefit pension plan covering all eligible employees. The Company adopted SFAS No. 158 (see Note 1) as of December 31, 2006. The plan provides defined benefits based on years of service and final average salary. Union measures defined benefit plan assets and obligations as of December 31, its fiscal year-end. Union's policy is to accrue annually an amount equal to the actuarially calculated expense. Union made additional tax deductible voluntary contributions of $450,000 and $250,000 to the pension plan in December 2006 and 2005, respectively, and are included in employer contributions below. Information pertaining to the activity in the plan is as follows:
Obligations and funded status at December 31:
Change in projected benefit obligation 2006 2005
-------------------------------------- ---------------------------
Projected benefit obligation at beginning of year $ 9,202,470 $ 8,041,022
Service cost 505,301 438,989
Interest cost 532,409 481,277
Actuarial loss 153,739 416,838
Benefits paid (193,840) (175,656)
---------------------------
Projected benefit obligation at end of year $10,200,079 $ 9,202,470
===========================
Change in fair value of plan assets
-----------------------------------
Fair value of plan assets at beginning of year $ 7,196,729 $ 6,255,300
Actual return on plan assets 1,173,466 395,201
Employer contributions 706,372 721,884
Benefits paid (193,840) (175,656)
---------------------------
Fair value of plan assets at end of year $ 8,882,727 $ 7,196,729
===========================
Liability for Pension benefits $(1,317,352) $(2,005,741)
Unrecognized prior service cost -- 47,083
Unrecognized net actuarial loss -- 1,863,253
---------------------------
Net amount recognized as accrued benefit cost $(1,317,352) $ (95,405)
===========================
2006 2005
===========================
Accumulated benefit obligation at December 31 $ 7,900,249 $ 7,042,311
---------------------------
|
The Company uses the alternate amortization method for prior service costs, as provided in paragraph 26 of SFAS 87, "Employers' Accounting for Pensions."
Net periodic pension benefit cost for 2006, 2005, and 2004 consisted of the following components:
2006 2005 2004
-------------------------------------
Service cost $ 505,301 $ 438,989 $ 408,422
Interest cost on projected benefit obligation 532,409 481,277 436,429
Expected return on plan assets (485,902) (423,662) (363,526)
Amortization of prior service cost 6,158 6,158 6,158
Amortization of net loss 84,060 61,401 81,804
-------------------------------------
Net periodic benefit cost $ 642,026 $ 564,163 $ 569,287
=====================================
|
It is estimated that the net periodic benefit cost for 2007 will include approximately $6 thousand of amortization of prior service cost and $20 thousand of amortization of net actuarial loss.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Weighted average assumption used to determine benefit obligation at December 31:
2006 2005
----------------
Discount rate 5.75% 5.75%
Wage base rate 3.50% 3.50%
Consumer Price Index rate 2.25% 2.25%
|
Weighted average assumptions used to determine net period benefit cost for years ended December 31:
2006 2005
----------------
Discount rate 5.75% 5.75%
Rate of increase in compensation levels 4.25% 4.25%
Expected long-term rate of return on plan assets 6.75% 6.75%
|
The overall expected long-term rate of return on assets was derived to be consistent with a 2.25% future inflation assumption and returns expected in that inflation environment. The return is more conservative than the plan's long-term actual results and is at a level that management believes is sustainable.
Union's pension plan weighted average asset allocations at December 31, 2006 and 2005, by asset category based on their fair values are as follows:
Percentage of
Plan Assets
----------------
Asset Category 2006 2005
-------------- ----------------
Cash & Equivalents 10.3 2.3
Debt Securities 21.9 27.0
Equity Securities 54.0 57.4
International Mutual Funds 13.8 13.3
----------------
Total 100.0 100.0
================
|
The investment philosophy for the pension plan is to prudently invest the assets of the plan and future contributions received in a diversified manner that will ensure the future benefits due to participants and beneficiaries over a long-term horizon as well as provide liquidity to pay current benefits. The Trustees of the plan seek to protect the pension plan assets through prudent asset allocation, FDIC insurance, manager selection and periodic reviews. Investments in stocks and fixed income investments should be diversified in a way consistent with risk tolerance and investment objectives. In order to obtain this goal the investment objective is to maintain a mix of growth and income investments with allocation as follows, and no more than 20% of the equity portion of the portfolio invested in foreign equities:
Equity Securities & International Mutual Funds 60-85% Debt Securities 15-35% Cash & Equivalents 0-5% |
The Company made a year-end contribution of $550,000 that had not yet been invested as of December 31, 2006, which was the cause of the Cash & Equivalents percentage being elevated at year-end. There are no securities of the Company or Union held by the pension plan. The assets of the plan are managed by the Trust & Asset Management Division of Union under the guidance of the plan's trustees. The estimated employer contribution for 2007 is $700,000.
The following table summarizes the estimated future benefit payments expected to be paid under the Plan:
2007 $ 194,649 2008 181,536 2009 183,938 2010 201,282 2011 261,620 Years 2012 to 2016 2,729,549 |
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Nonqualified Deferred Compensation Plans: Additionally, Union Bankshares, Inc. and Union have two nonqualified Deferred Compensation Plans for Directors and certain key officers. For the old plan, the future amount of payouts have been frozen at their current amounts for participants in payout status, and no deferrals were allowed in 2006 or 2005 for the four participants not yet in payout status. This deferred compensation plan will be re-evaluated during 2007 based on final rules under the federal American Jobs Creation Act of 2004, which are expected to be issued by the Internal Revenue Service ("IRS") during 2007. Prior to 2005 current participants could defer compensation that would otherwise be currently payable. Amounts deferred accrue interest at the prime rate less 100 basis points and benefits are payable over a 15 year period upon attainment of a certain age or death. The benefit obligations under the plan represent general unsecured obligations of the Company and no assets are segregated for such payments. However, Union Bankshares, Inc. and Union have purchased life insurance contracts on the lives of each participant in order to fund these benefits. The benefits accrued under this plan aggregated $1,156,481 and $1,193,906 at December 31, 2006 and 2005, respectively, and are included in the financial statement caption "Accrued interest and other liabilities". The cash surrender value of the life insurance policies purchased to fund the plan aggregated $1,898,139 and $1,781,737 at December 31, 2006 and 2005, respectively. These amounts are included in Other assets on the Company's balance sheets.
A new Executive Nonqualified Excess Plan was adopted in 2006 for Directors and certain key officers. The plan is a defined contribution plan to provide a means by which participants may elect to defer receipt of current compensation from the Company or its subsidiary in order to provide retirement or other benefits as selected in the individual adoption agreements. Participants may select among designated reference investments consisting of investment funds, with the performance of the participant's account mirroring the selected reference investment. Distributions are made only upon a qualifying distribution event, which may include a separation from service, death, disability or unforeseeable emergency, or upon a date specified in the participant's deferral election form. The plan is intended to comply with the provisions of Section 409A of the Internal Revenue Code. The plan is an unfunded plan representing a general unsecured obligation of the Company. As of December 31, 2006, $7,375 has been deferred under the plan.
401(k) Plan: Union maintains a defined contribution 401(k) plan under which employees may elect to make tax deferred contributions of up to the IRS maximum from their annual salary. All employees meeting service requirements are eligible to participate in the plan. Company contributions fully vest after three years of service. Union's employer matching contributions to the plan are at the discretion of the Board of Directors. Employer matching contributions to the plan were $131,681, $122,520 and $113,637 for 2006, 2005, and 2004, respectively.
Note 15. 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 and commitments to buy or sell securities. 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.
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 written on 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.
The Company generally requires collateral or other security to support financial instruments with credit risk.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 15. Financial Instruments With Off-Balance-Sheet Risk (Continued)
The following table shows financial instruments whose contract amount represents credit risk:
Contract or
Notional Amount
---------------------------
2006 2005
---------------------------
Commitments to originate loans $12,175,976 $ 9,722,166
Unused lines of credit 36,573,909 35,348,616
Standby letters of credit 1,045,752 918,000
Credit card arrangements 1,457,287 1,453,254
Equity commitments to affordable housing
limited partnerships 917,170 --
---------------------------
Total $52,170,094 $47,442,036
===========================
|
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 fixed expiration dates within 90 days of the commitment. Unused lines of credit are renewable at least annually except for home equity lines which have an indefinite expiration date. Unused lines may have other termination clauses and may require payment of a fee.
Since many of the commitments and lines are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon issuance of a commitment to extend credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support customer's private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
At December 31, 2006, the Company has a commitment to invest up to $917,170 in a tax advantaged limited partnership involved in a low income housing investment tax credit project in its market area.
Note 16. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, after consulting with the Company's legal counsel, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements.
Note 17. Fair Values of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. 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 judgement. 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. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments or the Company.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 17. Fair Values of Financial Instruments (Continued)
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities and interest bearing deposits: Fair values for investment securities and interest bearing deposits are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or discounted present values of cash flows.
Loans and loans held for sale: Fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan type. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their fair market values. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits (for example, checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate time deposits approximate their fair values at the reporting date. The fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities on such time deposits.
Borrowed funds: The fair values of the Company's long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments.
Off-balance-sheet financial instruments: The estimated fair market value of off-balance-sheet financial instruments approximates their contract or notional values as the majority of the Company's credit commitments are short-term (one year or less) in nature. The only commitments to extend credit that are longer than one year in duration are the Home Equity Lines whose interest rates are variable on a quarterly basis. The only fees collected for commitments are an annual fee on credit card arrangements and sometimes a flat fee on commercial lines of credit and standby letters of credit. The fair value of the off-balance-sheet financial instruments is not significant.
The estimated fair values and related carrying amounts of the Company's significant financial instruments at December 31 were as follows:
2006 2005
---------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 20,957,241 $ 20,957,241 $ 14,208,429 $ 14,208,429
Interest bearing deposits in banks 5,416,961 5,345,689 8,597,835 8,509,897
Investment securities available-for-sale 23,675,261 23,675,261 32,407,973 32,407,973
Loans and loans held for sale, net 314,114,199 312,792,043 303,999,356 303,586,133
Financial liabilities
Deposits $319,822,047 $319,760,647 $313,299,094 $312,873,444
Borrowed funds 14,596,130 14,514,490 16,256,274 16,116,629
|
The carrying amounts in the preceding table are included in the balance sheet under the applicable captions.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 18. Transactions with Related Parties
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with principal stockholders, directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
Aggregate loan transactions with related parties for the year ended December 31 were as follows:
2006 2005
---------------------------
Balance, beginning $ 584,151 $ 772,867
New loans and advances on lines 1,954,278 1,973,665
Repayments (1,428,768) (2,066,723)
Other, net (224,820) (95,658)
---------------------------
Balance, ending $ 884,661 $ 584,151
===========================
Balance available on lines of credit $ 679,383 $ 544,238
===========================
|
Deposit accounts with related parties were $1,760,161 and $1,710,109 at December 31, 2006 and 2005, respectively.
Note 19. Stock Option Plan
Under the Company's 1998 Incentive Stock Option Plan, ("Plan") the Company's Board of Directors, with shareholder approval, authorized the granting to certain key employees incentive options to purchase up to 75,000 shares of the Company's common stock. As of December 31, 2006, 45,450 shares remain available for future option grants. The exercise price of the options 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. These options have a one year requisite service period, vest over one year, and have a five-year contractual term. The compensation cost that has been charged against income for this plan was $10,285, $862 and $0, for 2006, 2005, and 2004 respectively. See Note 1.
The fair value of each option award is estimated on the date of grant using a Black-Scholes based option valuation model. The estimated grant date fair values, for options granted during 2006, 2005 and 2004, and the assumptions used are presented in the following table:
2006 2005 2004
-------------------------------
Fair value per share $ 2.80 $ 3.19 $ 4.60
Expected volatility 19.25% 19.24% 22.41%
Expected dividends 4.98% 4.21% 3.10%
Risk free interest rate 4.56% 4.22% 3.36%
Expected term (in years) 5 5 5
Vesting periods (in years) 1 1 1
|
Expected volatilities are based on historical volatilities of the Company's stock, and, possibly, other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is estimated from past exercise activity, and represents the period of time that granted options are expected to be outstanding. The risk free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Stock Option Plan (Continued)
A summary of the option activity under the Plan as of December 31, 2006, and changes during the year then ended, as follows:
Weighted Average Period End
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Term Intrinsic Value
-----------------------------------------------------------------------
Outstanding at January 1, 2006 12,825 $22.63
Granted 3,250 $22.50
Exercised -- $ --
Forfeited or expired -- $ --
------
Outstanding at December 31, 2006 16,075 $22.60 2.77 $ --
-----------------------------------------------------------------------
Exerciseable at December 31, 2006 12,825 $22.63 2.22 $ --
=======================================================================
|
The aggregate exercise date intrinsic value of options exercised during 2005 and 2004 was $26 thousand and $41 thousand, respectively. Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option.
A summary of the status of the Company's nonvested options as of December 31, 2006 is as follows:
Weighted Average
Grant Date
Shares Fair Value
---------------------------
Nonvested at January 1, 2006 3,250 $3.19
Granted 3,250 $2.80
Vested (3,250) $3.19
Forfeited -- --
---------------------------
Nonvested at December 31, 2006 3,250 $2.80
===========================
|
As of December 31, 2006, there was $8,753 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized fully during 2007. The total fair value of shares vested during the years ended December 31, 2006, 2005, and 2004, was $10,351, $14,950 and $12,900, respectively. The nonvested options at December 31, 2006 are expected to vest during 2007.
Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, the effects on net income and earnings per common share for the year ended December 31, 2004 would have been:
Net income as reported $5,835,127
Deduct: Total stock based compensation expense determined under
fair value based method for all awards, net of related tax effects (18,382)
-----------
Pro forma net income $5,816,745
-----------
Earnings per common share
As reported $1.28
Pro forma $1.28
|
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. 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, they must meet specific capital guidelines that involve quantitative measures of their 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.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Union to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2006 and 2005, the Company and Union met all capital adequacy requirements to which they were subject.
As of December 31, 2006 and 2005, the most recent notification from the FDIC categorized Union as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an institution must maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the date of the most recent notification that management believes might result in an adverse change to Union's regulatory capital category.
