Exhibit 13
Union Bankshares, Inc.
----------------------
2005 Annual Report
Union Bankshares, Inc.
Earnings Per Share & Dividends Paid to Stockholders by Year
Dividends EPS
-----------------
*1999 $0.60 $0.90
*2000 $0.65 $1.05
*2001 $0.71 $1.06
*2002 $0.76 $1.14
*2003 $0.82 $1.18
2004 $0.90 $1.28
2005 $1.38** $1.37
* Dividend amounts have been adjusted for 2003 stock split
** Includes a $0.40 per share special dividend
Facing page: The Union Bank Team
(not pictured: Faith Trottier; Heather Waterhouse; Heather Young)
[Photos of "The Union Bank Team"]
March 30, 2006
Dear Shareholder,
Much was accomplished in 2005 by your company and we are pleased to report
those accomplishments in this year's annual report.
On the financial side, short-term interest rates continued to increase as
the Federal Reserve pursued its policy of implementing, in small
increments, its anti-inflationary controls. This caused the "prime rate" to
rise from 5.25% to 7.25% during the year having a positive effect on net
interest income. Deposit rates have also risen rapidly in the past twelve
months requiring continued close monitoring of our asset/liability
management strategy.
We also focused this past year on improving our officer call program and as
a result loans outstanding and loans held for sale increased 9.6%
reflecting strong demand not only in our traditional market, but at our new
St. Albans loan office as well. Residential, home equity, municipal, and
commercial loans all experienced solid growth. Thus far in 2006 we are
experiencing a continuation of this trend.
As you read this report you will notice, in addition to the customary
financial information, we have highlighted a few services and activities
which are of interest. In particular is our newest full-service branch in
Littleton, New Hampshire. This office opened in March of 2006 replacing the
loan office we established there in 2001. We are quite pleased with the
reception we have received and it reflects positively on the quality of our
staff and advisory board who have many years of experience in the Littleton
market. In October, we completed renovations to our Portland Street branch
in St. Johnsbury with an eye toward improving lobby and vehicle traffic
flow as well as physical security. New loan and deposit activity at this
location has improved substantially.
Community banks continue to be a focal point of regulatory action; however,
this past year we have seen some beneficial reductions in "regulatory
burden" and other related legislation. For example, Congress recently
approved amendments to the FDIC Act, the first improvements since 1980. The
most significant change was an increase in deposit insurance coverage for
retirement accounts from $100,000 to $250,000. Since the inception of
Individual Retirement Accounts (IRA's) and similar retirement savings
accounts, deposits in these accounts have increased substantially. New
deposit insurance levels should assist us in attracting and retaining
retirement deposits. In addition, changes in bankruptcy law, Community
Reinvestment Act exams, Bank Secrecy Act compliance, and FASB accounting
issues were all beneficial to the banking community. There are even
recommendations to change some of the Sarbanes Oxley reporting
requirements. We will watch closely how the SEC responds to the
recommendations of the SEC Advisory Committee on Smaller Public Companies.
We want to thank our shareholders, customers, and especially our employees
for all contributing to the success of Union Bankshares this past year.
Sincerely,
/s/ Richard C. Sargent /s/ Kenneth D. Gibbons
Richard C. Sargent Kenneth D. Gibbons
Chairman President & CEO
2
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
3
2005: Growing to meet new opportunities
In 2005, the team at Union Bank (the sole subsidiary of Union Bankshares,
Inc.) continued to pursue a strategy of steady growth in assets, services
provided, market area, and profitability. The following narrative provides
some highlights of the year's activities which furthered the bank's pursuit
of financial success while enhancing the communities in our service area.
During the fourth quarter of 2005, the bank surpassed several previous
financial records, with new records for Total Assets $382 million, Total
Deposits $324 million and Total Loans $308 million.
COMMERCIAL SERVICES [Photo] Commercial Services Officers:
FRONT Stacey Chase, Rhonda Bennett,
Alycia Vosinek, Tracey Holbrook,
Dennis Lamothe. BACK David
Silverman, Peter Jones, Mike Curtis,
Steve Kendall, Phil Martin, Ken
Gibbons.
The economies of the geographic region served by Union Bank are driven by
many diverse businesses in the for-profit sector, as opposed to being
dominated by a small handful of very large companies. As a result of this,
small and medium sized businesses remain the "heart and soul" of the local
economy. Throughout its history, Union Bank has responded by specializing
in lending to independent businesses and entrepreneurs. We believe that by
providing proper financing, we can help each business grow and prosper,
increase their employment base and therefore add to the community as a
whole. At the same time, helping to create strong local economies has also
increased the Bank's growth and profitability.
2005 was a successful year for the Commercial Services team. The commercial
loan portfolio increased from $135 million at year end 2004 to $158 million
at year end 2005 representing 17% growth year over year. At the end of
2005, commercial loans comprised 51.4% of the bank's total loan portfolio.
One highlight in 2005 was the opening of the St. Albans (VT) Loan Center in
February 2005. Vice President and Commercial Loan Officer Mike Curtis and
Loan Assistant Carol Allen operate the office with an eye towards
developing business and commercial relationships in the greater St. Albans
- - Franklin County area. Both are highly experienced commercial bankers and
have worked in the St. Albans market for several years. "Carol and I have
been surprised that so many people in our community are already Union Bank
customers," states Mike. "The bank has a good reputation in the market. One
year later we are very pleased that so many more have become our loan
customers."
Mike and Carol have closely followed the Bank's philosophy of community
involvement. "A great part of our success is predicated on our active
involvement in our community," Mike continues, "whether it is the St.
Albans Free Library, Northwestern Counseling and Support Services, or St.
Albans For the Future, our local involvement gives us the community's pulse
and keeps Union Bank visible in our community.
Another active component of our Commercial Services Team is our Municipal
Services program. We have designated several team members as Municipal
specialists and have actively been soliciting deposit and loan business
from our local municipalities. This program has grown in size and
profitability over the last several years while benefiting the towns we
live in with cost effective financial solutions, customized to their needs.
"With CDARS and other programs," states Vice President Rhonda Bennett, "we
can not only assist towns and school districts with their financing and
cash management needs, we can also help them invest excess funds until
needed to meet municipal expenses."
David Silverman, Senior Vice President, adds "Our service philosophy is
consistently about building relationships. We view our commercial customers
as individuals with individual needs, not as transactions. One important
thing we have as a Bank is the relative longevity of our commercial
lenders. Seven of our eleven commercial officers have been part of the Team
for ten years or more. Our customers appreciate being able to work with a
person they've come to know and trust. Many of our new customers are
directed to us by our existing customers. We appreciate this level of
loyalty and remain determined to earn it every business day."
4
[Photo]
The Bank's Merchant Services (credit/debit card processing) program
continues to produce solid revenues while enhancing commercial customer
loyalty. In 2005 the bank processed over $80 million in card transactions,
an 8% increase year over year. Currently serving over 670 commercial
customers, the department is now developing newer markets in St. Albans,
Vermont and Littleton, New Hampshire.
"The Bank offers a great value in card processing, "states Stacey Chase,
Merchant Services Officer. "We take pride in providing a quick response to
customer calls and we take the time to thoroughly educate our customers
about the benefits of working with us and how to minimize their risk when
engaging in electronic commerce."
CONSUMER & RESIDENTIAL LENDING [Photo]
In Consumer Lending, the Bank continues to have success with the B.U.I.L.D.
Loan program. The B.U.I.L.D. Loan is unique to the Bank, and has features
that make it a leader in the Bank's market. In the past decade, the program
has helped over 1450 families to construct new homes, or renovate existing
homes."The B.U.I.L.D. Loan continues to generate both great interest and
great numbers," says B.U.I.L.D. Loan co-creator and Executive V.P., Cynthia
Borck. "We have helped thousands of individuals and families with this
program, and have also generated some very impressive loan numbers. At year
end, B.U.I.L.D. loans accounted for $20.7 million of our overall loan
portfolio."In addition to the B.U.I.L.D. Loan, traditional Mortgages and
Home Equity loans continued to show growth. The Bank also made a technology
investment with the installation of "Loan Prospector," a computer-driven,
software risk assessment tool which gives the Bank ready access to Freddie
Mac's credit and pricing terms, streamlining the underwriting process. The
Bank continues its long tradition of servicing the mortgages it
originates.
[Photo] COMMUNITY
The Bank's ongoing dedication to the communities it serves was demonstrated
in several ways, the first being its "Save for Success" school savings
programs. The Bank's "Save for Success" Team Leaders and volunteers visit
over 20 local graded schools every week in a program that encourages
youngsters to open and contribute to savings programs. Now in its 9th year,
Save for Success has been an extremely well received program that has
helped children learn to save at an early age. "At year end," says SFS
Facilitator Kristy Adams-Alfieri, "over 2900 kids were enrolled in the
Bank's Save for Success program.
"In 2005, the Bank also began a formal internship program with Lyndon State
College. Two students from Lyndon State College, were given training in
both Teller and Personal Banker procedures. Internship students generally
begin working with the Bank between their freshman & sophomore years,
culminating with an internship during the summer before their senior year.