Union's and the Company's actual capital amounts (000's omitted) and ratios are presented in the following tables:
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 2006
Total capital to risk weighted assets
Union $45,955 17.34% $21,202 8.0% $26,502 10.0%
Company 46,307 17.44% 21,242 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $42,574 16.07% $10,597 4.0% $15,896 6.0%
Company 42,926 16.16% 10,625 4.0% N/A N/A
Tier I capital to average assets
Union $42,574 11.21% $15,191 4.0% $18,989 5.0%
Company 42,926 11.29% 15,209 4.0% N/A N/A
|
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. Regulatory Capital Requirements (Continued)
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 2005
Total capital to risk weighted assets
Union $44,754 17.06% $20,987 8.0% $26,233 10.0%
Company 44,907 17.08% 21,034 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $41,548 15.84% $10,492 4.0% $15,738 6.0%
Company 41,701 15.86% 10,517 4.0% N/A N/A
Tier I capital to average assets
Union $41,548 11.08% $14,999 4.0% $18,749 5.0%
Company 41,701 11.10% 15,027 4.0% N/A N/A
|
Dividends paid by Union are the primary source of funds available to the Company for payment of dividends to its shareholders. Union is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by Union to the Company.
Note 21. Treasury Stock
On November 18, 2005, Union Bankshares, Inc. announced the implementation of a Stock Repurchase Program of up to $2.15 million or 100,000 shares of its common stock. Repurchases under the program may be made in the open market or in privately negotiated transactions as Management may deem conditions warrant. The basis for the carrying value of the Company's treasury stock is the purchase price of the shares at the time of purchase.
During 2006, the Company, under the authorized purchase program, repurchased 10,686 shares of its common stock at prices ranging from $20.73 to $22.00 per share, for a total of $227,250, compared to the 2005 repurchase of 15,000 shares at $21.00 per share for a total of $315,000.
Note 22. Subsequent Events
On January 12, 2007, Union Bankshares, Inc. declared a $0.28 per share regular dividend payable January 25, 2007 to stockholders of record on January 22, 2007.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 23. 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, 2006 AND 2005
2006 2005
---------------------------
ASSETS
Cash $ 415,144 $ 240,284
Investment in subsidiary-Union 41,570,863 41,450,452
Other assets 615,273 581,149
---------------------------
Total assets $42,601,280 $42,271,885
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 678,083 $ 669,074
---------------------------
Total liabilities 678,083 669,074
---------------------------
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2006 and 2005 9,837,222 9,837,222
Paid-in capital 150,146 139,861
Retained earnings 35,202,735 33,760,610
Treasury stock, at cost; 386,634 shares in 2006 and 375,948
shares in 2005 (2,264,181) (2,036,931)
Accumulated other comprehensive loss (1,002,725) (97,951)
---------------------------
Total stockholders' equity 41,923,197 41,602,811
---------------------------
Total liabilities and stockholders' equity $42,601,280 $42,271,885
===========================
|
The investment in the subsidiary bank is carried under the equity method of accounting. The investment and cash, which is on deposit with Union, has been eliminated in consolidation.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 23. Condensed Financial Information (Parent Company Only) (Continued)
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
-------------------------------------------
Revenues
Dividends-bank subsidiary $ 5,400,000 $ 6,050,000 $ 4,230,000
Other income 29,468 27,324 25,476
-------------------------------------------
Total revenues 5,429,468 6,077,324 4,255,476
-------------------------------------------
Expenses
Interest 1,369 1,381 838
Administrative and other 294,995 301,132 298,520
-------------------------------------------
Total expenses 296,364 302,513 299,358
-------------------------------------------
Income before applicable income tax and equity in
undistributed net income of subsidiary 5,133,104 5,774,811 3,956,118
Applicable income tax benefit (96,985) (96,391) (101,352)
-------------------------------------------
Income before equity in undistributed net income
of subsidiary 5,230,089 5,871,202 4,057,470
Equity in undistributed net income-Union 1,025,186 366,167 1,777,657
-------------------------------------------
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
===========================================
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UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Union (1,025,186) (366,167) (1,777,657)
Issuance of stock options 10,286 862 --
Increase in other assets (34,124) (35,971) (42,705)
Increase in other liabilities 9,009 41,812 39,744
-------------------------------------------
Net cash provided by operating activities 5,215,260 5,877,905 4,054,509
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,813,150) (6,286,215) (4,096,514)
Proceeds from exercise of stock options -- 38,010 61,113
Purchase of treasury stock (227,250) (315,000) --
-------------------------------------------
Net cash used in financing activities (5,040,400) (6,563,205) (4,035,401)
-------------------------------------------
Increase (decrease) in cash 174,860 (685,300) 19,108
Beginning cash 240,284 925,584 906,476
-------------------------------------------
Ending cash $ 415,144 $ 240,284 $ 925,584
===========================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest $ 1,369 $ 1,381 $ 838
===========================================
Income taxes $ 250 $ 250 $ 250
===========================================
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Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 24. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 2006, 2005, and 2004 is presented below (dollars in thousands):
Quarters in 2006 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 5,925 $ 6,242 $ 6,531 $ 6,499
Interest expense 1,447 1,610 1,819 1,945
Net interest income 4,478 4,632 4,712 4,554
Provision for loan losses 45 105 -- 30
Noninterest income 947 1,006 996 1,109
Noninterest expenses 3,397 3,451 3,423 3,543
Net income 1,473 1,534 1,662 1,586
Earnings per common share $ 0.32 $ 0.34 $ 0.37 $ 0.35
Quarters in 2005 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 5,131 $ 5,354 $ 5,779 $ 5,985
Interest expense 859 1,022 1,268 1,350
Net interest income 4,272 4,332 4,511 4,635
Provision for loan losses -- -- -- 60
Noninterest income 886 910 903 1,363
Noninterest expenses 3,181 3,277 3,352 3,246
Net income 1,395 1,433 1,494 1,915
Earnings per common share $ 0.31 $ 0.31 $ 0.33 $ 0.42
Quarters in 2004 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 4,866 $ 4,898 $ 5,114 $ 5,293
Interest expense 844 817 806 843
Net interest income 4,022 4,081 4,308 4,450
Provision for loan losses -- -- 30 --
Noninterest income 963 874 884 1,060
Noninterest expenses 3,176 3,149 3,022 2,972
Net income 1,274 1,305 1,499 1,757
Earnings per common share $ 0.28 $ 0.29 $ 0.33 $ 0.38
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Note 25. Noninterest Other Income and Noninterest Other Expenses
The components of noninterest other income and noninterest other expenses which are in excess of one percent of total revenues in any of the three years presented are as follows:
2006 2005 2004
----------------------------------------
Expenses
Supplies $ 202,525 $ 208,373 $ 240,189
State franchise tax 278,539 235,588 262,836
Amortization of low income housing partnerships 297,209 221,884 140,104
Advertising 244,493 264,755 223,866
Professional fees 271,490 283,153 201,253
Other 2,323,206 2,340,496 2,208,433
----------------------------------------
Other Expenses $3,617,462 $3,554,249 $3,276,681
========================================
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Union Bankshares, Inc. and Subsidiary
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 had a material effect on Union Bankshares, Inc.'s (Company's) financial position as of December 31, 2006 and 2005, and its results of operations for the years ended December 31, 2006, 2005, and 2004. This discussion is being presented to provide a narrative explanation of the financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data in this 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, 2006, which would materially affect the information presented.
FORWARD-LOOKING STATEMENTS
The Company may from time-to-time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Company may include forward-looking statements in its filings with the Securities and Exchange Commission (SEC), in its reports to stockholders, including this Annual Report, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are subject to uncertainties, both general and specific, and risk exists that those predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. When management uses any of the words "believes," "expects," "anticipates," "intends," "plans," "seeks," "estimates" or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. The possible events or factors that might affect the forward-looking statements include, but are not limited to, the following:
o uses of monetary, fiscal and tax policy by various governments;
o political, legislative or regulatory developments in Vermont, New Hampshire
or the United States including changes in laws concerning accounting,
taxes, financial reporting, banking and other aspects of the financial
services industry;
o developments in general economic or business conditions nationally, in
Vermont, or in northern New Hampshire including interest rate fluctuations,
market fluctuations and perceptions, job creation and unemployment rates,
ability to attract new business, and inflation and their effects on the
Company or its customers;
o changes in the competitive environment for financial services organizations
including increased competition from tax-advantaged credit unions and
out-of-market competitors offering financial services over the internet;
o acts or threats of terrorism or war and actions taken by the United States
or other governments that might adversely affect business or economic
conditions for the Company or its customers;
o the Company's ability to attract and retain key personnel;
o changes in technology including demands for greater automation which could
present operational issues or significant capital outlays
o unanticipated lower revenues or increased cost of funds, loss of customers
or business, or higher operating expenses;
o adverse changes in the securities market which could adversely affect the
value of the Company's stock;
o the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate;
o the failure of assumptions underlying the establishment of the allowance
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
o the failure of actuarial, investment, work force, salary and other
assumptions underlying the establishment of reserves for future pension
costs or changes in legislative or regulatory requirements;
o the amount invested in new business opportunities and the timing of these
investments;
o future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
o assumptions made regarding interest rate movement and sensitivity could
vary substantially if actual experience differs from historical experience
which could adversely affect the Company's results of operations;
o the Company's ability to attract and retain deposits;
o illegal acts of theft or fraud perpetuated against the bank or its
customers;
o any actual or alleged conduct which could harm the Company's reputation;
and
o natural or other disasters which could affect the ability of the Company to
operate under normal conditions.
When evaluating forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties and are reminded not to place undue reliance on such statements. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.
RISK FACTORS
The Company, like other financial institutions, is subject to a number of risks, many of which are outside of the Company's direct control, though efforts are made to manage those risks while optimizing returns. Risk identification and monitoring are key elements in overall risk management. Among the risks assumed are: (1) credit risk, which is the risk that loan customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect the Company's financial condition or results of operation, (3) liquidity risk, which is the risk that the Company will have insufficient funds or access to funds to meet operation needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. More information on risk is set forth under the heading "Risk Factors" included in Item 1A of our Annual Report on Form 10-K for the year-ended December 31, 2006.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America 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, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, or the results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and changes in delinquent, nonperforming or impaired loans. Changes in these factors may cause management's estimate of the allowance for loan losses to increase or decrease and result in adjustments to the Company's provision for loan losses in future periods.
The Company's pension benefit obligations and net periodic benefit cost are actuarially determined based on the following assumptions: discount rate, estimated future return on plan assets, wage base rate, anticipated mortality rates, Consumer Price Index rate, and rate of increase in compensation levels. The determination of the pension benefit obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment related to the amount and timing of expected future cash out flows for benefit payments and cash in flows for maturities and returns on plan assets. Changes in estimates and assumptions could have a material impact to the Company's financial condition or results of operations.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions, that are significant to understanding the results including the valuation of deferred tax assets and investment securities. The most significant accounting policies followed by the Company are presented in Note 1 to these financial statements, and FINANCIAL CONDITION --Allowance for Loan Losses and Liability for Pension Benefits below. Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
OVERVIEW
Beginning in July 2004 and continuing through June 2006, actions by the Federal Reserve Bank (FRB) to raise target interest rates resulted in the Prime Rate being increased from 4.00% to 8.25%. The Federal Reserve discount rate and the prime rate have remained steady at 5.25% and 8.25%, respectively since June 2006.
Historically, the largest and most variable source of income for the Company is net interest income. The results of operations for the years 2006, 2005 and 2004 reflect the impact of changes in short-term rates as well as growth in the volume of both interest earning assets and interest bearing liabilities during these periods.
The Company continued to grow and net income rose slightly during 2006 as the impact of increases in the prime rate over the last 24 months became evident, but an inverted yield curve and competitive pressure on interest rates paid on deposits tempered that growth. Earnings per share grew to $1.38 in 2006 from $1.37 in 2005. Dividends per share of $1.06 were paid out in 2006. With the payment of a special cash dividend of $0.40 per share in January 2005, dividends paid out to shareholders were $1.38 in 2005. The Company remained well capitalized under regulatory guidelines after payment of dividends. Dividend payouts, excluding the special dividend in 2005, increased $0.08 per share or 8.2%.
The Company grew 3.0% in average assets from $364 million in 2005 to $375 million in 2006, as compared to 3.0% between 2004 and 2005 when average assets grew from $354 million to $364 million. Average earning assets grew from $339 million in 2005 to $351 million in 2006 or 3.6% as compared to 3.7% from 2004 to 2005. The Company continued to manage growth and interest rate risk through the sale of some long-term fixed-rate loans. Despite the fact that the Prime Rate has increased from its low of 4% on June 30, 2004, to 7.25% at December 31, 2005, and to 8.25% at December 2006, the yield curve has inverted with long-term rates flat during the same time frame. The 100 basis point increase in the prime rate during 2006 helped to drive an increase in the net interest margin to 5.35% for 2006 as compared to 5.33% for 2005, as variable-rate loans have responded to these rate increases at their repricing intervals.
Loan demand was moderate in 2006 with total loan growth of $10.3 million or 3.4% over 2005, despite selling $17.8 million of loans in 2006. Growth for 2005 compared to 2004 was $27.0 million or 9.6%, net of loans sold of $15.0 million in 2005. Loans in nonaccrual status were up between years at $2.5 million at December 31, 2006 versus $1.3 million at December 31, 2005, of which $315 thousand was guaranteed by the U.S. Small Business Administration at December 31, 2006. Other nonperforming loans were down to $2.2 million at December 31, 2006 from $3.3 million at December 31, 2005. The ratio of net charge-offs to average loans not held for sale was -0.03% for 2006 compared to 0.02% for 2005, as recoveries exceeded charge-offs slightly during 2006. The Company's ratio of allowance for loan losses to loans not held for sale was 1.06%, 1.02% and 1.13% at December 31, 2006, 2005 and 2004, respectively. The ratio of allowance for loan losses to nonperforming loans has increased to 70.3% at December 31, 2006 from 66.66% and 57.91% at December 31, 2005 and 2004, respectively. The increase in the 2006 provision partially reflects management's concern during the fourth quarter of 2006 because of the lack of snow in our market area and the anticipated impact that may have on tourism dependent customers but the main reason was due to management's assessment of credit quality and the growth in the loan portfolio.