In addition, the Bank continued it's long relationship with Johnson State
College, by contributing to the Union Bank Scholarship Endowment. The JSC
Scholarships are for students who show promise in civic and business
leadership, and receive matching funds from the Vermont Higher Education
Trust Fund. To date, seventeen scholarships have been granted from the
interest on the endowment. The Bank will seek new interns from both Johnson
and Lyndon State Colleges in 2006.
5
[Photo] Left to Right: Retired Union Bank Director (and active St.
Johnsbury Advisory Board Member) William T. Costa, Jr.; NVRH Board
Chair Gretchen Hammer; Union Bank President Ken Gibbons, and NVRH
CEO Paul Bengtson.
Historically, the Bank has benefitted greatly from its interns. Many
talented team members began their careers at the bank as interns, and the
Bank continues to realize the internship programs as a source of well-
educated, experienced bank employees.
In August, Union Bank and Northeastern Vermont Regional Hospital, located
in St. Johnsbury, announced a five-year pledge from the Bank in support of
its ongoing capital campaign. In recognition, NVRH named a large meeting
room in its business and conference center the "Union Bank Conference
Room."
NVRH Board Chair Gretchen Hammer expressed particular thanks to recently
retired Union Bank Director and St. Johnsbury Advisory Board Member Bill
Costa for his support in recommending this gift to Union Bank's board.
"Bill was one of the leaders in building the original hospital and he
remains an important figure as we invest in the hospital to address the
Kingdom's health needs for the next few decades," said Ms. Hammer.
"Union Bank has set a standard that will encourage others to be generous.
Their support and leadership provides tremendous momentum to this campaign.
We have already seen several organizations follow their lead." Added Paul
Bengtson, NVRH's CEO.
[Photo]
In November, Union Bank's Mail Clerk, Don Rayta, spearheaded an effort to
collect Thanksgiving turkeys as part of a regional effort to help those in
need on this important family holiday. "The Bank's employees donated over
75 turkeys, which became part of well over 400 that were distributed
throughout the greater Lamoille Valley," said Don. "The delivery truck was
full of frozen birds."
Bank team members also participated in fund raising events for the American
Cancer Society, the March of Dimes and the Red Cross. In October, the Bank,
on behalf of the many community members who contributed, was able to give a
check for $11,893 (which included $10,000 from the Bank) to the American
Red Cross, specifically targeted for the victims of Hurricane Katrina.
"Every Union Bank branch from Fairfax to Littleton was set up to receive
donations," said Union Bank President, Ken Gibbons. "We wanted to make the
giving process as easy as possible for the members of the communities we
serve. All donations are and will continue to be of great use by Gulf Coast
relief efforts, as the challenge of Katrina's devastation will face the
region and the nation for some time to come."
TECHNOLOGIES [Photo]
Technology continues to redefine the process of banking, both for Union
Bank and its customer base. Formally defining an Electronic Banking
Department, the Bank has organized a team that is available to answer
electronic banking questions every business day. The Electronic Banking
Department handles everything from Wire Transfers to questions about its
NetTeller Online banking program.
6
[Photo]
"The bank serves over 3500 customers through its NetTeller(R) Internet
banking system and over 11,000 debit card customers," states Electronic
Banking Officer Sara Small. "We take pride in the high level of service we
offer our electronic banking customers, particularly given the wide array
of banking methods at their disposal." In 2005, the bank handled over
250,000 calls through its Express Telebanking(R) system. Recognizing the
increased potential for abuse of both debit and credit card accounts, the
Bank initiated several Anti-Fraud educational campaigns through print
advertising, direct mail and on its web site. "We have taken the initiative
to aggressively educate our customers and the community at large about the
growing issues of financial fraud," said Peter Eley, Senior Vice President.
" In this era of online commerce, criminals and scam artists can operate
with nearly complete anonymity, and from locations far outside our region,
and often outside the country. The Bank has taken solid steps to protect
its customers, but we're also doing our best to help them protect
themselves."
PORTLAND STREET, ST. JOHNSBURY
[Photo] The original Portland Street office, constructed in the mid 1960s.
[Photo] The same site, after major renovations in 2005.
[Photo] Portland Street Team: Melyssa Whitcomb, Molly Moghari, Teri
Achilles, Tina Before, and Kathie Crown.
In the fourth quarter of 2005, major renovations were completed to the
Bank's Portland Street Office in St. Johnsbury. Using the existing
structure as a starting point, the entire building was overhauled, both
interior and exterior. As described by the "before and after" images at the
left, the building was increased in size and was transformed into a more
traditional design.
"Moving to the classic 'New England look' has several benefits," says Paul
Grogan, Facilities Manager. "Besides simply being more 'in tune' with
typical village architecture, the sloped roof handles snow loads much
better and leaves more convenient access for infrastructure requirements,
such as wiring. The traffic flow was also improved, with better drive-
through access and better over all parking."
"Our customers have really responded favorably," states Portland Street
Branch Supervisor Kathie Crown. "We now have an on-site loan officer which
gives our customers much greater access to loan programs. From our
standpoint, our teller stations are much improved, with more space, easier
access to important banking equipment and much better lighting through out
the office. It's a very pleasant place to be in. Our renovations have even
been acknowledged by the Northeast Kingdom Chamber of Commerce, who awarded
us a 2005 Kingdom Improvement Award."
7
LITTLETON, NEW HAMPSHIRE
In March of 2006, construction was completed on the Bank's new full-service
office at 263 Dells Road in Littleton, New Hampshire, just off I-93. The
office opened officially on Monday, the 20th of March. The building is a
two-story, traditional structure that features a convenient drive through
teller window and ATM, a full teller line, and has both loan and closing
offices. The location is convenient to the village of Littleton and large-
chain retailers.
"I think that the word "initiative" is very appropriate in describing both
Union Bank's move into the Littleton market and Littleton as a community,"
says Littleton Advisory Board Member Stan Fillion. "Littleton as a
community, working with the Littleton Industrial Development Corporation,
took the initiative and brought new and diversified business to the area in
the 1970's in response to the demise of the local shoe industry and the
changing face of commerce in the North Country. Again in the 1990's,
Littleton became a 'National Main Street Community' and worked with the
newly formed Littleton Main Street Corporation to revitalize its Main
Street. Littleton continues this tradition of innovation and initiative
into the new century and has become an economic hub for the region.
Littleton and Union Bank are both built on the Yankee tradition of
ingenuity and integrity. These are truly traits that will bind Littleton
and Union Bank together."
[Photo] UB's Littleton Team: Millie
Nelson, Alycia Vosinek, Candy
Durocher, Ashley Reardon, Crystal
Chase, Samanth Carey and Tara
Donovan.
Norrine Williams, also on the Littleton Advisory Board adds, "Folks here
are looking for solid, dependable banks who remember the individual,
including the small business "Yankee" with deep roots to the North Country.
Union Bank has a great history with its support and recognition of how
important communities are, not just to themselves, but as part of the
overall fabric of regional economies. Northern New Hampshire and Vermont
are very similar in terms of business and small towns with a strong history
of both independence and local control."
Advisory Board Member Judy Aydelott sums up: "In my 25 years of experience
as co-owner of Profile Broadcasting Co., Inc. (WTLN AM/FM), I saw how
welcoming the region is to entrepreneurial thinking; innovative notions and
community involvement on the part of businesses of all sizes. I know that
the Union Bank family applauds and supports these points of view and is
eager for the opportunity to assist forward-thinking businesses and
individuals alike. I think that the bank's location and extremely
attractive exterior is going to set it apart from the other banks and
branches in Littleton."
With the completion of Littleton's full service branch, the Bank's office
locations run west to east from greater St. Albans in Northwestern Vermont
to greater Littleton in Northern New Hampshire and touches or encompasses 7
Vermont and 3 New Hampshire counties, with a total population (2004 Census
estimate) of over half a million individuals.
8
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Selected Financial Information
At or For The Years Ended December 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
----------------------------------------------------------------------
(Dollars in thousands, except per share data)
<s> <c> <c> <c> <c> <c>
Balance Sheet Data:
Total assets $ 374,746 $ 359,529 $ 356,557 $ 343,492 $ 337,475
Investment securities available-for-sale 32,408 40,966 44,370 45,824 49,610
Loans, net of unearned income 307,071 280,069 271,561 255,907 250,943
Allowance for loan losses (3,071) (3,067) (3,029) (2,908) (2,801)
Deposits 313,299 306,598 305,381 293,004 285,722
Borrowed funds 16,256 7,934 7,223 7,536 10,344
Stockholders' equity (1) 41,603 42,403 40,987 39,169 37,215
Income Statement Data:
Total interest income $ 22,256 $ 20,178 $ 20,372 $ 22,169 $ 24,124
Total interest expense (4,499) (3,310) (4,209) (6,364) (9,565)
----------------------------------------------------------------------
Net interest and dividend income 17,757 16,868 16,163 15,805 14,559
Provision for loan losses (60) (30) (114) (356) (320)
Noninterest income 4,056 3,774 3,603 3,560 3,073
Noninterest expenses (13,056) (12,319) (12,060) (11,761) (10,496)
----------------------------------------------------------------------
Income before provision for income taxes 8,697 8,293 7,592 7,248 6,816
Provision for income taxes (2,460) (2,458) (2,205) (2,068) (1,984)
----------------------------------------------------------------------
Net income $ 6,237 $ 5,835 $ 5,387 $ 5,180 $ 4,832
======================================================================
Per Common Share Data:
Net income (2)(3) $ 1.37 $ 1.28 $ 1.18 $ 1.14 $ 1.06
Cash dividends paid (3) 1.38 0.90 0.82 0.76 0.71
Book value (1)(3) 9.16 9.31 9.01 8.62 8.19
Weighted average number of shares outstanding (3) 4,554,055 4,551,469 4,547,366 4,543,113 4,546,204
Number of shares outstanding (3) 4,542,663 4,554,663 4,550,313 4,545,288 4,542,788
<FN>
- --------------------
<F1> Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale.
<F2> Computed using the weighted average number of shares outstanding for
the period.
<F3> 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.
</FN>
9
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
one of the financial experts 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
10
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, 2005 and 2004, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the two-year period ended December
31, 2005. 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. The consolidated financial
statements of Union Bankshares, Inc. and subsidiary for the year ended
December 31, 2003, were audited by other auditors whose report dated March
5, 2004, expressed an unqualified opinion on those statements.
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, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ UHY LLP
Albany, New York
March 10, 2006
VT Reg. No. 092-0000-648
11
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------
Consolidated Balance Sheets
December 31, 2005 and 2004
2005 2004
-----------------------------
<s> <c> <c>
ASSETS
Cash and due from banks $ 14,018,842 $ 16,929,793
Federal funds sold and overnight deposits 189,587 4,187,159
-----------------------------
Cash and cash equivalents 14,208,429 21,116,952
Interest bearing deposits in banks 8,597,835 7,508,703
Investment securities available-for-sale 32,407,973 40,965,888
Loans held for sale 6,546,019 8,813,910
Loans 300,677,096 271,420,631
Allowance for loan losses (3,071,421) (3,066,871)
Unearned net loan fees (152,338) (165,654)
-----------------------------
Net loans 297,453,337 268,188,106
Accrued interest receivable 1,971,924 1,527,808
Premises and equipment, net 5,898,424 5,121,046
Other assets 7,661,722 6,286,622
-----------------------------
Total assets $374,745,663 $359,529,035
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 52,616,912 $ 57,221,189
Interest bearing 260,682,182 249,376,952
-----------------------------
Total deposits 313,299,094 306,598,141
Borrowed funds 16,256,274 7,933,652
Accrued interest and other liabilities 3,587,484 2,594,218
-----------------------------
Total liabilities 333,142,852 317,126,011
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2005; 4,915,611 shares issued in 2004 9,837,222 9,831,222
Paid-in capital 139,861 106,989
Retained earnings 33,760,610 33,809,456
Treasury stock at cost; 375,948 shares in 2005 and 360,948 shares in 2004 (2,036,931) (1,721,931)
Accumulated other comprehensive (loss) income (97,951) 377,288
-----------------------------
Total stockholders' equity 41,602,811 42,403,024
-----------------------------
Total liabilities and stockholders' equity $374,745,663 $359,529,035
=============================
See accompanying notes to consolidated financial statements.
12
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Consolidated Statements of Income
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
-----------------------------------------
<s> <c> <c> <c>
Interest income
Interest and fees on loans $20,247,000 $17,948,375 $18,203,663
Interest on debt securities
Taxable 1,261,344 1,692,097 1,615,049
Tax exempt 191,549 214,449 233,902
Dividends 87,814 68,953 69,178
Interest on federal funds sold and overnight deposits 188,080 47,149 73,807
Interest on interest bearing deposits in banks 280,348 207,163 176,738
-----------------------------------------
Total interest income 22,256,135 20,178,186 20,372,337
-----------------------------------------
Interest expense
Interest on deposits 3,984,868 2,948,477 3,866,621
Interest on borrowed funds 513,951 362,101 342,362
-----------------------------------------
Total interest expense 4,498,819 3,310,578 4,208,983
-----------------------------------------
Net interest income 17,757,316 16,867,608 16,163,354
Provision for loan losses 60,000 30,000 114,000
-----------------------------------------
Net interest income after provision for loan losses 17,697,316 16,837,608 16,049,354
-----------------------------------------
Noninterest income
Trust income 300,491 204,392 162,508
Service fees 2,898,159 2,802,020 2,660,976
Net gains on sales of investment securities 144,673 23,443 379
Net gains on sales of loans held for sale 192,073 443,965 524,981
Net gains on sales of other real estate owned 336,153 90,191 22,866
Other income 183,920 210,387 231,010
-----------------------------------------
Total noninterest income 4,055,469 3,774,398 3,602,720
-----------------------------------------
Noninterest expenses
Salaries and wages 5,627,296 5,401,332 5,302,774
Pension and employee benefits 2,044,870 1,972,948 1,912,319
Occupancy expense, net 788,672 737,386 691,079
Equipment expense 1,040,797 930,939 903,280
Other expenses 3,554,249 3,276,681 3,250,283
-----------------------------------------
Total noninterest expense 13,055,884 12,319,286 12,059,735
-----------------------------------------
Income before provision for income taxes 8,696,901 8,292,720 7,592,339
Provision for income taxes 2,459,532 2,457,593 2,205,253
-----------------------------------------
Net income $ 6,237,369 $ 5,835,127 $ 5,387,086
=========================================
Earnings per common share (See Note 2) $ 1.37 $ 1.28 $ 1.18
Dividends per common share (See Note 2) $ 1.38 $ 0.90 $ 0.82
See accompanying notes to consolidated financial statements.
13
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2005, 2004, and 2003
Common Stock Accumulated
------------------------ other Total
Shares, Net Paid-in Retained Treasury comprehensive stockholders'
of Treasury Amount Capital earnings stock income (loss) equity
-----------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Balances, December 31, 2002 3,030,057 $6,541,378 $317,553 $33,357,259 $(1,721,931) $674,280 $39,168,539
-----------
Stock split effected in the
form of a stock dividend
(See Note 2) 1,515,231 3,271,094 (329,453) (2,945,045) - - (3,404)
-----------
Comprehensive income:
Net income - - - 5,387,086 - - 5,387,086
Change in net unrealized
gain (loss) on investment
securities available-for-sale,
net of reclassification
adjustment and tax effects - - - - - 86,374 86,374
-----------
Total comprehensive income 5,473,460
-----------
Cash dividends declared - - - (3,728,457) - - (3,728,457)
Exercise of stock options 5,025 10,050 66,476 - - - 76,526
--------------------------------------------------------------------------------------------
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
============================================================================================
See accompanying notes to consolidated financial statements.