There has been significant competition in the financial services market place during the last few years for loans. The improvement in the stock market and the re-introduction of "special" deposit products and teaser rates have made the competition for deposits intense. The growth in deposits was $1.2 million or 0.4% in 2004, $6.7 million or 2.2% in 2005 and $6.5 million or 2.1% in 2006. Of the net deposit growth in 2006, $5.0 million was generated by the new Littleton, New Hampshire branch. These factors combined to reduce the net interest spread from 4.99% in 2005 to 4.86% in 2006 as the average rate paid on interest bearing liabilities rose from 1.67% to 2.43% from 2005 to 2006. The Company completed a review of the deposit products it offers and introduced streamlined offerings during the first quarters of 2005 and 2006 for consumers and during 2006 for small businesses. The Company reduced
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
the investment security portfolio and utilized short-term liquidity advances and longer term matched funded advances from the FHLB of Boston to fund loan demand that could not be funded by the current deposit base. The Company will continue to focus on customer service, its core business of community banking to provide products and services to the communities it serves adopting new technologies as appropriate, and the new Littleton branch market.
The regulatory environment of the past few years, including the federal Sarbanes-Oxley Act of 2002, has placed an extensive burden on small publicly traded companies as there is virtually no difference in the requirements because of size, complexity of operations and products, or other regulatory oversight which the banking industry already has from states, the FDIC and the Federal Reserve. The additional requirements add to operating costs and divert management somewhat from the objectives of growing and strengthening the business. Banks also spend a significant amount of time and dollars complying with the US Patriot Act and the Bank Secrecy Act to protect the U.S. financial system and their customers against identity theft, anti-money laundering, and terrorism.
On November 18, 2005, The Board of Directors of Union Bankshares, Inc. approved a Stock Repurchase Program. Under this program, the Company may repurchase up to $2.15 million or up to 100,000 shares of its common stock. During 2006, the Company purchased 10,686 shares of its common stock totaling $227 thousand. See Note 21 to the financial statements for additional information.
The Company's bank subsidiary maintains a noncontributory defined benefit pension plan covering all eligible employees who meet certain service requirements. During 2006 and 2005 contributions totaling $706 and $722 thousand, respectively were made to the pension plan. Minimum required contribution under the ERISA guidelines was $256 and $472 thousand, respectively and the Company made an additional tax deductible voluntary contribution of $450 and $250 thousand in 2006 and 2005, respectively, in anticipation of the impact of the implementation of SFAS No. 158, which will now require companies to reflect the funded status of defined benefit pension plans in their financial statements. See Notes 1 and 14 to the financial statements for additional information.
The following per share information and key ratios depict several measurements of performance or financial condition for or at the years ending December 31, 2006, 2005, and 2004 respectively:
12/31/06 12/31/05 12/31/04
----------------------------------
Return on average assets (ROA) 1.67% 1.71% 1.65%
Return on average equity (ROE) 14.96% 15.23% 14.17%
Net interest margin (1) 5.35% 5.33% 5.24%
Efficiency ratio (2) 60.89% 59.42% 59.02%
Net interest spread (3) 4.86% 4.99% 4.98%
Loan to deposit ratio 99.30% 98.06% 91.40%
Net loan (recoveries) charge-offs to average loans
not held for sale (0.03)% 0.02% 0.00%
Allowance for loan losses to loans not held for sale 1.06% 1.02% 1.13%
Nonperforming assets to total assets 1.35% 1.23% 1.48%
Equity to assets 11.00% 11.10% 11.79%
Total capital to risk weighted assets 17.44% 17.08% 18.57%
Book value per share $9.25 $9.16 $9.31
Earnings per share $1.38 $1.37 $1.28
Dividends paid per share (5) $1.06 $1.38 $0.90
Dividend payout ratio (4)(5) 76.81% 100.73% 70.31%
--------------------
(1) The ratio of tax equivalent net interest income to average earning assets.
(2) The ratio of noninterest expense to tax equivalent net interest income and noninterest
income excluding securities gains and losses.
(3) The difference between the average rate earned on assets minus the average rate paid on
liabilities.
(4) Cash dividend declared and paid per share divided by consolidated net income per share.
(5) Includes a $0.40 special cash dividend in 2005.
|
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 2006, was $6.26 million compared with net income of $6.24 million for the year 2005, and $5.8 million for the year 2004.
Net Interest Income. The largest component of the Company's operating income is net interest income, which is the difference between interest and dividend income received from interest earning assets and the interest expense paid on interest bearing liabilities. The Company's net interest income increased $626 thousand, or 3.5%, to $18.4 million for the year ended December 31, 2006, from $17.8 million for the year ended December 31, 2005. This increase was due primarily to larger growth in earning assets than interest bearing liabilities, and the continued increases in the prime interest rate during the first half of the year. Variable-rate loans responded to the increases in the prime rate at their repricing dates. In addition, $15.6 million of lower rate investment securities and interest bearing deposits matured or were sold and overnight federal funds sold, while down in volume were up in yield.
On average for the year, 93.5% of assets earned interest in 2006 versus 93.0% in 2005. The net interest spread decreased to 4.86% for the year-ended December 31, 2006, from 4.99% for the year ended December 31, 2005, reflecting the continued challenging interest rate environment. The net interest margin for the 2006 period increased two basis points to 5.35% from 5.33% for the 2005 period as variable-rate loans adjusted to higher rates at their repricing dates.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Yields Earned and Rates Paid. The following table shows for the periods indicated, the total amount of income recorded from average interest earning assets, the related average yields, the interest expense associated with average interest bearing liabilities, the related average rates paid, and the relative net interest spread and margin. Yield and rate information for a period is average information for the period, and is calculated by dividing the tax equivalent income or expense item for the period by the average balance of the appropriate balance sheet item during the period. Nonaccrual loans are included in asset balances for the appropriate periods, but recognition of interest on such loans is discontinued and any remaining accrued interest receivable is reversed, in conformity with federal regulations.
Years Ended December 31,
------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Average Assets
Federal funds sold and
overnight deposits $ 4,173 $ 214 5.05% $ 5,560 $ 188 3.34% $ 3,851 $ 47 1.20%
Interest bearing deposits
in banks 6,855 269 3.92% 8,073 280 3.47% 6,631 207 3.12%
Investment securities (1), (2) 26,179 1,157 4.75% 35,080 1,491 4.51% 42,787 1,944 4.75%
Loans, net (1), (3) 312,149 23,459 7.61% 288,854 20,240 7.08% 272,204 17,941 6.65%
FHLB of Boston stock 1,520 98 6.36% 1,241 50 3.94% 1,241 32 2.56%
------------------------------------------------------------------------------------------------
Total interest earning
assets (1) 350,876 25,197 7.29% 338,808 22,249 6.66% 326,714 20,171 6.25%
Cash and due from banks 10,338 12,360 14,925
Premises and equipment 6,068 5,439 4,855
Other assets 8,062 7,840 7,350
------------------------------------------------------------------------------------------------
Total assets $375,344 $364,447 $353,844
================================================================================================
Average Liabilities and
Stockholders' Equity
NOW accounts $ 52,937 391 0.74% $ 51,813 267 0.51% $ 45,619 185 0.41%
Savings/money market
accounts 102,347 1,673 1.63% 109,669 1,297 1.18% 111,893 836 0.75%
Time deposits 105,688 3,843 3.64% 96,852 2,421 2.50% 92,656 1,927 2.08%
Borrowed funds 18,907 914 4.77% 11,335 514 4.47% 9,674 362 3.66%
------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 279,879 6,821 2.43% 269,669 4,499 1.67% 259,842 3,310 1.27%
Noninterest bearing deposits 49,328 50,007 49,638
Other liabilities 4,315 3,812 3,172
------------------------------------------------------------------------------------------------
Total liabilities 333,522 323,488 312,652
Stockholders' equity 41,822 40,959 41,192
------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $375,344 $364,447 $353,844
================================================================================================
Net interest income $18,376 $17,750 $16,861
=====================================================================================
Net interest spread (1) 4.86% 4.99% 4.98%
Net interest margin (1) 5.35% 5.33% 5.24%
--------------------
(1) Average yields reported on a tax equivalent basis.
(2) Average balances of investment securities are calculated on the amortized cost basis.
(3) Includes loans held for sale and is net of unearned income and allowance for loan losses.
|
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates 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:
o changes in volume (change in volume multiplied by prior rate);
o changes in rate (change in rate multiplied by prior volume); and
o 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, 2006 Year-Ended December 31, 2005
Compared to Year-Ended Compared to Year-Ended
December 31, 2005 Increase/ December 31, 2004 Increase/
(Decrease) Due to Change In (Decrease) Due to Change In
--------------------------------------------------------------
Volume Rate Net Volume Rate Net
--------------------------------------------------------------
(Dollars in thousands)
Interest earning assets
Federal funds sold and overnight deposits $ (55) $ 81 $ 26 $ 28 $ 113 $ 141
Interest bearing deposits in banks (45) 34 (11) 47 26 73
Investment securities (415) 81 (334) (352) (101) (453)
Loans, net 1,668 1,551 3,219 1,117 1,182 2,299
FHLB of Boston stock 13 35 48 -- 18 18
--------------------------------------------------------------
Total interest earning assets $1,166 $1,782 $2,948 $ 840 $1,238 $2,078
--------------------------------------------------------------
Interest bearing liabilities
NOW accounts $ 6 $ 118 $ 124 $ 28 $ 54 $ 82
Savings/money market accounts (91) 467 376 (17) 478 461
Time deposits 238 1,184 1,422 90 404 494
Borrowed funds 364 36 400 67 85 152
--------------------------------------------------------------
Total interest bearing liabilities $ 517 $1,805 $2,322 $ 168 $1,021 $1,189
--------------------------------------------------------------
Net change in net interest income $ 649 $ (23) $ 626 $ 672 $ 217 $ 889
==============================================================
|
Interest and Dividend Income 2006 versus 2005. The Company's interest and dividend income increased $2.9 million or 13.3% to $25.2 million for the year ended December 31, 2006 from $22.3 million for the year ended December 31, 2005. Average earning assets increased $12.1 million or 3.6% from $338.8 million at December 31, 2005 to $350.9 million at December 31, 2006. Average loans were $312.1 million for the year ended December 31, 2006 compared to $288.9 million for the year ended December 31, 2005, which is an increase of $23.3 million or 8.1%. Increases in average residential real estate, commercial real estate, commercial and municipal loans, were partially offset by declines in real estate construction loans and the installment loan portfolio. The yield on the loan portfolio increased from 7.08% for the year ended December 31, 2005, to 7.61% for the year ended December 31, 2006, or an increase of 53 basis points, as short-term interest rates and the prime rate continued to rise during the first half of 2006 and adjustable-rate loans repriced accordingly.
The average balance of investment securities (including mortgage-backed securities) decreased $8.9 million or 25.4% from $35.1 million for the year ended December 31, 2005 to $26.2 million for the year ended December 31, 2006. This decrease was due to a decision to utilize cash flows from existing investments, and the sale of a portion of the Company's portfolio of debt and equity securities to fund the loan demand which outpaced the growth in deposits. The yield on the investment portfolio increased from 4.51% for 2005 to 4.75% for 2006 or 24 basis points as the duration of the portfolio has been kept short in anticipation of the rise in interest rates which started mid-2004 but has not yet happened on longer term instruments and to fund the Company's ordinary liquidity needs as well as anticipated loan growth. The average level of federal funds sold and overnight deposits decreased $1.4 million or 24.9% from $5.6 million for the year ended December 31, 2005 to $4.2 million for the year ended December 31, 2006. The yield on federal funds sold and overnight deposits increased from 3.34% for 2005 to 5.05% for 2006, or 171 basis points, the result of continuing increases in short-term rates by the Federal Reserve during
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
the first half of 2006. The average balance of interest bearing deposits in banks decreased $1.2 million or 15.1% to $6.9 million for the year ended December 31, 2006 from $8.1 million for the year ended December 31, 2005. These deposit instruments are FDIC insured. The yield on interest bearing deposits in banks increased from 3.47% for 2005 to 3.92% for 2006 or 45 basis points, reflecting the rising rate environment and competitive pricing pressures.
Interest and Dividend Income 2005 versus 2004. The Company's interest and dividend income increased $2.1 million or 10.3% to $22.3 million for the year ended December 31, 2005 from $20.2 million for the year ended December 31, 2004. Average earning assets increased $12.1 million or 3.7% from $326.7 million at December 31, 2004 to $338.8 million at December 31, 2005. Average loans were $288.9 million for the year ended December 31, 2005 compared to $272.2 million for the year ended December 31, 2004, which is an increase of $16.7 million or 6.1%. Increases in residential real estate, commercial real estate, and municipal loans, were partially offset by declines in real estate construction loans and the installment loan portfolio. The yield on the loan portfolio increased from 6.65% for the year ended December 31, 2004 to 7.08% for the year ended December 31, 2005, or an increase of 43 basis points, as short-term interest rates continued to rise during 2005.
The average balance of investment securities (including mortgage-backed securities) decreased $7.7 million or 18.0% from $42.8 million for the year ended December 31, 2004 to $35.1 million for the year ended December 31, 2005. This decrease was due to a decision to utilize cash flows from existing investments, and the sale of a portion of the Company's portfolio of debt and equity securities to fund the loan demand which outpaced the growth in deposits. The yield on the investment portfolio dropped from 4.75% for 2004 to 4.51% for 2005 or 24 basis points as the duration of the portfolio has been kept short in anticipation of the rise in interest rates which started mid-2004 and to fund the Company's ordinary liquidity needs as well as anticipated loan growth. The average level of federal funds sold and overnight deposits increased $ 1.7 million or 44.4% from $3.9 million for the year ended December 31, 2004 to $5.6 million for the year ended December 31, 2005. The yield on federal funds sold and overnight deposits increased from 1.20% for 2004 to 3.34% for 2005, or 214 basis points, the result of continuing increases in short-term rates by the Federal Reserve. The average balance of interest bearing deposits in banks increased $1.4 million or 21.7% to $8.1 million for the year ended December 31, 2005 from $6.6 million for the year ended December 31, 2004. These deposit instruments are FDIC insured. The yield on interest bearing deposits in banks increased from 3.12% for 2004 to 3.47% for 2005 or 35 basis points.
Interest Expense 2006 versus 2005. The Company's interest expense increased $2.3 million or 51.6% from $4.5 million for the year ended December 31, 2005 to $6.8 million for the year ended December 31, 2006. Interest rates paid in 2006 increased for all categories of interest bearing liabilities as short-term interest rates rose during the first half of the year and financial institutions competed aggressively for deposits. Average interest bearing liabilities increased $10.2 million or 3.8% from $269.6 million for the year ended December 31, 2005 to $279.9 million for the year ended December 31, 2006. Average NOW accounts increased $1.1 million or 2.2% from $51.8 million for the year ended December 31, 2005 to $52.9 million for the year ended December 31, 2006 mainly due to the redesign of our deposit products which resulted in the introduction of a free NOW account to customers 55 and older in May 2005 and also the increase in funds held in NOW accounts by municipalities in 2006. The average balances of savings and money market accounts decreased $7.3 million or 6.7% from $109.7 million for the year ended December 31, 2005 to $102.3 million for the year ended December 31, 2006 as customers moved funds into time deposits to take advantage of the higher interest rates offered. Time deposits increased $8.8 million or 9.1% to $105.7 million for 2006 from $96.9 million for 2005. The market for these deposits was very competitive throughout 2006 with brokerage firms and insurance companies pushing the interest rates offered up dramatically. The average rate paid on interest bearing deposits increased 72 basis points from 1.54% in 2005 to 2.26% in 2006. This contributed significantly to the reduction in the net interest spread from 4.99% in 2005 to 4.86% in 2006. The average balance of borrowed funds increased $7.6 million or 66.8%, from $11.3 million for the year ended December 31, 2005, to $18.9 million for the year ended December 31, 2006. The Company used this source of monies to fund loan growth as lower cost deposits weren't always available as a funding source due to the continuing competitive market for deposit dollars and seasonal shifts in municipal deposits. The balance in borrowed funds, which are all in the form of Federal Home Loan Bank advances, was down to $14.6 million by December 31, 2006 as traditionally the fourth quarter of the year is the strongest in terms of municipal deposit levels. The average rate paid for borrowed funds increased from 4.47% for the year ended December 31, 2005 to 4.77% for the year ended December 31, 2006 reflecting the rising interest rate environment during 2006.
Interest Expense 2005 versus 2004. The Company's interest expense increased $1.2 million or 35.9% from $3.3 million for the year ended December 31, 2004 to $4.5 million for the year ended December 31, 2005. Interest rates paid-in 2005 increased for all categories of interest bearing liabilities as short-term interest rates rose during the year
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
and financial institutions competed aggressively for deposits. Average interest bearing liabilities increased $9.8 million or 3.8% from $259.8 million for the year ended December 31, 2004 to $269.6 million for the year ended December 31, 2005. Average NOW accounts increased $6.2 million or 13.6% from $45.6 million for the year ended December 31, 2004 to $51.8 million for the year ended December 31, 2005 mainly due to the redesign of our deposit products which resulted in the offering of a new free NOW account to customers 55 and older. The average balances of savings and money market accounts decreased $2.2 million or 2.0% from $111.9 million for the year ended December 31, 2004 to $109.7 million for the year ended December 31, 2005. Time deposits increased $4.2 million or 4.5%, as customers took advantage of increases in time deposit rates resulting from a competitive market in these types of deposits during 2005, and the continuing increases in short-term interest rates. The average balance of borrowed funds increased $1.7 million or 17.2%, from $9.7 million for the year ended December 31, 2004, to $11.3 million for the year ended December 31, 2005. The Company used this source of monies to fund loan growth as lower cost deposits weren't as available as a funding source due to the continuing competitive market for deposit dollars. The average rate paid for borrowed funds increased from 3.66% for the year ended December 31, 2004 to 4.47% for the year ended December 31, 2005 reflecting the rising interest rate environment during 2005.
Provision for Loan Losses. Due to management's assessment of the credit quality of the Company's loan customers, the growth in the loan portfolio, and economic conditions and risks, including the impact of the lack of snow in late 2006 in our market area, the provision for loan losses was increased from $60 thousand in 2005 to $180 thousand in 2006. The provision had increased from $30 thousand in 2004 to $60 thousand in 2005.
Noninterest income. The following table sets forth changes from 2005 to 2006 and 2004 to 2005 for the components of noninterest income:
For The Year Ended December 31,
-------------------------------------------------
2006 2005 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Trust income $ 304 $ 301 $ 3 1.0
Service fees 3,109 2,905 204 7.0
Net gains on sales of investment securities 135 145 (10) (6.9)
Net gains on sales of loans held for sale 288 192 96 50.0
Net gains on sales of other real estate owned -- 336 (336) (100.0)
Other 222 184 38 20.7
-----------------------------------------------
Total noninterest income $ 4,058 $ 4,063 $ (5) (0.1)
===============================================
For The Year Ended December 31,
-------------------------------------------------
2005 2004 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Trust income $ 301 $ 204 $ 97 47.5
Service fees 2,905 2,809 96 3.4
Net gains on sales of investment securities 145 24 121 504.2
Net gains on sales of loans held for sale 192 444 (252) (56.8)
Net gains on sales of other real estate owned 336 90 246 273.3
Other 184 210 (26) (12.4)
-----------------------------------------------
Total noninterest income $ 4,063 $ 3,781 $ 282 7.5
===============================================
|
Trust income. For 2005 compared to 2004, the increase resulted from approximately $46 thousand in fees for one-time services and increases in regular fees due to the improved market value of assets under management.
Service fees. The increase in service fees for 2006 compared to 2005 is primarily due to the increase in overdraft fees from $989 thousand in 2005 to $1.136 million in 2006 and the increase in ATM and interchange fees from $615 thousand in 2005 to $676 thousand in 2006.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net gains on sales of loans held for sale. Net gains increased from 2005 to 2006 by $96 thousand or 50.0% even though total loans sold only increased 18.7% to $17.8 million in 2006 from $15.0 million in 2005. Gains decreased from 2004 to 2005 as the Company decided to hold more originated residential mortgages in portfolio and there was a reduced volume of refinancings. Sales of loans held for sale decreased from $25.8 million in 2004 to $15.0 million in 2005.
Net gains on sales of other real estate owned. The increase in 2005 compared to 2004 was due primarily to the transfer during 2005 of the value of the collateral into OREO from nonperforming loans and the subsequent sale prior to year end of the underlying properties from one mixed commercial and residential loan relationship.
Noninterest expense. The following table sets forth changes from 2005 to 2006 and 2004 to 2005 for the components of noninterest expense:
For The Year Ended December 31,
-------------------------------------------------
2006 2005 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Salaries and wages $ 6,012 $ 5,627 $ 385 6.8
Pension and employee benefits 2,344 2,045 299 14.6
Occupancy expense, net 802 789 13 1.6
Equipment expense 1,038 1,041 (3) (0.3)
Professional fees 272 283 (11) (3.9)
Advertising 244 265 (21) (7.9)
Vermont franchise tax 279 236 43 18.2
Equity in losses of limited partnerships 297 222 75 33.8
Other 2,526 2,548 (22) (0.9)
-----------------------------------------------
Total noninterest expense $13,814 $13,056 $ 758 5.8
===============================================
For The Year Ended December 31,
-------------------------------------------------
2005 2004 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Salaries and wages $ 5,627 $ 5,401 $ 226 4.2
Pension and employee benefits 2,045 1,973 72 3.6
Occupancy expense, net 789 737 52 7.1
Equipment expense 1,041 931 110 11.8
Professional fees 283 201 82 40.8
Advertising 265 224 41 18.3
Vermont franchise tax 236 263 (27) (10.3)
Equity in losses of limited partnerships 222 140 82 58.6
Other 2,548 2,449 99 4.0
-----------------------------------------------
Total noninterest expense $13,056 $12,319 $ 737 6.0
===============================================
|
Salaries, wages and benefits. The salaries and wages increase in 2006 over 2005 was due primarily to regular salary activity and the expansion of the Littleton loan production office to a full service branch. The increase in expenses for the pension and employee benefits was partially due to growth but $176 thousand was due to the increased cost of partially self insured medical plans and $78 thousand was due to the defined benefit pension plan expense increase. The increase in 2005 over 2004 was due primarily to regular salary activity, and the opening of the St. Albans, Vermont, loan production office during 2005, and increases in 401(k) contributions and in the Company's medical insurance costs.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Occupancy and equipment expense. Despite the construction and furnishing of the new Littleton branch, occupancy and equipment expense both remained stable from 2005 to 2006. Occupancy expense increased in 2005 versus 2004 due to the opening of the St. Albans, Vermont, loan production office, the setup and utilization of a temporary branch location while the Portland Street, St. Johnsbury, Vermont, branch was renovated as well as increases in utility and heating fuel expenses. The increase in equipment expense for 2005 versus 2004 was due mainly to increased depreciation expense and maintenance contract expense as computers, software, ATM's and other equipment, were upgraded to remain current and competitive.
Professional fees. Professional fees increased in 2005 versus 2004 due primarily to $36 thousand in expenses related to the Company's ongoing implementation of provisions of the Sarbanes-Oxley Act of 2002, $31 thousand in expenses related to information systems testing and management services, $9 thousand in fees related to strategic planning, and $9 thousand related to review of the Company's nonqualified deferred compensation plan. The Company also incurred professional fees related to the development and launch of new retail deposit products during 2005.
Advertising expense. Advertising expense increased in 2005 versus 2004 due primarily to marketing efforts related to the opening of the St. Albans, Vermont, loan center and advertising programs related to the launch of new retail deposit products.
Vermont franchise tax. Vermont franchise tax, which is based on deposits, increased for 2006 compared to 2005 as $33 thousand of the net tax credits purchased in 2005 applied to that year only and the remaining increase of $10 thousand was due to the increase in average deposits for 2006. The decrease for 2005 compared to 2004 is the result of franchise tax credits acquired and applied during 2005, which were partially offset by increases due to the increase in average deposits.
Equity in losses of limited partnerships. These expenses increased in both 2006 and 2005 due primarily to equity in losses of 2005 investments in affordable housing projects. The Company invested in two additional affordable housing projects during 2005. The Company receives income tax credits from these investments as well as a reduction in income tax expense from the equity in losses.
Income Tax Expense. The Company has provided for current and deferred federal income taxes for the current and all prior periods presented. The Company's provision for income taxes decreased to $2.2 million for 2006 from $2.5 million for 2005. This is mainly the result of the decrease in federal income taxes from decreased taxable income and the higher amount of low income housing tax credits received in the 2006 tax year related to the Company's mid 2005 limited partnership investments in two low income housing projects in its market area. The provision was flat at $2.6 million for both 2005 and 2004 despite the increase in federal income taxes from increased taxable income as that increase was offset by increased low income housing credits for 2005 related to the new investments. The Company's effective tax rate for 2006 was 25.9% compared to 28.3% for 2005 and 29.6% for 2004.
FINANCIAL CONDITION
At December 31, 2006, the Company had total consolidated assets of $381.1 million, including gross loans and loans held for sale ("total loans") of $317.6 million, deposits of $319.8 million and stockholders' equity of $41.9 million. Based on the most recent information published by the Vermont Banking Commissioner, in terms of total assets at December 31, 2005, Union Bank ranked as the fifth largest institution of the nineteen commercial banks and savings institutions headquartered in Vermont.
The Company's total assets increased by $6.4 million, or 1.7% to $381.1 million at December 31, 2006 from $374.7 million at December 31, 2005. Total net loans and loans held for sale increased by $10.1 million or 3.3% to $314.1 million, representing 82.4% of total assets at December 31, 2006 as compared to $304.0 million or 81.1% of total assets at December 31, 2005. This was due to increases of $7.7 million in residential real estate loans, $4.5 million in real estate construction loans and $2.3 million in municipal loans. These increases were partially offset by a $1.4 million decrease in commercial loans and a $2.8 million decrease in loans held for sale. Loan growth was moderate during the year and was lessened by management's decision to continue to sell some low fixed-rate loans into the secondary market during 2006 to mitigate future interest rate risk and to participate out a few of large commercial real estate loans to mitigate the level of credit risk.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash and due from banks decreased from $14.0 million at December 31, 2005 to $11.7 million at December 31, 2006. Federal funds sold and overnight deposits increased $9.1 million to $9.3 million at December 31, 2006 from $190 thousand at December 31, 2005. Investment securities available-for-sale decreased $8.7 million or 27.0% from $32.4 million at December 31, 2005 to $23.7 million at December 31, 2006. The decrease was due to funds maturing as well as the sale of $7.8 million of debt and equity securities, at a net gain of $135 thousand, that were not reinvested in securities but were instead used to support loan demand. There was also an increase of $85 thousand in the unrealized holding losses resulting in unrealized net losses of $233 thousand at December 31, 2006 due to the increase in interest rates during 2006 which resulted in a reduction in the value of debt securities held.
Total deposits increased $6.5 million or 2.1% to $319.8 million at December 31, 2006 from $313.3 million at December 31, 2005. Noninterest bearing deposits increased 4.3% or $2.3 million from $52.6 million at December 31, 2005 to $54.9 million at December 31, 2006. Interest bearing deposits increased 1.6% or $4.3 million from $260.7 million to $264.9 million.
Borrowed funds from the Federal Home Loan Bank of Boston decreased $1.7 million or 10.2% to $14.6 million at December 31, 2006 from $16.3 million at December 31, 2005 as some of the short-term liquidity advances were repaid.
Loan demand and net growth after loan sales outpaced the increase in deposits during 2006. This differential was supported by the decrease in investment securities and interest bearing deposits in banks. Please refer back to the discussion of average balances on a year-to-year basis presented in the Results of Operations section above for additional information.
Total stockholders' equity increased by $320 thousand or 0.8% to $41.9 million at December 31, 2006 from $41.6 million at December 31, 2005. This increase reflected net income of $6.2 million, offset by dividend payments of $4.8 million, the purchase of treasury stock for $227 thousand, an increase of $56 thousand in the net unrealized holding loss on investment securities available-for-sale and the adjustment to initially apply SFAS No. 158, net of tax effect, of $849 thousand for the Company's defined benefit pension plan.
Loan Portfolio. The Company's loan portfolio (including loans held for sale) primarily consists of adjustable-and fixed-rate mortgage loans secured by one-to-four family, multifamily residential or commercial real estate. As of December 31, 2006, the gross loan portfolio totaled $317.6 million or 83.3% of assets compared to $307.2 million or 82.0% of assets as of December 31, 2005. Total loans have increased $10.3 million or 3.4% since December 31, 2005, despite selling $17.8 million of loans held for sale during 2006 resulting in a gain on sale of loans of $288 thousand. Sales of loans in 2005 totaled $15.0 million for a gain of $192 thousand and $25.8 million for a gain of $444 thousand in 2004. Management expects to continue to use this strategy to manage interest rate exposure in the future.