14
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
----------------------------------------------
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,237,369 $ 5,835,127 $ 5,387,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 772,971 696,686 654,483
Provision for loan losses 60,000 30,000 114,000
Provision for deferred income taxes 93,290 197,939 1,918
Net amortization of investment securities 135,638 205,571 261,400
Equity in losses of limited partnerships 221,884 140,104 124,948
Issuance of stock options 862 - -
Net gains on sales of investment securities (144,673) (23,443) (379)
Net gains on sales of loans held for sale (192,073) (443,965) (524,981)
Net gains on sales of other real estate owned (336,153) (90,191) (22,866)
Net gains on disposals of premises and equipment (1,995) (7,395) (5,609)
Write-downs of other real estate owned - - 42,846
Write-downs of impaired investment securities 47,500 41,501 -
Decrease in unamortized loan fees (13,316) (19,542) (20,904)
Proceeds from sales of loans held for sale 15,208,927 26,269,537 30,186,323
Origination of loans held for sale (12,748,963) (16,115,144) (31,046,743)
(Increase) decrease in accrued interest receivable (444,116) 123,698 238,972
(Increase) decrease in other assets (135,134) 90,814 (359,474)
Increase (decrease) in income taxes 7,742 4,653 (1,409)
Increase (decrease) in accrued interest payable 200,046 (51,046) (216,388)
Increase (decrease) in other liabilities 81,661 (326,142) (217,340)
----------------------------------------------
Net cash provided by operating activities 9,051,467 16,558,762 4,595,883
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits in banks
Maturities and redemptions 5,374,868 3,562,529 3,562,015
Purchases (6,464,000) (4,551,539) (4,755,075)
Investment securities available-for-sale
Sales 2,453,236 1,761,346 350,553
Maturities, calls and pay downs 15,245,085 13,161,672 22,958,760
Purchases (9,898,930) (12,323,253) (21,986,482)
Purchase of Federal Home Loan Bank stock - - (5,300)
Increase in loans, net (29,624,052) (18,259,344) (13,686,707)
Recoveries of loans charged off 54,972 124,164 98,581
Purchase of premises and equipment (1,551,164) (1,377,719) (497,439)
Investments in limited partnerships (640,107) (100) (378,900)
Proceeds from sales of premises and equipment 2,810 14,548 13,643
Proceeds from sales of other real estate owned 615,552 - 75,396
Proceeds from sales of repossessed property 11,370 12,684 42,251
----------------------------------------------
Net cash used in investing activities (24,420,360) (17,875,012) (14,208,704)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings outstanding, net 8,322,622 711,122 (313,502)
Proceeds from exercise of stock options 38,010 61,113 76,526
Net (decrease) increase in noninterest bearing deposits (4,604,277) 8,855,595 7,387,039
Net increase (decrease) in interest bearing deposits 11,305,230 (7,638,873) 4,987,911
Purchase of treasury stock (315,000) - -
Proceeds paid out for fractional shares - - (3,404)
Dividends paid (6,286,215) (4,096,514) (3,728,457)
----------------------------------------------
Net cash provided by (used in) financing activities 8,460,370 (2,107,557) 8,406,113
----------------------------------------------
Decrease in cash and cash equivalents (6,908,523) (3,423,807) (1,206,708)
Cash and cash equivalents:
Beginning 21,116,952 24,540,759 25,747,467
----------------------------------------------
Ending $ 14,208,429 $ 21,116,952 $ 24,540,759
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 4,298,773 $ 3,361,624 $ 4,425,371
==============================================
Income taxes paid $ 2,186,544 $ 2,283,094 $ 2,223,156
==============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING &
FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 243,665 $ 319,368 $ 130,717
==============================================
Repossessed property acquired in settlement of loans $ 13,500 $ 8,916 $ 25,078
==============================================
Loans originated to finance the sale of other real estate owned $ - $ 283,634 $ 801,296
==============================================
Investment in limited partnerships acquired by capital
contributions payable $ 703,817 $ - $ -
==============================================
Change in unrealized (losses) gains on investment securities
available-for-sale $ (720,059) $ (580,858) $ 129,603
==============================================
Transfer of loans held for sale to portfolio $ 1,983,458 $ - $ -
==============================================
See accompanying notes to consolidated financial statements.
15
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"). On
May 16, 2003, the two subsidiaries (Union Bank and Citizens Savings Bank
and Trust Company (Citizens) of Union Bankshares, Inc. were merged with
the surviving, state chartered bank being Union Bank headquartered in
Morrisville, Vermont. All significant intercompany transactions and
balances have been eliminated. The Company utilizes the accrual method of
accounting for financial reporting purposes.
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 its
loan production offices in St. Albans, Vermont and Littleton, New
Hampshire. This market area encompasses primarily retail consumers, small
businesses, municipalities, agricultural producers, and the tourism
industry. The Company's primary deposit products are checking, savings,
money market accounts, 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, most of its lending activities
are conducted within the Northern Vermont and New Hampshire market area
where it is located and a substantial portion of the Company's loans are
secured by real estate and/or are Small Business Administration ("SBA")
guaranteed. 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 7 discusses the types of lending which the
Company engages in.
Use of estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles 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 higher degree of complexity and
subjectivity and the amount of the change that is reasonably possible
cannot be estimated.
Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the portfolio. 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.
16
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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 assets
Assets held by the Trust & Asset Management Division of Union in a
fiduciary or agency capacity, other than trust cash on deposit, are not
included in these consolidated financial statements because they are not
assets of Union or the Company.
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 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 non-accrual 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.
17
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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 is generally amortizing 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.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb 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.
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.
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
$1,240,500 at both December 31, 2005 and 2004. 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.
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
at 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.
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 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 is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions.
18
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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 non-contributory 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 and are funded as accrued. As of January 1,
2004, former Citizens employees became eligible to participate in the
defined benefit pension plan.
Union also has a contributory 401(k) pension plan covering all employees
who meet certain service requirements. The plan is voluntary, and in 2005,
2004, and 2003, 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. Citizens had a contributory
401(k) pension plan covering all employees who met certain age and service
requirements. The obligations of Citizens under the plan were assumed by
Union at the time of the merger of the two subsidiaries in May of 2003. The
plan was voluntary, and Citizens/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 2003.
Contributions to the profit sharing component of the plan were at the
discretion of the Citizens' Board of Directors and were made in 2003.
Effective January 1, 2004, the Citizens 401(k) pension plan was merged into
the Union 401(k) pension plan.
Advertising costs
The Company expenses advertising costs as incurred.
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, stock dividends, and stock issues and reduced
for shares held in treasury. The weighted average shares outstanding were
4,554,055, 4,551,469 and 4,547,366 for the years ended December 31, 2005,
2004 and 2003, 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
19
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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
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, 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. Such items, along with net income,
are components of comprehensive income.
Other comprehensive income components and related tax effects at December
31 are as follows:
2005 2004 2003
------------------------------------
<s> <c> <c> <c>
Unrealized holding (losses) gains on investment securities
available-for-sale $(622,886) $(598,916) $129,982
Reclassification adjustment for (gains) losses realized in income (97,173) 18,058 (379)
------------------------------------
Net unrealized (losses) gains (720,059) (580,858) 129,603
Tax effect 244,820 197,492 (43,229)
------------------------------------
Net of tax amount $(475,239) $(383,366) $ 86,374
====================================
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 financial services industry and
include providing traditional banking 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 Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards ("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. As a result, the Company has provided the pro forma
disclosures of net income, earnings per share and other disclosures, as if
the fair value based method of accounting had been applied. The pro forma
effects on net income and earnings per share were not material in 2004 and
2003. See Note 20 - Stock Option Plan for additional information.
Recent accounting pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Statements, an amendment of FASB Statements No. 133 and
140. This statement permits fair value measurement for any hybrid financial
instrument that contains
20
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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. 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.
This statement is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins
after September 15, 2006. The Company does not believe the adoption of SFAS
No. 155 will have a material impact on the Company's financial position or
results of operations but is still in the process of analyzing that impact.
In November 2005, the FASB issued FASB Staff Position ("FSP") 115-1, The
Meaning of Other-than-temporary Impairment and its Application to Certain
Investments. This FSP provides additional guidance on when an investment in
a debt or equity security should be considered impaired and when that
impairment should be considered other-than-temporary and recognized as a
loss in earnings. The guidance indicates that an investor should recognize
an impairment loss no later than when the impairment is deemed other-than-
temporary, even if a decision to sell has not been made.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.
The statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. SFAS No. 154 requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is impracticable to determine either the period-
specific effects or the cumulative effects of the change. APB Opinion No.
20 previously required that most voluntary changes in accounting principle
be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS No. 154
improves financial reporting because its requirements enhance the
consistency of financial information between periods. SFAS No. 154 is
effective for fiscal years beginning after December 15, 2005, with early
adoption permitted. The Company has adopted SFAS No. 154, which has had no
impact on the Company's financial position or results of operations.
In March 2005, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 107 - Interaction of SFAS No. 123R,
Share-Based Payment and certain SEC rules and regulations. SAB No. 107
provides guidance from the SEC staff related to share-based payment
transactions with nonemployees, the transition from nonpublic to public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable
financial instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial measures, first-
time adoption of SFAS No. 123R in an interim period, capitalization of
compensation cost related to share-based payment arrangements, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123R, the modification of employee share options prior
to adoption of SFAS No. 123R and disclosures in Management's Discussion and
Analysis ("MD&A") subsequent to adoption of SFAS No. 123R. SFAS No. 123R,
issued in December 2004, was adopted in December 2005 and requires the
Company to expense share-based payments under the "modified prospective"
method. Under this method, compensation expense is recognized at the time
of the grant for all share-based payments granted at or after adoption, and
also for all awards granted prior to adoption that remain unvested on the
adoption date. The Company had no unvested share-based payments on the
adoption date. As of the adoption date, the Company had not adopted the
transitional provisions of SFAS No. 123, but had continued to account for
its stock option plan in accordance with the provisions of APB Opinion No.
25 as allowed under SFAS No. 123. See Note 20 - Stock Option Plan for
additional information.
Reclassifications
Certain amounts in the 2004 and 2003 financial statements have been
reclassified to conform to the current year presentation.
Note 2. Stock Split
On July 16, 2003, the Board of Directors of Union Bankshares, Inc. declared
a three-for-two stock split effected in the form of a 50% stock dividend to
shareholders of record on July 26, 2003, payable on August 8, 2003. The
stock split resulted in the issuance of 1,515,231 additional shares of the
Company's common stock, net of fractional shares settled in cash. Per share
amounts presented in the consolidated financial statements, including
earnings per share, weighted average number of common shares outstanding,
and the dividends declared per share for 2003 have been adjusted to
retroactively reflect the stock split.
21
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 3. Restrictions on Cash and Due From Banks
The Company is required to maintain vault cash or non-interest bearing
reserve balances with Federal Reserve Bank of Boston. In accordance with
Federal Reserve banking regulations, the Company decided in 2005 to
reclassify transaction deposit accounts that meet certain criteria to
savings accounts for purposes of reporting deposits subject to reserve
requirements and as a result the daily reserve requirement has been
reduced. Total reserve balance required at December 31, 2005 was $330,000
and $6,140,000 at December 31, 2004.