The composition of the Company's total loan portfolio at year-end for each of the last five years was as follows:
Year Ended, December 31,
2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate 114,139 35.9 106,470 34.7 100,130 35.7 89,974 33.1 94,977 37.1
Construction real estate 22,568 7.1 18,066 5.9 20,050 7.2 18,257 6.7 14,370 5.6
Commercial real estate 130,848 41.2 130,483 42.5 108,474 38.7 102,366 37.7 86,081 33.6
Commercial 19,253 6.1 20,650 6.7 20,584 7.4 17,877 6.6 19,919 7.8
Consumer & other 7,717 2.4 7,999 2.6 8,729 3.1 9,402 3.5 10,758 4.2
Municipal 19,297 6.1 17,009 5.5 13,454 4.8 15,346 5.6 12,869 5.0
Loans held for sale 3,750 1.2 6,546 2.1 8,814 3.1 18,524 6.8 17,139 6.7
------------------------------------------------------------------------------------------------
Total loans 317,572 100.0 307,223 100.0 280,235 100.0 271,746 100.0 256,113 100.0
================================================================================================
|
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
For residential loans, the Company does not lend more than 80% of the appraised value of the home without a government guaranty or the borrower purchasing private mortgage insurance and never lends more than 100% of the value. The Company lends up to 80% of the collateral value on small commercial real estate loans to strong borrowers. The majority of commercial real estate loans do not exceed 75% of the appraised collateral value. However, the loan to value may go up to 90% on loans with government guarantees or other mitigating circumstances. The Company does not make loans that are interest only or that result in negative amortization of the principal, except for construction 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 just the current rate.
The Company originates and sells residential mortgages into the secondary market, with most such sales made to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Vermont Housing Finance Agency ("VHFA"). These loans are classified as held for sale at the time of origination and accounted for at the lower of cost or fair value and reviewed at least quarterly based on current market pricing. The Company serviced a residential real estate mortgage portfolio of $198.5 million and $184.7 million at December 31, 2006 and 2005, respectively. Of that portfolio, $84.3 million at December 31, 2006 and $78.2 million at December 31, 2005 was serviced for unaffiliated third parties. Additionally, the Company originates commercial real estate and commercial loans under various Small Business Administration ("SBA") programs that provide an agency guarantee for a portion of the loan amount. The Company occasionally sells the guaranteed portion of the loan to other financial concerns and will retain servicing rights, which generates fee income. These loans are classified as held for sale as they are identified and accounted for at the lower of cost or fair value and priced at least quarterly by an independent party. The Company serviced approximately $7.9 million of commercial and commercial real estate loans for unaffiliated third parties as of December 31, 2006 and $6.8 million at December 31, 2005. The Company capitalizes servicing rights on these fees and recognizes gains and losses on the sale of the principal portion of these notes as they occur. The unamortized balance of servicing rights on loans sold with servicing retained was $310 thousand as of December 31, 2006 and $295 thousand as of December 31, 2005, with an estimated market value in excess of their carrying value at both year ends. Management periodically evaluates and measures the servicing assets for impairment.
In the ordinary course of business, the Company occasionally participates out a portion of commercial/commercial real estate loans to other financial institutions for liquidity or credit concentration management purposes. The total of loans participated out as of December 31, 2006 was $9.5 million and $6.5 million at December 31, 2005.
The majority of the Company's loan portfolio is secured by real estate located throughout Northern Vermont and New Hampshire. Underlying real estate values for both residential and commercial loans have only decreased slightly in the Company's market area during the last year, though a quick sale may not be possible in all cases should a sale of real estate collateral become necessary. Although the Company's loan portfolio consists of different segments, there is a portion of the loan portfolio centered in tourism related loans. The Company has implemented risk management strategies to mitigate exposure in this industry through utilizing government guaranty programs as well as participations with other financial institutions as discussed above. Additionally, the loan portfolio contains many seasoned and well established 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 tourism industry as part of the Company's risk management program.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table breaks down by classification the maturities of the gross loans held in portfolio and held for sale as of December 31, 2006:
Within
1 2-5 Over 5
Year Years Years
--------------------------------
(Dollars in thousands)
Residential real estate
Fixed-rate $ 3,610 $ 4,515 $ 40,413
Variable-rate 3,644 1,263 63,396
Construction real estate
Fixed-rate 15,729 575 138
Variable-rate 1,002 2,398 2,726
Commercial real estate
Fixed-rate 1,808 2,260 9,007
Variable-rate 13,370 8,611 96,840
Commercial
Fixed-rate 1,489 6,197 507
Variable-rate 5,454 3,412 2,194
Municipal
Fixed-rate 14,531 2,058 1,370
Variable-rate -- -- 1,338
Consumer & Other
Fixed-rate 2,257 4,772 299
Variable-rate 328 61 --
--------------------------------
Total $63,222 $36,122 $218,228
================================
|
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. Management closely monitors the Company's loan and investment portfolios and other real estate owned for potential problems and reports to the Company's and the subsidiary's Boards of Directors at regularly scheduled meetings. Policies set forth portfolio diversification levels to mitigate concentration risk.
The Company's Board of Directors has set forth lending policies (which are periodically reviewed and revised as appropriate) that include low individual lending limits for officers, Board approval for large credit relationships, a loan review program and other limits or standards deemed necessary and prudent. The Company's loan credit review department is supervised by an experienced former regulatory examiner and staffed by a Certified Public Accountant and encompasses a quality control process for loan documentation and underwriting that includes post-closing reviews. The Company also maintains a monitoring process for credit extensions. The Company performs periodic concentration analyses based on various factors such as industries, collateral types, large credit sizes and officer portfolio loads. The Company has established underwriting guidelines to be followed by its officers, exceptions are required to be approved by a senior loan officer or the Board of Directors. The Company monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company's loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general or local economic conditions.
Restructured loans include the Company's troubled debt restructurings that involved forgiving a portion of interest or principal on any loans, refinancing loans 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. Restructured loans do not include qualifying restructured loans that have complied with the terms of their restructure agreement for a satisfactory period of time. Restructured loans in compliance with modified terms totaled $1.3 million at December 31, 2006 all of which are guaranteed by the U.S. Department of Agriculture, and $21 thousand at December 31, 2005. At December 31, 2006, the Company was not committed to lend any additional funds to borrowers whose terms have been restructured.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Management reviews the loan portfolio continuously for evidence of problem loans. Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status. Loans are designated as nonaccrual when reasonable doubt exists as to the full collection of interest and principal. Normally, when a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of interest and principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
The Company had loans on nonaccrual status totaling $2.5 million at December 31, 2006 and $1.3 million at December 31, 2005. Of the $2.5 million in nonaccrual status at December 31, 2006, there is a U.S. Small Business Administration guarantee on $315 thousand. The aggregate interest on nonaccrual loans not recognized for the years ended December 31, 2006, 2005 and 2004 was $371, $268, and $338 thousand respectively.
The Company had $2.2 million and $3.3 million in loans past due 90 days or more and still accruing at December 31, 2006 and 2005, respectively. Certain loans, totaling $348 thousand, past due 90 days or more and still accruing interest are covered by guarantees of U.S. government or state agencies. At December 31, 2006, the Company had internally classified certain loans totaling $319 thousand and $2.8 million at December 31, 2005. In management's view, such loans represent a higher degree of risk and could become 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:
o the financial condition of the borrower is unsatisfactory;
o repayment terms have not been met;
o the borrower has sustained losses that are sizable, either in absolute
terms or relative to net worth;
o confidence is diminished;
o loan covenants have been violated;
o collateral is inadequate; or
o other unfavorable factors are present.
On occasion real estate properties are acquired through or in lieu of loan foreclosure. These properties are held for sale and are initially recorded at the lesser of the recorded loan or fair value at the date of the Company's acquisition of the property, with fair value based on an appraisal for more significant properties and on management's estimate for minor properties. The Company had property classified as OREO at December 31, 2006 valued at $399 thousand and no property so classified on December 31, 2005.
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 allowance for loan losses to absorb such losses. The allowance is maintained at a level which, by management's best estimate, is adequate to absorb probable credit losses inherent in the loan portfolio; however, actual loan losses may vary from current estimates.
Adequacy of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance, management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, 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. The adequacy of the allowance for loan losses is assessed by an allocation process whereby specific loss allocations are made against certain adversely classified loans and general loss allocations are made against segments of the loan portfolio which have similar attributes. While the Company allocates the allowance for loan losses based on the percentage category to total loans, the portion of the allowance for loan losses allocated to each category does not represent the total available for future losses which may occur within the loan category since the total allowance for possible loan losses is a valuation reserve applicable to the entire portfolio.
The allowance is increased by a provision for loan losses, which is charged to earnings and reduced by charge-offs, net of recoveries. The provision for loan losses represents the current period credit cost associated with maintaining an appropriate allowance for loan losses. Based on an evaluation of the loan portfolio, management presents a
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
quarterly analysis of the allowance to the Board of Directors, indicating any changes in the allowance since the last review and any recommendations as to adjustments in the allowance. Additionally, bank regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process.
Credit quality of the commercial portfolio is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of commercial and retail credit portfolios are also assessed on a regular basis by an independent Credit Review Department. Credit Review personnel conduct ongoing portfolio analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies. The level of allowance allocable to each group of risk rated loans is then determined by applying a loss factor that estimates the amount of probable loss in each category. The assigned loss factor for each risk rating is based upon management's assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience.
Consumer and residential real estate loan quality is evaluated on a portfolio- wide basis including delinquency data and other available credit data due to the large number of such loans and the relatively small size of individual credits. Allocations for these loan categories are principally determined by applying loss factors that represent management's best estimate of inherent probable credit losses based upon historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience. In addition, certain loans in these categories may be individually risk rated if considered necessary by management.
The other method used to allocate the allowance for loan losses entails the assignment of reserve amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be 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. Under this method, loans are selected for evaluation based on internal risk ratings or nonaccrual status. A specific reserve amount is allocated to an individual loan when that loan has been deemed impaired on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value.
For the year-ended December 31, 2006, the methodology used to determine the provision for loan losses was unchanged from the prior year. The composition of the Company's loan portfolio remained relatively unchanged from December 31, 2005, and there was no material change in the lending programs or terms during the year.
The following table reflects activity in the allowance for loan losses for the years ended December 31:
2006 2005 2004 2003 2002
--------------------------------------------------
(Dollars in thousands)
Balance at the beginning of period $3,071 $3,067 $3,029 $2,908 $2,801
Charge-offs
Real estate 8 28 37 17 108
Commercial 3 19 26 10 115
Consumer and other 73 63 53 65 136
--------------------------------------------------
Total charge-offs 84 110 116 92 359
--------------------------------------------------
Recoveries
Real estate 26 14 6 2 8
Commercial 18 4 72 28 24
Consumer and other 127 36 46 69 78
--------------------------------------------------
Total recoveries 171 54 124 99 110
--------------------------------------------------
Net (charge-offs) recoveries 87 (56) 8 7 (249)
Provision for loan losses 180 60 30 114 356
--------------------------------------------------
Balance at end of period $3,338 $3,071 $3,067 $3,029 $2,908
==================================================
|
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table shows the breakdown of the Company's allowance for loan loss by category of loan (net of loans held for sale) and the percentage of loans in each category to total loans in the respective portfolios at December 31:
2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate
Residential $ 640 34.8 $ 571 35.4 $ 585 34.4 $ 550 33.2 $ 534 37.4
Commercial 1,901 41.7 1,826 43.4 1,733 42.5 1,578 42.7 1,409 37.3
Construction 296 7.2 181 6.0 199 7.3 183 7.2 143 6.0
Other Loans
Commercial 312 6.1 343 6.9 349 7.5 336 7.1 405 9.1
Consumer installment 125 2.5 123 2.6 138 3.3 145 3.7 174 4.7
Municipal, other and
unallocated 64 7.7 27 5.7 63 5.0 237 6.1 243 5.5
----------------------------------------------------------------------------------------------------
Total $3,338 100.0 $3,071 100.0 $3,067 100.0 $3,029 100.0 $2,908 100.0
====================================================================================================
Ratio of net (recoveries)
charge-offs to average
loans not held for sale (0.03%) 0.02% 0.00% 0.00% 0.11%
Ratio of allowance for
loan losses to loans not
held for sale 1.06% 1.02% 1.13% 1.20% 1.22%
Ratio of allowance for
loan losses to
nonperforming loans (1) 70.26% 66.66% 57.91% 91.65% 127.99%
--------------------
(1) Nonperforming loans includes loans in nonaccrual status plus loans past due 90 days or more and still accruing.
|
Management of the Company believes, in their best estimate, that the allowance for loan losses at December 31, 2006 is adequate 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 allowance at December 31, 2006.
While the Company recognizes that an economic slowdown may adversely impact its borrowers' financial performance and ultimately their ability to repay their loans, management continues to be cautiously optimistic about the key credit indicators from the Company's loan portfolio.
Investment Activities. The investment portfolio is used to generate interest income, manage liquidity and mitigate interest rate sensitivity. At December 31, 2006, the reported value of investment securities available-for-sale was $23.7 million or 6.2% of assets compared to $32.4 million or 8.6% of assets at December 31, 2005. The Company had no investment securities classified as held-to-maturity or trading. Current accounting guidance requires banks to recognize all appreciation or depreciation of the investment portfolio either on the balance sheet or through the income statement even though a gain or loss has not been realized. Investment securities classified as available-for-sale are marked-to-market with any unrealized gain or loss after taxes charged to the equity portion of the balance sheet. The reported value of investment securities available-for-sale at December 31, 2006 reflects a negative valuation adjustment of $233 thousand. The offset of this adjustment, net of income tax effect, was $154 thousand in the Company's accumulated other comprehensive loss component of stockholders' equity and the related net deferred tax asset was $79 thousand.
At December 31, 2006, forty-five debt securities had unrealized losses with aggregate depreciation of 1.7% from the Company's amortized cost basis. Securities are evaluated at least quarterly for other-than-temporary impairment and during 2006, no security was other-than-temporarily impaired.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following tables show as of December 31, 2006 and 2005 the amortized cost, fair value and weighted average yield of the Company's investment debt portfolio maturing within the stated periods:
December 31, 2006
----------------------------------------------------------------------------
Maturities
----------------------------------------------------------------------------
Within One to Five to Over Total Weighted
One Year Five Years Ten Years Ten Years Cost Average Yield
----------------------------------------------------------------------------
(Dollars in thousands)
Investment securities available-for-sale
U.S. Government sponsored enterprises $1,000 $ -- $ 998 $ 499 $ 2,497 4.36%
Mortgage-backed -- 3,982 1,726 5,951 11,659 4.47%
State and political subdivisions 140 2,675 941 704 4,460 5.86%
Corporate debt 500 3,898 -- 698 5,096 5.01%
---------------------------------------------------------------------------
Total investment debt securities $1,640 $10,555 $3,665 $7,852 $23,712 4.83%
===========================================================================
Fair value $1,614 $10,438 $3,618 $7,656 $23,326
==========================================================
Weighted average yield 3.63% 4.96% 5.05% 4.81% 4.83%
==========================================================
December 31, 2005
----------------------------------------------------------------------------
Maturities
----------------------------------------------------------------------------
Within One to Five to Over Total Weighted
One Year Five Years Ten Years Ten Years Cost Average Yield
----------------------------------------------------------------------------
(Dollars in thousands)
Investment securities available-for-sale
U.S. Government and agencies $ 500 $ -- $ -- $ -- $ 500 1.88%
U.S. Government sponsored enterprises -- 1,000 997 498 2,495 4.36%
Mortgage-backed -- 4,914 3,480 7,555 15,949 4.24%
State and political subdivisions 196 2,670 1,172 704 4,742 5.97%
Corporate debt 250 6,931 453 696 8,330 5.14%
---------------------------------------------------------------------------
Total investment debt securities $ 946 $15,515 $6,102 $9,453 $32,016 4.70%
===========================================================================
Fair value $ 948 $15,336 $6,034 $9,249 $31,567
==========================================================
Weighted average yield 3.85% 4.73% 4.85% 4.65% 4.70%
==========================================================
|
The tables above exclude marketable equity securities, with a book value of $196 thousand and a market value of $349 thousand at December 31, 2006, and a book value of $541 thousand and a market value of $841 thousand at December 31, 2005 which have no maturity but may be sold by the Company at any time.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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, 2006 and 2005:
2006 2005
-----------------------------------------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
-----------------------------------------------------------------------
(Dollars in thousands)
Nontime deposits
Noninterest bearing deposits $ 49,328 15.9 -- $ 50,007 16.2 --
NOW accounts 52,937 17.1 0.74% 51,813 16.8 0.51%
Money market accounts 56,286 18.1 2.48% 59,300 19.2 1.60%
Savings accounts 46,061 14.8 0.60% 50,369 16.4 0.69%
---------------------------------------------------------------------
Total nontime deposits 204,612 65.9 1.01% 211,489 68.6 0.74%
---------------------------------------------------------------------
Time deposits
Less than $100,000 66,982 21.6 3.34% 61,834 20.1 2.23%
$100,000 and over 38,706 12.5 4.14% 35,018 11.3 2.98%
---------------------------------------------------------------------
Total time deposits 105,688 34.1 3.64% 96,852 31.4 2.50%
---------------------------------------------------------------------
Total deposits $310,300 100.0% 1.90% $308,341 100.0% 1.29%
=====================================================================
|
A maturity distribution of time deposits in denominations of $100,000 or more at December 31 is as follows:
2006 2005
----------------------
(Dollars in thousands)
Three months or less $13,466 $11,545
Over three months through six months 17,254 15,660
Over six months through twelve months 11,299 6,941
Over twelve months 2,219 1,436
----------------------
$44,238 $35,582
======================
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Liability for Pension Benefits. The Company has a Liability for Pension Benefits for its defined benefit pension plan of $1.3 million at December 31, 2006 and $95 thousand at December 31, 2005. The adjustment to initially apply SFAS No. 158 for the unfunded liability at December 31, 2006 was $1.286 million. Note 14 to the Consolidated Financial Statements includes further discussion and information on the Company's Employee benefits and is incorporated herein by reference.
The Company's pension benefit obligation and net periodic cost are actuarially determined based on the following assumptions: discount rate, expected future return on plan assets, change in the Social Security wage base rate, the Consumer Price Index rate, mortality tables, and the expected rate of increase in compensation levels. While a change in any of the assumptions would have an impact on financial condition and future results of operations, a change in the discount rate and future rate of return on plan assets could be material. The discount rate is used both to determine the present value of future benefit obligations and the net periodic benefit cost. The expected rate of return on plan assets is only used to determine net period benefit cost.
In determining the discount rate to be utilized the following factors were considered: average age and anticipated longevity of current plan participants, the inversion of the current yield curve and the resulting yields available on long-term investments by review of Moody's Corporate Bond Indexes, yield on 15 and 30 year mortgages, and the Lehman US Corporate and Agency Bond Indexes. The determination was made to leave the Discount rate at 5.75%.
The Company bases it's expected rate of return on plan assets on past history, current earning rates available on investments and economic forecasts of where rates are headed in the future. The expected rate of return is conservative as the plan has typically taken short-term risk by investing heavily in equity and international mutual fund markets which over the long-term have proven to be good decisions. Through the end of 2005, our actual net investment returns averaged 8.4% over the last 15 years with a high of 20.35% and a low of negative 6.6%. The latest one year return as of December 31, 2006 was 13.33%. Therefore, the conservative expectation of 6.75%, which is consistent with the 2.25% inflation assumption, is balanced by our aggressive discount rate of 5.75% since the plan has a very long-term (40+ years) horizon.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the potential of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending, investing, deposit taking, and borrowing activities as yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. Many other factors also affect the Company's exposure to changes in interest rates, such as general and local economic and financial conditions, competitive pressures, customer preferences, and historical pricing relationships.
The earnings of the Company and its subsidiary are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve System. The monetary policies of the Federal Reserve System influence to a significant extent the overall growth of loans, investments, deposits and borrowings; the level of interest rates earned on assets and paid for liabilities; and interest rates charged on loans and paid on deposits. The nature and impact of future changes in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct involvement by senior management and oversight by the Board of Directors as to the level of risk assumed by the Company in its balance sheet. The Board of Directors reviews and approves risk management policies, including risk limits and guidelines, and reviews quarterly the current position in relationship to those limits and guidelines. Daily oversight functions are delegated to the Asset Liability Management Committee ("ALCO"). The ALCO, consisting of senior business and finance officers, actively measures, monitors, controls and manages the interest rate risk exposure that can significantly impact the Company's financial position and operating results. The ALCO sets liquidity targets based on the Company's financial condition and existing and projected economic and market conditions. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company attempts to structure its balance sheet to maximize net interest income and shareholder value while controlling its exposure to interest rate risk and strategies might include selling or participating out loans held for sale or investments available-for-sale. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The ALCO's methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the Company's entire balance sheet, and a simulation analysis, which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest.
Members of ALCO meet at least weekly to set loan and deposit rates, make investment decisions, monitor liquidity and evaluate the loan demand pipeline. Deposit runoff is monitored daily and loan prepayments evaluated monthly. The Company historically has maintained a substantial portion of its loan portfolio on a variable-rate basis and plans to continue this Asset/Liability/ Management (ALM) strategy in the future. Portions of the variable-rate loan portfolio have interest rate floors and caps which are taken into account by the Company's ALM modeling software to predict interest rate sensitivity including prepayment risk. The investment portfolio is all classified as available-for-sale and the modified duration is relatively short. The Company does not utilize any derivative products or invest in any "high risk" instruments.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's interest rate sensitivity analysis (simulation) as of December 2005 for a simulated, immediate, and proportional 100 basis point shock from 7.25% to the anticipated prime rate of 8.25%, maintained throughout 2006, projected the following 2006 results compared to the actual:
2006 2006 %
Projected Actual Variance
-----------------------------------
(Dollars in thousands)
Average earning assets $357,518 $350,876 (1.86)
Average loans $310,896 $312,149 0.40
% of loans to interest earning assets 87.0% 89.0% 2.30
Average interest bearing liabilities $285,219 $279,879 (1.87)
Noninterest bearing deposits $50,776 $49,328 (2.85)
Interest and fees on loans $24,558 $23,459 (4.48)
Other interest income 2,084 1,738 (16.60)
Interest expense 6,267 6,821 (8.84)
---------------------------------
Net interest income 20,375 18,376 (9.81)
Provision for loan losses 180 180 --
Noninterest income 3,488 4,058 16.34
Noninterest expense 13,690 13,814 (0.91)
Provision for income taxes 2,800 2,185 22.00
---------------------------------
Net income $7,193 $6,255 (13.04)
Net interest margin 5.61% 5.35% (4.63)
Yield on interest earning assets 7.45% 7.29% (2.19)
Rates paid on interest bearing liabilities 2.20% 2.43% (10.45)
Net interest spread 5.25% 4.86% (7.43)
Return on assets 1.88% 1.67% (11.17)
Return on equity 17.03% 14.96% (12.16)
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In actuality, interest rates moved up on short-term assets and variable-rate loans in conjunction with the four prime rate increases on January 31st, March 28th, May 10th and June 29th while long-term rates remained almost flat throughout the year. Rates paid on deposits moved up more quickly than projected in response to competitive pressures. Also, due to the difficulty in attracting new, low-cost deposits during the year, the investment securities portfolio did not grow as anticipated and therefore Average earning assets were down $6.6 million from projections.
Noninterest income was $570 thousand or 16.34% higher than projected mainly due to increased overdraft fees, $135 thousand in gain on the sale of securities, and an increase of $174 thousand in the gain on sale of loans held for sale as long-term interest rates stayed low and mortgages continued to be sold to mitigate interest rate risk. The increase of $124 thousand in noninterest expense was over many categories. The reduction in taxes from projection to actual is due to three causes, reduction in income before taxes, increase in non tax exempt municipal income and an increase in tax credits available for 2006 from ongoing investments in low income housing partnerships.
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 and to reduce its own exposure to fluctuation 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 and commitments to buy or sell securities or certificates of deposit. 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 these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
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 written on adjustable-rate loans,
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
The Company generally requires collateral or other security to support financial instruments with credit risk.
The following table shows financial instruments whose contract amount represents credit risk in each of the future periods presented:
Contract or Notional Amount
------------------------------------------------------------------------
2007 2008 2009 2010 2011 Thereafter Total
------------------------------------------------------------------------
(Dollars in thousands)
Commitments to originate loans $12,176 $ -- $ -- $ -- $ -- $ -- $12,176
Unused lines of credit 28,447 923 776 888 236 5,304 36,574
Standby letters of credit 532 409 70 5 30 -- 1,046
Credit card arrangements 1,457 -- -- -- -- -- 1,457
Equity investment commitment to
housing limited partnership -- 917 -- -- -- -- 917
------------------------------------------------------------------------
Total $42,612 $2,249 $846 $893 $266 $5,304 $52,170
========================================================================
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Approximately $5.1 million of the unused lines of credit outstanding at December 31, 2006 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, and many of these lines may expire without being fully drawn upon and therefore the commitment amounts do not necessarily represent future cash needs.
Commitments to originate loans increased from $9.7 million at December 31, 2005 to $12.2 million at December 31, 2006 due primarily to increases in commitments for commercial loans. Unused lines of credit grew from $35.3 million at December 31, 2005 to $36.6 million at December 31, 2006 as growth was experienced in all business segments.
The Company may, from time-to-time, enter into commitments to sell loans, securities or certificates of deposit which involve market and interest rate risk. There were no such commitments at December 31, 2006.
Contractual Obligations: The Company has various financial obligations, including contractual obligations that may require future cash payments. The following table presents, as of December 31, 2006, significant fixed and determinable contractual obligations to third parties by payment date:
Payments Due By Period
-----------------------------------------------------------
Less than 2 & 3 4 & 5
1 year years years Thereafter Total
-----------------------------------------------------------
(Dollars in thousands)
Operating lease commitments $ 95 $ 140 $ 81 $ -- $ 316
Maturities on borrowed funds 1,966 1,359 2,912 8,359 14,596
Deposits without stated maturity (1) 202,997 -- -- -- 202,997
Certificates of deposit (1) 97,411 18,145 1,269 -- 116,825
Pension plan contributions (2) 700 -- -- -- 700
Deferred compensation payouts 80 160 160 151 551
Construction related contract (3) 28 -- -- -- 28
Equity housing limited partnership 356 -- -- -- 356
-----------------------------------------------------------
Total $303,633 $19,804 $4,422 $8,510 $336,369
===========================================================
--------------------
(1) While Union Bank has a contractual obligation to depositors should they wish to withdraw all
or some of the funds on deposit, management believes, based on historical analysis, that the
majority of these deposits will remain on deposit for the foreseeable future. The amounts
exclude interest payable.
(2) Funding requirements for pension benefits after 2007 are excluded due to the significant
variability in the assumptions required to project the amount and timing of future cash
contributions.
(3) Contract to install central air conditioning in one location.
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Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's subsidiary bank is required (as are all banks) to maintain vault cash or a noninterest bearing reserve balance as established by Federal Reserve Board regulations. The average total reserve for the 14-day maintenance period ended December 31, 2006 was $2.3 million, which was satisfied by vault cash. The Company has also committed to maintain a noninterest bearing contracted clearing balance of $1 million at December 31, 2006 with the Federal Reserve Bank of Boston.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is defined as the difference between interest earning assets and interest bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling interest earning assets and interest bearing liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except that:
o adjustable-rate loans, investment securities, variable-rate time deposits, and FHLB of Boston advances are included in the period when they are first scheduled to adjust and not in the period in which they mature;
o fixed-rate mortgage-related securities and loans reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by the Company, and empirical data;
o other nonmortgage related fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and
o NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table shows the Company's rate sensitivity analysis as of December 31, 2006:
Cumulative repriced within
-------------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------------------------------------------------------------------------
(Dollars in thousands by repricing date)
Interest sensitive assets
Federal funds sold and overnight deposits $ 9,263 $ -- $ -- $ -- $ -- $ 9,263
Interest bearing deposits in banks 197 2,466 2,362 392 -- 5,417
Investment securities available-
for-sale (1)(3) 1,085 4,136 10,600 3,755 3,750 23,326
Loans (2)(3) 107,002 70,109 75,412 50,971 13,958 317,452
FHLB Stock -- -- -- -- 1,467 1,467
-------------------------------------------------------------------------
Total interest sensitive assets $117,547 $76,711 $ 88,374 $ 55,118 $ 19,175 $356,925
=========================================================================
Interest sensitive liabilities
Time deposits $35,325 $63,108 $ 17,123 $ 1,269 $ -- $116,825
Money markets 10,170 -- -- -- 41,157 51,327
Regular savings 4,320 -- -- -- 39,517 43,837
NOW accounts 13,421 -- -- -- 39,537 52,958
Borrowed funds 241 1,725 1,359 2,912 8,359 14,596
-------------------------------------------------------------------------
Total interest sensitive liabilities $ 63,477 $64,833 $ 18,482 $ 4,181 $ 128,570 $279,543
=========================================================================
Net interest rate sensitivity gap $ 54,070 $11,878 $ 69,892 $ 50,937 $(109,395) $ 77,382
Cumulative net interest rate sensitivity gap $ 54,070 $65,948 $135,840 $186,777 $ 77,382
Cumulative net interest rate sensitivity gap
as a percentage of total assets 14.2% 17.3% 35.6% 49.0% 20.3%
Cumulative interest sensitivity gap as a
percentage of total interest earning assets 15.1% 18.5% 38.1% 52.3% 21.7%
Cumulative net interest sensitivity gap as
percentage of total interest bearing
liabilities 19.3% 23.6% 48.6% 66.8% 27.7%
--------------------
(1) Investment securities available-for-sale exclude marketable equity securities with a fair value of $349 million
that may be sold by the Company at any time.