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:
2005 2004
-------------------------
<s> <c> <c>
Non-interest bearing accounts $1,767,171 $ 559,318
Federal Reserve Bank of Boston 9,087,433 12,538,867
Federal funds sold - 4,013,453
Federal Home Loan Bank of Boston 189,587 173,706
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,
2005 and 2004, which are included in the Federal Reserve Bank balances
above.
Note 4. 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 2.15% to 5.65% and mature at
various dates through 2011, with approximately $3,970,000 scheduled to
mature in 2006.
Note 5. Investment Securities
Investment securities available-for-sale consists of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<s> <c> <c> <c> <c>
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
======================================================
22
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 5. Investment Securities (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<s> <c> <c> <c> <c>
December 31, 2004:
Debt securities:
U.S. Government and agencies $ 4,717,868 $ 1,550 $ (23,251) $ 4,696,167
U.S. Government sponsored enterprises 4,271,448 6,639 (9,111) 4,268,976
Mortgage-backed 16,524,542 76,832 (129,212) 16,472,162
State and political subdivisions 5,137,263 135,131 (14,549) 5,257,845
Corporate 8,887,830 230,636 (21,031) 9,097,435
------------------------------------------------------
Total debt securities 39,538,951 450,788 (197,154) 39,792,585
Marketable equity securities 855,289 318,014 - 1,173,303
------------------------------------------------------
Total $40,394,240 $768,802 $(197,154) $40,965,888
======================================================
Investment securities with a carrying amount of $1,661,176 and $2,456,096
at December 31, 2005 and 2004, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
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
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
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 any marketable
equity securities with unrealized losses at
December 31, 2005.
Information pertaining to investment securities available-for-sale with
gross unrealized losses at December 31, 2004, 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
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Debt securities:
U.S. Government and agencies $ 4,470,999 $ (22,874) $ - $ - $ 4,470,999 $ (22,874)
U.S. Government sponsored enterprises 2,989,408 (9,488) - - 2,989,408 (9,488)
Mortgage-backed 12,306,222 (128,835) 28,605 (377) 12,334,827 (129,212)
State and political subdivisions 823,218 (14,549) - - 823,218 (14,549)
Corporate debt 2,045,070 (21,031) - - 2,045,070 (21,031)
----------------------------------------------------------------------------------
Total debt securities $22,634,917 $(196,777) $ 28,605 $ (377) $22,663,522 $(197,154)
==================================================================================
There were no marketable equity securities with unrealized losses at
December 31, 2004.
23
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 5. Investment Securities (Continued)
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, 2005, fifty-eight debt securities had unrealized losses
with aggregate depreciation of 1.7% from the Company's amortized cost
basis. The primary factor causing securities to have gross unrealized loss
is the change over the last eighteen months in the interest rate
environment. The Federal Reserve discount rate and the commercial prime
rate have risen twelve times or 300 basis points since July 1, 2004.
At December 31, 2005, twenty-eight debt securities had been in an
unrealized loss position totaling $324 thousand, or 1% of the value of the
amortized cost of the entire portfolio, for more than twelve months but
upon individual analysis, the impairment is not considered other than
temporary. Management has the ability to hold these debt securities until
maturity, or for the foreseeable future as the securities are classified as
available-for-sale.
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 remains on the Company's books as of December 31, 2005 and the
fair value is lower than its new carrying cost by 1.4% . During 2004, the
Company recognized other than temporary impairment on two equity securities
of $41,501 to their quoted market value. One of the securities was
subsequently sold at a profit and the second security is still in the
portfolio with a fair market value higher than the new carrying cost.
Proceeds from the sale of securities available-for-sale were $2,453,236,
$1,761,346 and $350,553 in 2005, 2004, and 2003, respectively. Gross
realized gains from sales of investments available-for-sale were $160,040,
$35,673 and $379 with gross realized losses of $15,366, $12,230 and $0 for
the years 2005, 2004, and 2003 respectively.
The scheduled maturities of debt securities available-for-sale as of
December 31, 2005 were as follows:
Amortized Fair
Cost Value
--------------------------
<s> <c> <c>
Due in one year or less $ 946,017 $ 947,696
Due from one to five years 10,601,072 10,546,795
Due from five to ten years 2,621,691 2,613,123
Due after ten years 1,898,125 1,849,287
--------------------------
16,066,905 15,956,901
Mortgage-backed securities 15,948,823 15,610,367
--------------------------
Total debt securities $32,015,728 $31,567,268
==========================
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.
24
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 6. Loans Held for Sale and Loan Servicing
At December 31, 2005 and 2004, loans held for sale consisted of
conventional residential mortgages, commercial real estate mortgages and
commercial loans originated for subsequent sale. At December 31, 2005 and
2004, the estimated fair value of these loans was in excess of their
carrying value, and therefore no valuation reserve is necessary for loans
held for sale. There were no guarantees to repurchase loans or recourse for
any amount at December 31, 2005.
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 $85,044,568 and $81,178,069 at
December 31, 2005 and 2004, respectively.
The Company generally retains the servicing rights on loans sold. At
December 31, 2005 and 2004, 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, 2005 and 2004, and therefore no impairment reserve was
necessary. Loan servicing rights of $112,254, $194,601 and $200,765 were
capitalized in 2005, 2004, and 2003, respectively. Amortization of
servicing rights was $134,786, $146,445 and $141,376 for 2005, 2004, and
2003, respectively.
Note 7. Loans
The composition of net loans at December 31 is as follows:
2005 2004
-----------------------------
<s> <c> <c>
Residential real estate $106,469,996 $100,130,337
Construction real estate 18,066,108 20,050,164
Commercial real estate 130,482,781 108,473,777
Commercial 20,650,229 20,583,924
Consumer 7,998,500 8,729,004
Municipal loans 17,009,482 13,453,425
-----------------------------
Gross loans (1) 300,677,096 271,420,631
Deduct:
Allowance for loan losses (3,071,421) (3,066,871)
Net deferred loan fees, premiums, and discounts (152,338) (165,654)
-----------------------------
(3,223,759) (3,232,525)
-----------------------------
Net loans $297,453,337 $268,188,106
=============================
<FN>
<F1> Includes loans in non-accrual status of $1,269,148 and $1,169,457 and
loans past due 90 days or more and still accruing of $3,338,168 and
$4,126,040 as of December 31, 2005 and 2004, respectively.
</FN>
Residential real estate loans aggregating $7,621,904 and $3,756,744 at
December 31, 2005 and 2004, 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:
2005 2004 2003
--------------------------------
<s> <c> <c> <c>
Impaired loans $670,558 $872,829 $742,312
Total allowance for loan losses related to impaired loans 81,788 121,108 110,360
Interest income recognized on impaired loans 23,652 46,625 46,161
Average investment in impaired loans 542,699 981,566 741,994
At December 31, 2005, the Company was not committed to lend any additional
funds to borrowers whose loans are non-performing, impaired or
restructured. Aggregate interest on non-accrual loans not recognized was
$286,463, $338,456 and $392,732 for the years ended December 31, 2005, 2004
and 2003, respectively.
25
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 8. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
2005 2004 2003
----------------------------------------
<s> <c> <c> <c>
Balance, beginning $3,066,871 $3,028,813 $2,908,222
Provision for loan losses 60,000 30,000 114,000
Recoveries of amounts charged off 54,973 124,164 98,581
----------------------------------------
3,181,844 3,182,977 3,120,803
Amounts charged off (110,423) (116,106) (91,990)
----------------------------------------
Balance, ending $3,071,421 $3,066,871 $3,028,813
========================================
Note 9. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at
December 31 are as follows:
2005 2004
---------------------------
<s> <c> <c>
Land and land improvements $ 901,220 $ 689,456
Building and improvements 5,387,775 4,860,283
Furniture and equipment 7,684,481 7,320,954
Construction in progress 363,491 107,153
---------------------------
14,336,967 12,977,846
Less accumulated depreciation (8,438,543) (7,856,800)
---------------------------
$ 5,898,424 $ 5,121,046
===========================
Depreciation included in occupancy and equipment expenses amounted to
$772,971, $696,686 and $654,483 for the years ended December 31, 2005,
2004, and 2003, respectively.
The Company is obligated under noncancelable operating leases for premises
that expire in various years through the year 2010. 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, 2005 were as follows:
<s> <c>
2006 $101,268
2007 55,270
2008 33,820
2009 28,000
2010 14,000
--------
$232,358
========
Rent expense for 2005, 2004, and 2003 amounted to $132,050, $107,841 and
$101,307, respectively.
Occupancy expense is shown in the consolidated statements net of rental
income of $97,674 in 2005, $73,983 in 2004, and $71,930 in 2003.
Note 10. Other Real Estate Owned
There was no other real estate owned at December 31, 2005, and $35,734 at
December 31, 2004 which was included in Other Assets.