(2) Balances shown net of unearned income of $120 thousand.
(3) Estimated repayment assumptions considered in Asset/Liability model.
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Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and capital
(Net Fair Value) under various interest rate scenarios, balance sheet trends,
and strategies over a relatively short time horizon. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, product pricing, prepayment speeds on mortgage related assets,
principal maturities on other financial instruments, and changes in funding
mix. While such assumptions are inherently uncertain as actual rate changes
rarely follow any given forecast and asset-liability pricing and other model
inputs usually do not remain constant in their historical relationships,
management believes that these assumptions are reasonable. Based on the results
of these simulations, the Company is able to quantify its estimate of interest
rate risk and develop and implement appropriate strategies.
The following chart reflects the results of the Company's latest simulation analysis for next year-end on net interest income, net income, return on assets, return on equity and net fair value ratio. Stocks are intended to capture interest rate risk under extreme conditions by immediately shifting. The projection utilizes a proportional rate shock of up 300 basis points and down 300 basis points from the year-end prime rate of 8.25%; this is the highest and lowest internal slopes monitored. This slope range was determined to be the most relevant during this economic cycle.
INTEREST RATE SENSITIVITY SIMULATION ANALYSIS
DECEMBER 31, 2006
(Dollars in thousands)
Year Prime Net Interest Change Net Return on Return on Net Fair
Ending Rate Income % Income Assets % Equity % Value Ratio
-------------------------------------------------------------------------------------------------------
December-07 11.25 $19,401 12.3 $6,985 1.85 16.31 12.89
8.25 17,279 0.0 5,498 1.46 13.05 11.16
5.25 15,004 (13.2) 3,906 1.04 9.44 9.35
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The resulting projected effect of these estimates on net interest income and the net fair value ratio for the year ending December 31, 2007 are within the approved ALCO guidelines. The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk.
Liquidity. Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. 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 Company's principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities and other short-term investments, sales of securities and loans available-for-sale, earnings, and funds provided from operations. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company's exposure to rollover risk on deposits and limits reliance on volatile short-term purchased funds. Short-term funding needs arise from declines in deposits or other funding sources, funding of loan commitments, draws on unused lines of credit and requests for new loans. The Company's strategy is to fund assets, to the maximum extent possible, with core deposits that provide a sizable source of relatively stable and low-cost funds. For the year ended, December 31, 2006, the Company's ratio of average loans to average deposits was 100.6% compared to the average for the year ended December 31, 2005 of 93.7% reflecting 2006's moderately strong loan demand and stiff competition for deposit dollars.
Management understands the implication of the increase in the average loans to average deposits ratio and during 2006 took several steps to address the deposit funding shortfall, including increasing the Company's borrowing capacity at the FHLB of Boston, increasing the interest rates paid on certain deposit products, and implementing a new free small business checking account to help attract and retain deposits. In addition, management has sought to expand its deposit gathering market area by opening a full service branch in Littleton, New Hampshire which was a new deposit market for the Company. That branch has generated $5.0 million in new deposits since it opened in late March 2006, accounting for 76.9% of the Company's deposit growth over 2005. The Company also increased its preapproved Federal Funds line and now offers two tiered variable-rate certificates of deposit products that allow customers flexibility in making additional deposits or a one-time withdrawal.
In addition, as Union is a member of the FHLB of Boston, it has access to preapproved lines of credit up to $7.2 million at December 31, 2006 over and above the term advances already drawn on the line. This line of credit could
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
be used for either short-term or long-term liquidity or other needs. Union maintains a $7.5 million preapproved Federal Funds line of credit with an upstream correspondent bank and a repurchase agreement line with a brokerage house. There were no balances outstanding on either line at December 31, 2006. Union is a member of the Certificate of Deposit Account Registry Service ("CDARS") of Promontory Interfinancial Network which allows Union to provide higher FDIC deposit insurance to customers by exchanging deposits with other members and allows Union to purchase deposits from other members as another source of funding.
Union maintains an IDEAL Way Line of Credit with the FHLB of Boston. The total line available was $551 thousand at December 31, 2006 and 2005. There were no borrowings against this line of credit at either year-end. Interest on these borrowings is chargeable at a rate determined by the FHLB of Boston and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.
While scheduled loan and securities payments and FHLB of Boston advances are relatively predictable sources of funds, deposit flows and prepayments on loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions, and competition. The Company's liquidity is actively managed on a daily basis, monitored by the ALCO, and reviewed periodically with the subsidiary's Board of Directors. The ALCO measures the Company's marketable assets and credit available to fund liquidity requirements and compares the adequacy of that aggregate amount against the aggregate amount of the Company's interest sensitive or volatile liabilities, such as core deposits and time deposits in excess of $100,000, borrowings and term deposits with short maturities, and credit commitments outstanding. The primary objective is to manage the Company's liquidity position and funding sources in order to ensure that it has the ability to meet its ongoing commitments to its depositors, to fund loan commitments and unused lines of credit and to maintain a portfolio of investment securities.
The Company's management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Although approximately 83.4% of time deposits will mature within twelve months, that pattern is consistent with prior periods, with the percentage of time deposits to mature within twelve months ranging from 72% to 84% over the preceding seven years. Accordingly, management believes, based on past experience that the Company will retain a substantial portion of these deposits. Management will continue to offer a competitive but prudent pricing strategy to facilitate retention of such deposits. A reduction in total deposits could be offset by purchases of federal funds, purchase of deposits, short-or long-term FHLB borrowings, utilization of the repurchase agreement line or liquidation of investment securities, purchased brokerage certificates of deposit or loans held for sale. Such steps could result in an increase in the Company's cost of funds and adversely impact the net interest spread and margin. 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 cash flows are subject to substantial uncertainty. Management continually evaluates opportunities to buy/sell securities and loans available-for-sale, obtain credit facilities from lenders, or restructure debt for strategic reasons or to further strengthen the Company's financial position.
Capital Resources. Management of the Company's capital resources 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 short and long-term strategies; and builds long-term stockholder value. Dividends are generally increased in line with long-term trends in earnings per share growth and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments and provide continued support for deposits.
The total dollar value of the Company's stockholders' equity increased from $41.6 million at December 31, 2005 to $41.9 million at December 31, 2006, reflecting net income of $6.2 million for 2006, less dividends paid of $4.8 million, the purchase of 10,686 shares of Treasury stock during 2006 totaling $227 thousand, and an increase in accumulated other comprehensive loss of $56 thousand on investment securities available-for-sale and the adjustment to initially apply SFAS No. 158 for the Company's defined benefit pension plan, net of tax effect of $849 thousand. The Company has 5,000,000 shares of $2.00 par value common stock authorized. As of December 31, 2006, the Company had 4,918,611 shares issued, of which 4,531,977 were outstanding and 386,634 were held in Treasury. Also as of December 31, 2006, there were outstanding employee incentive stock options with respect to 16,075 shares of the Company's common stock, granted pursuant to the Company's 1998 Incentive Stock Option Plan, of which 12,825 were exercisable. Of the 75,000 shares authorized for issuance under the 1998 Plan, 45,450 shares remained available for future option grants at December 31, 2006.
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
On November 18, 2005, the Company announced a stock repurchase program. The Board of Directors has authorized the repurchase of up to 100,000 shares of common stock, or approximately 2.2% of the Company's outstanding shares, for an aggregate repurchase cost not to exceed $2.15 million. Shares can be repurchased in the open market or in negotiated transactions. Shares may be reacquired for reissuance in connection with the stock option plan, stock dividend declaration and for general corporate purposes. The repurchase program is open for an unspecified period of time. As of December 31, 2006 the Company had repurchased 25,686 shares under this program, for a total cost of $542 thousand.
For the Company and Union at December 31, 2006, total capital to risk weighted assets was 17.44% and 17.34% respectively. Tier I capital to risk weighted assets was 16.16%, and 16.07% respectively and Tier I capital to average assets was 11.29% and 11.21%, respectively. Union is categorized as well capitalized under the regulatory framework and the Company is well over the minimum capital requirements.
Impact of Inflation and Changing Prices. The Company's consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which require 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. Interest rates have a more significant impact on the Company's financial performance than the effect of general inflation. From June of 2003 until July of 2004, because of the uneven nature of the expansion of the U.S. economy, the Federal Reserve had kept overnight rates at 40 year lows of 1% but moved the targeted federal funds rates up five 25 basis points steps between then and December 31, 2004 and another eight 25 basis point steps up during 2005, and another four 25 basis point steps up during the first half of 2006 to the target rate of 5.25% where it has remained since then. 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.
Regulatory Matters. The Company and its subsidiary bank are subject to periodic examinations by the various regulatory agencies. These examinations include, but are not limited to, procedures designed to review lending practices, risk management, credit quality, liquidity, compliance and capital adequacy. During 2006, the Securities and Exchange Commission, Vermont State Department of Banking, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank of Boston performed various examinations of the Company and Union pursuant to their regular, periodic regulatory reviews. No comments were received from these various bodies that would have a material adverse effect on either Company's liquidity, capital resources, or operations.
Union Bankshares, Inc. and Subsidiary
Union Bankshares' Stock Performance Graph
The following graph compares the cumulative total return (stock price appreciation plus reinvested dividends) on Union Bankshares, Inc.'s common stock for the last five calendar years with (i) the cumulative total return on the stocks included in the NASDAQ Composite Index and (ii) the cumulative return on the stocks included in the SNL Financial (SNL) $250M-$500M Bank Asset-Size Index for the same time period. All of these cumulative returns are computed assuming the investment of $100 on December 31, 2001 and the reinvestment of dividends at the frequency with which dividends were paid (quarterly) during the applicable years.
Total Return Performance
[Graphic Omitted]
Period Ending
-------------------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
--------------------------------------------------------------------------------------------------------
Union Bankshares, Inc. 100.00 111.85 186.43 175.24 177.12 182.55
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
SNL $250M-$500M Bank Index 100.00 128.95 186.31 211.46 224.51 234.58
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Source: SNL Financial LC, Charlottesville, VA
Union Bankshares, Inc. and Subsidiary
Market for Union Bankshares' Common Shares and Related Stockholder Matters
On March 14, 2007, there were 4,530,414 shares of common stock outstanding held by 650 stockholders of record. The number of stockholders does not reflect the number of persons or entities who may hold the stock in nominee or street name.
Union Bankshares' common stock is listed on the American Stock Exchange ("AMEX") and trades under the symbol UNB. LaBranche & Co. of New York City are the market specialists for Union Bankshares, Inc. stock.
2006 2005
-------------------------------------------------------------------
High Low Dividends High Low Dividends
-------------------------------------------------------------------
First Quarter (1) $24.15 $20.74 $0.26 $24.99 $22.02 $0.64
Second Quarter $22.40 $20.52 $0.26 $23.20 $21.00 $0.24
Third Quarter $23.25 $20.35 $0.26 $22.50 $21.20 $0.24
Fourth Quarter $22.58 $20.25 $0.28 $23.40 $21.01 $0.26
--------------------
(1) First quarter 2005 included a $0.40 special dividend.
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On January 13, 2007, the Company declared a regular dividend of $0.28 per share to stockholders of record as of January 22, 2007, payable January 25, 2007.
Shareholder Assistance and Investor Information
If you need assistance with a change in registration of certificates, reporting lost certificates, non-receipt or loss of dividend checks, assistance regarding direct deposit of dividends, information about the Company, or to receive copies of financial reports, please contact:
JoAnn A. Tallman, Assistant Secretary
Union Bankshares, Inc.
P.O. Box 667
Morrisville, VT 05661-0667
Phone: 802-888-6600
Facsimile: 802-888-4921
E-mail: ubexec@unionbankvt.com
Form 10-K
A copy of the Form 10-K Report filed with the Securities and Exchange Commission may be obtained without charge upon written request to:
Marsha A. Mongeon, Treasurer and Chief Financial Officer
Union Bankshares, Inc.
P.O. Box 667
Morrisville, VT 05661-0667
Corporate Name: Union Bankshares, Inc.