Note 11. Investments Carried at Equity
The carrying values of investments carried at equity were $2,538,272 and
$1,416,232 at December 31, 2005 and 2004, respectively consisting of
investments in limited partnerships for low income housing projects. The
capital contributions payable related to these investments were $703,817
and $0 at December 31, 2005 and 2004, respectively. The provision for
undistributed net losses of the partnerships charged to earnings was
$221,884, $140,104 and $124,948 for 2005, 2004 and 2003, respectively.
26
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 12. Deposits
The following is a summary of interest bearing deposits at December 31:
2005 2004
----------------------------
<s> <c> <c>
NOW accounts $ 58,279,020 $ 48,948,414
Saving and money market accounts 105,377,154 108,232,927
Time deposits, $100,000 and over 35,581,736 29,324,394
Other time deposits 61,444,272 62,871,217
----------------------------
$260,682,182 $249,376,952
============================
The following is a summary of time deposits by maturity at December 31,
2005:
<s> <c>
2006 $75,657,302
2007 10,657,420
2008 8,339,468
2009 1,138,237
2010 1,233,581
-----------
$97,026,008
===========
Note 13. Borrowed Funds
At December 31, 2005 and 2004, borrowed funds were comprised of option
advance borrowings from the FHLB of Boston of $16,256,274, and $7,933,652,
respectively. The option advance borrowings are a mix of bullets, balloons
and amortizers with maturities through 2025. At December 31, 2005 and 2004,
all of the borrowings had fixed interest rates ranging from 2.22% to 6.06 %
and 2.13% to 6.06%, respectively. The weighted-average interest rates on
the borrowings were 4.51% and 4.09% at December 31, 2005 and 2004,
respectively.
The contractual maturities of borrowed funds as of December 31, 2005 are as
follows:
<s> <c>
2006 $ 7,869,620
2007 815,941
2008 610,649
2009 416,715
2010 and thereafter 6,543,349
-----------
$16,256,274
===========
Additionally, Union maintains an IDEAL Way Line of Credit with the FHLB of
Boston. As of December 31, 2005, the total amount of this line approximated
$551,000. There were no borrowings outstanding on this line at December 31,
2005. 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, 2005, the total
amount of this line approximated $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.
27
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 14. Income Taxes
The components of the provision for income taxes for the years ended
December 31 were as follows:
2005 2004 2003
---------------------------------------
<s> <c> <c> <c>
Currently paid or payable $2,552,822 $2,259,654 $2,203,335
Deferred (93,290) 197,939 1,918
---------------------------------------
$2,459,532 $2,457,593 $2,205,253
=======================================
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:
2005 2004 2003
----------------------------------------
<s> <c> <c> <c>
Computed "expected" tax expense $2,956,946 $2,819,525 $2,581,395
Tax exempt interest (238,456) (203,901) (215,958)
Increase in cash surrender value life insurance (35,988) (36,644) (38,796)
Tax credits on limited partnership investments (243,019) (135,986) (135,986)
Other 20,049 14,599 14,598
----------------------------------------
$2,459,532 $2,457,593 $2,205,253
========================================
Listed below are the significant components of the net deferred tax asset
at December 31:
2005 2004
-------------------------
<s> <c> <c>
Components of the deferred tax asset:
Bad debts $ 846,186 $ 844,640
Mark-to-market loans 28,755 53,005
Nonaccrual loan interest 91,278 115,075
Deferred compensation 422,798 447,072
Pension 32,438 86,063
Unrealized loss on investment securities available-for-sale 50,459 -
Other 15,145 22,056
-------------------------
Total deferred tax asset 1,487,059 1,567,911
Valuation allowance - -
-------------------------
Total deferred tax asset, net of valuation allowance 1,487,059 1,567,911
-------------------------
Components of the deferred tax liability:
Depreciation (180,131) (207,043)
Mortgage servicing rights (100,346) (108,007)
Limited partnership tax credits (119,882) (119,882)
Unrealized gain on investment securities available-for-sale - (194,360)
Other (116,314) (119,762)
-------------------------
Total deferred tax liability (516,673) (749,054)
-------------------------
Net deferred tax asset $ 970,386 $ 818,857
=========================
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, 2005 will be realized.
Net deferred income tax assets are included in the caption "Other assets"
on the balance sheet at December 31, 2005 and 2004.
28
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 15. Employee Benefits
Union sponsors a non-contributory defined benefit pension plan covering all
eligible employees. The employees of the former Citizens which was merged
into Union in May 2003 became eligible to participate in the plan January
1, 2004. The plan provides defined benefits based on years of service and
final average salary. Union uses a December 31 measurement date for the
plan. Union's policy is to accrue annually an amount equal to the
actuarially calculated expense. Union made an additional tax-deductible
voluntary contribution of $250,000 to the pension plan in December 2005.
Information pertaining to the activity in the plan using a measurement date
of December 31, is as follows:
Obligations and funded status at December 31:
Change in projected benefit obligation 2005 2004
- -------------------------------------- ---------------------------
<s> <c> <c>
Projected benefit obligation at beginning of year $ 8,041,022 $ 7,155,345
Service cost 438,989 408,422
Interest cost 481,277 436,429
Actuarial loss 416,838 196,110
Benefits paid (175,656) (155,284)
---------------------------
Projected benefit obligation at end of year $ 9,202,470 $ 8,041,022
===========================
Change in fair value of plan assets
- -----------------------------------
Fair value of plan assets at beginning of year $ 6,255,300 $ 5,268,288
Actual return on plan assets 395,201 634,155
Employer contributions 721,884 508,141
Benefits paid (175,656) (155,284)
---------------------------
Fair value of plan assets at end of year $ 7,196,729 $ 6,255,300
===========================
Funded status $(2,005,741) $(1,785,722)
Unrecognized prior service cost 47,083 53,083
Unrecognized net actuarial loss 1,863,253 1,479,513
---------------------------
Net amount recognized as accrued benefit cost $ (95,405) $ (253,126)
===========================
2005 2004
---------------------------
<s> <c> <c>
Accumulated benefit obligation at December 31 $ 7,042,311 $ 5,767,765
===========================
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 2005, 2004, and 2003 consisted of the
following components:
2005 2004 2003
-------------------------------------
<s> <c> <c> <c>
Service cost $ 438,989 $ 408,422 $ 301,433
Interest cost on projected benefit obligation 481,277 436,429 391,817
Expected return on plan assets (423,662) (363,526) (295,025)
Amortization of prior service cost 6,158 6,158 6,158
Amortization of transition asset (7,649) (7,649) (7,649)
Amortization of net loss 69,050 89,453 75,348
-------------------------------------
Net periodic benefit cost $ 564,163 $ 569,287 $ 472,082
=====================================
29
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 15. Employee Benefits (Continued)
Weighted-average assumption used to determine benefit obligation at
December 31:
2005 2004
---------------
<s> <c> <c>
Discount rate 5.75% 6.00%
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:
2005 2004
---------------
<s> <c> <c>
Discount rate 5.75% 6.00%
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,
2005 and 2004, by asset category based on their fair values are as follows:
Plan Assets
-----------------
Asset Category 2005 2004
- -------------- -----------------
<s> <c> <c>
Cash & Equivalents 2.3% 3.7%
Debt Securities 27.0% 33.0%
Equity Securities 57.4% 50.4%
International Mutual Funds 13.3% 12.9%
-----------------
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. The Trustees of the plan seek to
protect the pension plan assets through prudent asset allocation, 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:
<s> <c>
Equity Securities & International Mutual Funds 60-85%
Debt Securities 15-35%
Cash & Equivalents 0-5%
There are no securities of the Company held by the pension plan. The
estimated employer contribution for 2006 is $498,000.
The following table summarizes the estimated future benefit payments
expected to be paid under the plan:
<s> <c>
2006 $ 183,014
2007 170,909
2008 170,909
2009 173,318
2010 190,825
Years 2011 to 2015 2,291,782
30
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 15. Employee Benefits (Continued)
Additionally, Union Bankshares, Inc. and Union have a non-qualified
Deferred Compensation Plan for Directors and certain key officers. For
participants in payout status, the future amount of payouts have been
frozen at their current amounts and no deferrals were allowed in 2005 for
the four participants not yet in payout status. The current deferred
compensation plan will be re-evaluated during 2006 based on final rules
under the federal American Jobs Creation Act of 2004, which were issued by
the Internal Revenue Service ("IRS") late in 2005 to become effective by
December 31, 2006. 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 have to be 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 $1,193,906 and
$1,314,917 at December 31, 2005 and 2004, 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
these plans aggregated $1,781,737 and $1,675,889 at December 31, 2005 and
2004, respectively. These amounts are included in the financial statement
caption "Other assets".
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 $122,520, $113,637 and $76,930 for 2005,
2004, and 2003, respectively.
Citizens maintained separately a 401(k) plan which included a discretionary
profit sharing component. The 401(k) plan covered all employees meeting
certain eligibility requirements. Employees were permitted to contribute
any amount of their compensation to the 401(k) plan in accordance with IRS
limits. Citizens, at the discretion of their Board of Directors, made
matching contributions up to 6% of an employee's compensation. Matching
contributions to this plan were $21,906 for 2003. Profit sharing
contributions were at the discretion of Citizens' Board of Directors.
Contributions were $71,848 for 2003. The Citizens 401(k) plan was merged
into the Union plan effective January 1, 2004.
Note 16. 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.
The following table shows financial instruments whose contract amount
represents credit risk:
Contract or
Notional Amount
--------------------------
2005 2004
--------------------------
<s> <c> <c>
Commitments to originate loans $ 9,722,166 $13,773,009
Unused lines of credit 35,348,616 31,907,901
Standby letters of credit 918,000 1,003,748
Credit card arrangements 2,236,309 2,273,323
Equity commitments to affordable housing limited partnerships - 1,348,808
--------------------------
Total $48,225,091 $50,306,789
==========================
31
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 16. Financial Instruments With Off-Balance-Sheet Risk (Continued)
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, 2005, the Company had $2,538,272 of investments in tax
advantaged limited partnerships involved in low income housing investment
tax credit projects in its market area of which $703,817 is recorded as a
payable in other liabilities. There are no commitments to invest additional
monies in such partnerships.
Note 17. 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 18. 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 underlying fair value of the Company.
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.
32
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 18. Fair Values of Financial Instruments (Continued)
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 our 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 are as follows:
2005 2004
------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------
<s> <c> <c> <c> <c>
Financial assets:
Cash and cash equivalents $ 14,208,429 $ 14,208,429 $ 21,116,952 $ 21,116,952
Interest bearing deposits in banks 8,597,835 8,509,897 7,508,703 7,519,068
Investment securities available-for-sale 32,407,973 32,407,973 40,965,888 40,965,862
Loans and loans held for sale, net 303,999,356 303,586,133 277,002,016 277,254,542
Financial liabilities:
Deposits $313,299,094 $312,873,444 $306,598,141 $306,341,457
Borrowed funds 16,256,274 16,116,629 7,933,652 8,085,683
The carrying amounts in the preceding table are included in the balance
sheet under the applicable captions.
Note 19. 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:
2005 2004
----------------------------
<s> <c> <c>
Balance, beginning $ 772,867 $ 1,051,851
New loans 1,973,665 1,200,896
Repayments (2,066,723) (1,479,222)
Other, net (95,658) (658)
---------------------------
Balance, ending $ 584,151 $ 772,867
---------------------------
Balance available on lines of credit $ 544,238 $ 527,199
===========================
Deposit accounts with related parties were $1,710,699 and $745,924 at
December 31, 2005 and 2004, respectively.
33
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 20. 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, 2005,
48,700 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. 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 $862, $0, and $0, for
2005, 2004, and 2003 respectively.
The fair value of each option award is estimated on the date of grant using
a Black-Scholes based option valuation model that utilizes the assumptions
noted in the following table. 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
rate for periods within the contractual life of the option is based on the
U.S. Treasury yield curve at the time of grant.
2005 2004 2003
-------------------------
<s> <c> <c> <c>
Expected volatility 19.24% 22.41% 22.41%
Expected dividends 4.21% 3.10% 3.10%
Risk free interest rate 4.22% 3.36% 3.18%
Expected term (in years) 5 5 5
Vesting periods (in years) 1 1 1
A summary of the option activity under the Plan as of December 31, 2005,
and changes during the year then ended is presented as follows:
Weighted Average
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Term Intrinsic Value
-----------------------------------------------------------------
<s> <c> <c> <c> <c>
Outstanding at January 1, 2005 12,575 $20.08
Granted 3,250 $23.30
Exercised (3,000) $12.67
Forfeited or expired - -
------
Outstanding at December 31, 2005 12,825 $22.63 3.22 $ -
-----------------------------------------------------------
Exerciseable at December 31, 2005 9,575 $22.40 3.30 $ -
===========================================================
The weighted average grant-date fair value of options granted during the
years 2005, 2004, and 2003, was $3.19, $4.60, and $4.30, respectively. The
total intrinsic value of options exercised during the years ended December
31, 2005, 2004, and 2003, was $0.
A summary of the status of the Company's nonvested options as of December
31, 2005 is as follows:
Weighted Average
Grant-Date
Shares Fair Value
----------------------------
<s> <c> <c>
Nonvested at January 1, 2005 3,250 $4.60
Granted 3,250 $3.19
Vested (3,250) $4.60
Forfeited - -
------
Nonvested at December 31, 2005 3,250 $3.19
======
34
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 20. Stock Option Plan (Continued)
As of December 31, 2005, there was $9,488 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 2006. The total fair value of shares vested during the years
ended December 31, 2005, 2004, and 2003, was, $14,950, $12,900, and $9,098
respectively. The nonvested options at December 31, 2005 are expected to
vest during 2006.
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 years ended December 31 would have been:
2004 2003
-------------------------
<s> <c> <c>
Net income as reported $5,835,127 $5,387,086
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax effects (18,382) (9,026)
-------------------------
Pro forma net income $5,816,745 $5,378,060
=========================
Earnings per common share
As reported $ 1.28 $ 1.18
Pro forma $ 1.28 $ 1.18
Note 21. Regulatory Capital Requirements
The Company (on a consolidated basis) and Union are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the Company's
and Union's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, 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, 2005 and 2004, the Company and Union met all capital
adequacy requirements to which they were subject.
As of December 31, 2005 and 2004, 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. 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.
35
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 21. Regulatory Capital Requirements (Continued)
Union's and the Company's actual capital amount (000's omitted) and ratios
are also presented in the table.
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
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
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
As of December 31, 2004:
Total capital to risk weighted assets
Union $44,361 18.27% $19,425 8.0% $24,281 10.0%
Company 45,212 18.57% 19,477 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $41,182 16.96% $ 9,713 4.0% $14,569 6.0%
Company 42,026 17.27% 9,734 4.0% N/A N/A
Tier I capital to average assets
Union $41,182 11.42% $14,425 4.0% $18,031 5.0%
Company 42,026 11.62% 14,467 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 22. 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 2005, the Company, under the authorized purchase program, purchased
15,000 shares of its common stock at $21.00 per share for a total of
$315,000.
36
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 23. Subsequent Events
On January 13, 2006, Union Bankshares, Inc. declared a $0.26 per share
regular dividend payable January 26, 2006 to stockholders of record on
January 23, 2006.
Note 24. Condensed Financial Information (Parent Company Only)
The following 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, 2005 AND 2004
2005 2004
---------------------------
<s> <c> <c>
ASSETS
Cash $ 240,284 $ 925,584
Investment in subsidiary - Union 41,450,452 41,559,523
Other assets 581,149 545,178
---------------------------
Total assets $42,271,885 $43,030,285
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 669,074 $ 627,261
---------------------------
Total liabilities 669,074 627,261
---------------------------
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2005 and 4,915,611 shares issued in 2004 9,837,222 9,831,222
Paid-in capital 139,861 106,989
Retained earnings 33,760,610 33,809,456
Treasury stock, at cost; 375,948 shares in 2005 and 360,948 shares in 2004 (2,036,931) (1,721,931)
Accumulated other comprehensive income (97,951) 377,288
---------------------------
Total stockholders' equity 41,602,811 42,403,024
---------------------------
Total liabilities and stockholders' equity $42,271,885 $43,030,285
===========================
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.