Corporate Transfer Agent: Union Bank, P.O. Box 667, Morrisville, VT 05661-0667
Administration & Management
Directors
UNION BANKSHARES, INC. & UNION BANK
Richard C. Sargent, Chairman Franklin G. Hovey II Attorney at Law, Richard Sargent President, Hovey Enterprises, Inc. Law Office Cynthia D. Borck Richard C. Marron Vice President, Union Bankshares, Inc. Owner, Town & Country Motor Lodge Executive Vice President, Union Bank Steven J. Bourgeois Robert P. Rollins CEO & Principal Owner Retired Insurance Agent Strategic Initiatives for Business LLC Kenneth D. Gibbons John H. Steel President & CEO, Union Bankshares, Inc. Owner, President & Treasurer President & CEO, Union Bank Steel Construction, Inc. Officers UNION BANKSHARES, INC. Richard C. Sargent Chairman Cynthia D. Borck Vice President Kenneth D. Gibbons President & CEO Marsha A. Mongeon Vice President/Treasurer Robert P. Rollins Secretary JoAnn A. Tallman Assistant Secretary ST. JOHNSBURY ADVISORY BOARD Cynthia D. Borck Kirk Dwyer J.R. Alexis Clouatre Kenneth D. Gibbons Dwight A. Davis Franklin G. Hovey II LITTLETON ADVISORY BOARD Judy F. Aydelott Schuyler W. Sweet Stanley T. Fillion Norrine A. Williams Officers UNION BANK Stacey M. Belanger Assistant Treasurer Fairfax Rhonda L. Bennett Vice President Morrisville John T. Booth, Jr. Finance Officer Morrisville Cynthia D. Borck Executive Vice President Morrisville Jennie H. Buchanan Assistant Vice President Morrisville Stacey L.B. Chase Assistant Treasurer Morrisville Jeffrey G. Coslett Vice President Morrisville Michael C. Curtis Vice President St. Albans Peter J. Eley Senior Vice President Morrisville Fern C. Farmer Assistant Vice President Morrisville Kenneth D. Gibbons President & CEO Morrisville Don D. Goodhue Information Systems Officer Morrisville Lorraine M. Gordon Assistant Vice President Morrisville Melissa A. Greene Assistant Treasurer Hardwick Karyn J. Hale Assistant Treasurer Morrisville Claire A. Hindes Assistant Vice President Morrisville Patricia N. Hogan Vice President Morrisville Tracey D. Holbrook Vice President St. Johnsbury Lynne P. Jewett Assistant Treasurer Morrisville Peter R. Jones Vice President Morrisville Stephen H. Kendall Vice President Morrisville Susan O. Laferriere Vice President St. Johnsbury Dennis J. Lamothe Vice President St. Johnsbury Susan F. Lassiter Vice President Jeffersonville Robert L. Miller Trust Officer St. Johnsbury Marsha A. Mongeon Senior Vice President-Treasurer Morrisville Mildred R. Nelson Vice President Littleton Karen Carlson Noyes Assistant Vice President Morrisville Barbara A. Olden Vice President St. Johnsbury Ctr. Deborah J. Partlow Trust Officer Morrisville Bradley S. Prior Assistant Treasurer Morrisville Colleen D. Putvain Assistant Treasurer Morrisville Craig S. Provost Assistant Vice President Stowe Suzanne L. Roberts Vice President Lyndonville Robert P. Rollins Secretary Morrisville Ruth P. Schwartz Vice President Morrisville Robyn A. Sheltra Assistant Treasurer Stowe David S. Silverman Senior Vice President Morrisville JoAnn A. Tallman Assistant Secretary Morrisville Alycia R. Vosinek Commercial Loan Officer Littleton Francis E. Welch Assistant Vice President Morrisville |
For more Company information, please visit Union Bank's web pages at www.unionbankvt.com.
St. Albans Fairfax* Jeffersonville* Johnson* Hyde Park
Union Bank Loan Ctr. Jct. Rtes. 104 & 128 44 Main St. 198 Lower Main St. 250 Main Street
120 North Main Street P.O. Box 26 P.O. Box 369 P.O. Box 614 Hyde Park VT 05655
St. Albans VT 05478 Fairfax VT 05454 Jeffersonville VT 05464 Johnson VT 05656 802.888.6880
802.524.9000 802.849.2600 802.644.6600 802.635.6600
Morrisville* Morrisville* Stowe* Hardwick* Lyndonville*
65 Northgate Plaza 20 Lower Main St. 47 Park St. 103 VT Rte. 15 West P.O. Box 1067
Route 100 o P.O. Box 667 P.O. Box 667 P.O. Box 419 P.O. Box 1280 183 Depot St.
Morrisville VT 05661 Morrisville VT 05661 Stowe VT 05672 Hardwick VT 05843 Lyndonville VT 05851
802.888.6860 802.888.6600 802.253.6600 802.472.8100 802.626.3100
St. Johnsbury Center* St. Johnsbury* St. Johnsbury* Littleton*
Green Mtn. Mall P.O. Box 219 P.O. Box 219 263 Dells Road
1998 Memorial Dr., Suite 10 364 Railroad St. 325 Portland St. Littleton NH 03561
St. Johnsbury VT 05819 St. Johnsbury VT 05819 St. Johnsbury VT 05819 603.444.7136
802.748.2454 802.748.3131 802.748.3121
1.802.888.6600
Toll Free 1.866.862.1891
* indicates ATM on premises. Express Telebanking
1.800.583.2869
www.unionbankvt.com
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Union Bankshares, Inc. o 20 Lower Main Street, P.O. Box 667 o Morrisville VT 05661
CODE OF ETHICS Exhibit 14.2
No profession or industry has maintained higher standards of conduct nor provided greater public service than the banking industry. Banks have traditionally recognized their duty to act in a manner of public trust and confidence.
A bank's reputation for integrity is perhaps its most valuable asset and is determined by the conduct of its Directors, Officers and employees. Each of us must strive to avoid situations that might cause a conflict of interest between the bank, its customers, its shareholders and ourselves. The following is the bank's policy. All Directors and employees are expected to adhere to these guidelines. Failure to comply with Union Bank's Code of Ethics may result in disciplinary action, up to and including termination of employment.
The Sarbanes-Oxley Act of 2002 places particular importance on the ethical behavior of the directors and senior financial executives of Union Bank. This law requires Union Bankshares, Inc. to provide full, fair, accurate, timely and understandable disclosure in reports filed with the Securities & Exchange Commission, and to comply with all applicable government laws, rules and regulations. Additionally, as Union Bankshares, Inc. stock is traded on the American Stock Exchange, all Amex rules and regulations will be followed.
A. Confidential Information
1. As set forth by the Gramm-Leach-Bliley Act of 1999 as well as by state law, confidential information acquired through the course of employment about the bank and its customers is to be used solely for banking purposes and not as a basis for furthering a private interest or as a means of making profit.
2. A staff member may not disclose confidential information of one customer to another customer or to any other outside party, unless allowed by federal or state law. Disclosure to other bank employees should be kept to a minimum on a need-to-know basis.
Information, regardless of the form in which it is stored or presented, is an asset of Union Bank. As such, it is the responsibility of each employee to protect it from unauthorized use, change, destruction and disclosure. Please realize that all bank information can be subpoenaed; therefore, the appropriateness and the professionalism of all bank related information is paramount.
All employees and directors should be familiar with Union Bank's privacy policy. If you have questions or are unsure of the procedures, please contact the Bank's Privacy Officer. Any breach of confidence by an employee will result in immediate disciplinary action, which may include termination of employment.
B. Conflict of Interest
1. A bank employee or Director shall not represent Union Bank in any transaction where he or she has any material connection or substantial financial interest. Specifically, a material connection includes the involvement of any family member. By extension, close personal friends also provide the potential for a similar conflict of interest. This policy includes, but is not limited to, approval of bank overdrafts, authorizing or accepting checks on uncollected funds, waiving of bank charges, late charges or other normal fees. It also includes making loans, waiving required documentation or any similar type of activity.
2. A Union Bank employee may not accept a directorship of another corporation without approval of the President. Charitable and nonprofit organizations are exceptions to this general policy.
3. A Union Bank employee who is authorized to purchase investments for the Bank may not have a brokerage account with any of the Bank's brokerage houses.
4. Union Bank will not give preferential treatment to any outside interest of our Directors or Employees. Utilization of these outside interests will be on the same basis as any independent vendor and in accordance with the Related Person Transactions Approval Policy.
5. No employee involved in purchasing or in investing for Union Bank or a member of his/her family will accept any gift, hospitality, or entertainment that could potentially influence a bank's purchasing decision or appear to have such influence.
C. Fraudulent or Dishonest Activities
Section 806 of the Sarbanes-Oxley Act of 2002 creates a civil cause of action protecting employees, termed "whistleblowers" in the Act, who are discharged or adversely affected in their employment conditions because they lawfully provide information, cause information to be provided, or otherwise assist in any investigation of conduct of the employer, officers or other employees of the Bank, which the employee "reasonably believes" to constitute a violation of the federal criminal statutes prohibiting mail, wire, bank or securities fraud, any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders.
An employee who informs a manager, supervisor, or the Audit Committee about an activity which that person believes to be fraudulent or dishonest.
All employees of Union Bank are encouraged to promptly report fraudulent, dishonest or questionable conduct. To determine if conduct is fraudulent, dishonest or questionable, consider the following:
1. Is the action legal?
2. Does it comply with Union Bank's values?
3. If you do it, will you feel bad?
4. How will it look in the newspaper?
5. If you know its wrong, don't do it.
6. If you're not sure, ask.
7. Keep asking until you get an answer.
An employee should report his or her concerns to a supervisor, manager or other bank officer. If for any reason an employee finds it difficult to report his or her concerns to a supervisor, manager or other bank officer, the employee can confidentially and anonymously report suspected misconduct directly to the audit committee. To do so, write to: Audit Committee, Union Bank, P. O. Box 1346, Morrisville, VT 05661. Please note "confidential" on the envelope and it will be delivered to an Audit Committee member. All other mail is opened by the Bank's internal auditor.
During the investigation process, best efforts will be made to protect the identification of those who file reports. However, confidentiality during this process cannot be guaranteed. Union Bank, in accordance with the Sarbanes-Oxley Act, will protect those who report fraudulent, dishonest or questionable conduct from retaliation.
The employer or it's employees may not retaliate against a whistleblower with the intent or effect of adversely affecting the terms or conditions of employment (including but not limited to, threats of physical harm, loss of job, punitive work assignments, or impact on salary or wages). Whistleblowers who believe that they have been retaliated against may file a written complaint with the Audit Committee. A proven complaint of retaliation shall result in a proper remedy for the person harmed and the initiation of disciplinary action, up to and including dismissal, against the retaliating person. This protection from retaliation is not intended to prohibit managers or supervisors from taking action, including disciplinary action, in the usual scope of their duties and based on valid performance-related factors.
The Audit Committee needs the extended "eyes and ears" of the employee community in order to help make its accounting oversight effective and well focused. The Audit Committee shall conduct or direct the investigations of all suspected fraudulent or dishonest conduct in consultations with such bank officials as may be necessary or appropriate. After an investigation is complete, the Audit Committee will take the appropriate steps in resolving the conduct. If you are not satisfied with the Audit Committee's findings, you have the right to report the conduct to the Department of Labor.
D. Gifts, Fees, Legacies and Loans
1. A Union Bank employee may not accept a loan from a bank customer or supplier. This prohibition does not apply to loans from banks or other financial institutions on customary terms to finance proper credit needs such as home mortgage and consumer credit loans, or if the customer is a close relative.
2. Union Bank follows "Regulation O" guidelines when lending to Executive Officers and Directors of the bank. Executive Officers and Directors must adhere to the following general provisions of "Regulation O".
a. No Executive Officer may become indebted to the bank in excess of $100,000 unless the borrowings are for their primary residence, to finance their children's education or are secured by acceptable liquid assets.
b. All loans made to Executive Officers and Directors must be approved by the Board of Directors in compliance with the Related Person Transactions Approval Policy prior to disbursement and be granted on the same terms and creditworthiness as any other borrower, or through a bank wide loan discount plan as long as the plan does not give preference to any insiders.
All loans to executive officers must be made subject to the condition that the loan be written "due and payable upon demand."
c. When contemplating borrowings of any nature, Executive Officers and Directors must be aware of the credit limitations and guidelines provided in "Regulation O".
3. A Director, or Employee may not solicit or receive anything of value for making a loan.
4. A Director or Employee may not accept a fee for performance of any act that the bank could have performed.
5. It is improper for an Employee to solicit or accept a gift from a customer, supplier or from any other person or business seeking a business or supplier relationship with Union Bank. This prohibition does not apply to gifts from relatives, food or entertainment at a luncheon or business meeting, advertising or promotional materials of nominal value on special occasions such as holidays. Nominal value is a value that would be within the ability of the officer to reciprocate on a personal basis or with legitimate claim for reimbursement under similar circumstances. An employee of Union Bank should decline any gift where there would be even the slightest implication of influence on future business dealings.
6. Any Director, Officer or Employee will refuse to serve personally as executor, trustee, or guardian of an estate or trust of a bank customer unless approved by the Board of Directors except where the customer is a close relative.
7. A staff member may not do indirectly what he or she is prohibited from doing directly, to include, but not limited to arranging to have a member of his or her family accept a gift from a customer.
E. Outside Interests
All outside business interests or employment for non-officers must be approved by the immediate supervisor; for Officers, approval must come from the President. Union Bank management will be liberal in granting approvals unless there is a potential appearance of a conflict of interest. Specific types of outside activities which could raise questions of conflict might include:
1. Employment by a firm that competes with Union Bank.
2. Preparation of material that will be presented to Union Bank by
anyone seeking a loan.
3. Delivering investment counsel.
4. Rendering accounting services.
5. Drafting wills or practicing law.
6. Performing any service that Union Bank could perform.
7. Use of Union Bank equipment, supplies, or facilities.
8. Data processing/consulting services.
All employees should disclose to the Internal Audit Officer all potential conflicts of interest, including those in which they have been inadvertently placed due to either business or personal relationships with customers, suppliers, business associates or competitors of Union Bank.
In general, it is the policy of the Bank not to hire an individual who is employed by the registered independent accounting firm and was part of the engagement team that audited the Bank's financial statements in any of the previous three years.
F. Investments
1. It is improper for a Union Bank Director, Officer, or Employee to invest in, or enable other to invest in, a bank customer's business unless the interest is acquired through an organized exchange, and the individual has no access to confidential or material inside information.
2. It is improper for a Union Bank Officer or employee to subscribe to new issues of stock in the bank customer's business.
3. Major NASD (National Association of Securities Dealers) exchanges require that members avoid handling the speculative accounts of bank-employed persons without the written consent of the employer. Speculative investments such as margin buying, short accounts, puts, calls, or combinations are discouraged.
4. There are no restrictions on investing in U.S. government securities, municipal bonds, or mutual funds.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER Exhibit 31.1
I, Kenneth D. Gibbons, certify that:
1. I have reviewed this annual report on Form 10-K of Union Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:
a) designed such disclosure controls and procedures under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluations; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 30, 2007 /s/ Kenneth D. Gibbons ---------------------- [Signature] President and Chief Executive Officer |
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER Exhibit 31.2
I, Marsha A. Mongeon, certify that:
1. I have reviewed this annual report on Form 10-K of Union Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:
a) designed such disclosure controls and procedures under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluations; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 30, 2007 /s/ Marsha A. Mongeon --------------------- [Signature] Treasurer and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Union Bankshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge; 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
A signed original of this written statement required by Section 906 has been provided to Union Bankshares, Inc. and will be retained by Union Bankshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Kenneth D. Gibbons ---------------------- Kenneth D. Gibbons Chief Executive Officer March 30, 2007 |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Union Bankshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of her knowledge; 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
A signed original of this written statement required by Section 906 has been provided to Union Bankshares, Inc. and will be retained by Union Bankshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Marsha A. Mongeon --------------------- Marsha A. Mongeon Chief Financial Officer March 30, 2007 |