37
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 24. Condensed Financial Information (Parent Company Only) (Continued)
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------------------------------------
<s> <c> <c> <c>
Revenues
Dividends-bank subsidiary $6,050,000 $4,230,000 $4,015,000
Other income 27,324 25,476 29,018
----------------------------------------
Total revenues 6,077,324 4,255,476 4,044,018
----------------------------------------
Expenses
Interest 1,381 838 633
Administrative and other 301,132 298,520 363,548
----------------------------------------
Total expenses 302,513 299,358 364,181
----------------------------------------
Income before applicable income tax and equity in undistributed
net income of subsidiary 5,774,811 3,956,118 3,679,837
Applicable income tax benefit (96,391) (101,352) (120,260)
----------------------------------------
Income before equity in undistributed net income of subsidiary 5,871,202 4,057,470 3,800,097
Equity in undistributed net income-Union 366,167 1,777,657 1,586,989
----------------------------------------
Net income $6,237,369 $5,835,127 $5,387,086
========================================
38
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 24. Condensed Financial Information (Parent Company Only) (Continued)
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
-------------------------------------------
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,237,369 $ 5,835,127 $ 5,387,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Union (366,167) (1,777,657) (1,586,989)
Issuance of stock options 862 - -
Increase in other assets (35,971) (42,705) (46,391)
Increase in other liabilities 41,812 39,744 63,361
-------------------------------------------
Net cash provided by operating activities 5,877,905 4,054,509 3,817,067
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (6,286,215) (4,096,514) (3,728,457)
Proceeds from exercise of stock options 38,010 61,113 76,526
Proceeds paid out for fractional shares - - (3,404)
Purchase of treasury stock (315,000) - -
-------------------------------------------
Net cash used in financing activities (6,563,205) (4,035,401) (3,655,335)
-------------------------------------------
(Decrease) increase in cash (685,300) 19,108 161,732
Beginning cash 925,584 906,476 744,744
-------------------------------------------
Ending cash $ 240,284 $ 925,584 $ 906,476
===========================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest $ 1,381 $ 838 $ 633
===========================================
Income taxes $ 250 $ 250 $ 250
===========================================
39
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Note 25. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 2005, 2004 and 2003 is
presented below (dollars in thousands):
Quarters in 2005 Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------------------------------------------
<s> <c> <c> <c> <c>
Interest income $5,132 $5,356 $5,782 $5,986
Interest expense 859 1,022 1,268 1,350
Net interest income 4,273 4,334 4,514 4,636
Provision for loan losses - - - 60
Noninterest income 885 908 900 1,362
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,
----------------------------------------------
<s> <c> <c> <c> <c>
Interest income $4,867 $4,902 $5,116 $5,293
Interest expense 844 817 806 843
Net interest income 4,023 4,085 4,310 4,450
Provision for loan losses - - 30 -
Noninterest income 962 870 882 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
Quarters in 2003 Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------------------------------------------
<s> <c> <c> <c> <c>
Interest income $5,141 $5,109 $5,081 $5,041
Interest expense 1,199 1,111 978 921
Net interest income 3,942 3,998 4,103 4,120
Provision for loan losses 42 42 30 -
Noninterest income 915 790 828 1,070
Noninterest expenses 3,091 3,093 2,965 2,922
Net income 1,229 1,189 1,362 1,607
Earnings per common share $ 0.27 $ 0.26 $ 0.30 $ 0.35
Note 26. 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:
2005 2004 2003
--------------------------------------
<s> <c> <c> <c>
Expenses
Supplies $ 208,373 $ 240,189 $ 256,944
State franchise tax 235,588 262,836 253,693
Postage and shipping 201,104 219,966 256,599
Advertising 264,755 223,866 154,560
Professional fees 283,153 201,253 171,120
Other 2,361,276 2,128,571 2,157,367
--------------------------------------
Other Expenses $3,554,249 $3,276,681 $3,250,283
======================================
40
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, 2005 and 2004, and its results of
operations for the years ended December 31, 2005, 2004, and 2003. 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, 2005, which would materially affect the information
presented below.
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, 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 spe-cific, 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:
* uses of monetary, fiscal and tax policy by various governments
* political, legislative or regulatory developments in Vermont, New
Hampshire or the United States including changes in laws concerning
accounting, taxes, banking and other aspects of the financial
services industry
* 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
* changes in the competitive environment for financial services
organizations including increased competition from tax- advantaged
credit unions
* 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
* the Company's ability to retain key personnel
* changes in technology including demands for greater automation which
could present operational issues or significant capital outlays
* unanticipated lower revenues or increased cost of funds, loss of
customers or business, or higher operating expenses
* adverse changes in the securities market which could adversely affect
the value of the Company's stock
* the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate
* 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
* 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
* the amount invested in new business opportunities and the timing of
these investments
* 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
* 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
41
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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.
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 related notes. The Securities and Exchange Commission
("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 also has other key
accounting policies, which involve the use of estimates, judgments and
assumptions, that are significant to understanding the results including
the liability for the defined benefit pension plan, valuation of deferred
tax assets and analysis of potential impairment of 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 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 January 2001 and continuing through July 2003, actions by the
Federal Reserve Bank (the "FRB") to cut target interest rates resulted in
the Prime Rate being reduced from 9.50% to 4.00% and beginning in June 2004
through December 2005, FRB actions to raise the discount rate resulted in
increasing the Prime Rate from 4.00% to 7.25%.
Historically, the largest and most variable source of income for the
Company is net interest income. The results of operations for the years
2005, 2004 and 2003 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 became more profitable during 2005 as the
impact of increases in the prime rate over the last 18 months became
evident. Earnings per share grew to $1.37 in 2005, from $1.28 in 2004 or a
7.0% increase. With the payment of a special cash dividend of $0.40 per
share in January 2005, dividends paid out to shareholders increased from
$0.90 per share in 2004 to $1.38 in 2005, or 53.3% . The Company remained
well capitalized after payment of the regular and special dividends.
Dividend payouts, excluding the special dividend, increased $0.08 per share
or 8.9% .
The Company grew 3.0% in average assets from $354 million in 2004 to $364
million in 2005, as compared to 2.5% between 2003 and 2004 when average
assets grew from $345 million to $354 million. Average earning assets grew
from $327 million in 2004 to $339 million in 2005 or 3.7%. 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 5.25% at December 31,
2004, and to 7.25% at December 31, 2005, the yield curve has narrowed and
long-term rates are flat or have decreased during the same time frame. The
200 basis point increase in the prime rate during 2005 helped to drive an
increase in the net interest margin to 5.33% for 2005 as compared to 5.24%
for 2004, as
42
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
variable rate loans have responded to these rate increases at their
repricing intervals, while rates on interest bearing deposits have lagged
the increases in the prime rate.
Loan demand was strong in 2005 with total loan growth $27.0 million or 9.6%
over 2004 despite selling $15.0 million of loans in 2005. Growth for 2004
compared to 2003 was $8.5 million or 3.1%, net of loans sold of $25.8
million in 2004. Loans in non-accrual status were essentially flat between
years at $1.3 million at December 31, 2005 versus $1.2 million at December
31, 2004. Other non-performing loans are down to $3.3 million at December
31, 2005 from $4.1 million at December 31, 2004. The ratio of net charge-
offs to average loans not held for sale was 0.02% for 2005 compared to
0.00% for 2004. Therefore, the allowance for loan losses has remained
adequate and the Company has been able to reduce its provision for loan
losses from $359 thousand in 1999 to $114 thousand in 2003, $30 thousand in
2004 and to $60 thousand in 2005, while still maintaining a loan loss
allowance coverage ratio of over 1.0% of total loans not held for sale.
Competition in the financial services market place has been stiff during
the last few years for loans and 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 dropped
from $12.4 million or 4.2% in 2003 to $1.2 million or 0.4% in 2004, and
increased moderately to $6.7 million or 2.2% in 2005. The Company completed
a review of the deposit products it offers and introduced streamlined
offerings during the first quarter of 2005. The Company reduced 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 and its core business of
community banking to provide products and services to the communities it
serves.
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 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. The subsidiaries of bank holding companies also spend a good
deal of time and dollars complying with the U.S. 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 2005, the Company purchased 15,000 shares of its common stock
totaling $315 thousand. See Footnote 22 to the financial statements for
additional information.
The Company's bank subsidiary maintains a non-contributory defined benefit
pension plan covering all eligible employees who meet certain service
requirements. During 2005 contributions totaling $722 thousand were made to
the pension plan. Minimum required contribution under the ERISA guidelines
was $472 thousand, and the Company made an additional tax-deductable
voluntary contribution of $250 thousand. See Footnote 15 to the financial
statements for additional information.
43
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The following per share information and key ratios depict several
measurements of performance or financial condition for or at the years
ending December 31, 2005, 2004, and 2003 respectively:
12/31/05 12/31/04 12/31/03
--------------------------------
<s> <c> <c> <c>
Return on average assets (ROA) 1.71% 1.65% 1.56%
Return on average equity (ROE) 15.23% 14.17% 13.50%
Net interest margin (1) 5.33% 5.24% 5.20%
Efficiency ratio (2) 59.42% 59.02% 60.19%
Net interest spread (3) 4.99% 4.98% 4.91%
Loan to Deposit ratio 98.06% 91.40% 88.99%
Net loan charge-offs to average loans not
held for sale 0.02% 0.00% 0.00%
Allowance for loan losses to loans not held
for sale 1.02% 1.13% 1.20%
Non-performing assets to total assets 1.23% 1.48% 0.93%
Equity to assets 11.10% 11.79% 11.50%
Total capital to risk weighted assets 17.08% 18.57% 17.99%
Book value per share $9.16 $9.31 $9.01
Earnings per share $1.37 $1.28 $1.18
Dividends paid per share (5) $1.38 $0.90 $0.82
Dividend payout ratio (4)(5) 100.73% 70.31% 69.49%
<FN>
- -------------------
<F1> The ratio of tax equivalent net interest income to average earning
assets.
<F2> The ratio of noninterest expense to tax equivalent net interest
income and noninterest income excluding securities gains and losses.
<F3> The difference between the average rate earned on assets minus the
average rate paid on liabilities.
<F4> Cash dividend declared and paid per share divided by consolidated net
income per share.
<F5> Includes a $0.40 special cash dividend in 2005.
</FN>
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 2005, was $6.2
million compared with net income of $5.8 million for the year 2004, and
$5.4 million for the year 2003. Net income per share was $1.37 for 2005
compared to $1.28 for 2004, and $1.18 for 2003. Return on average assets
was 1.71% for 2005 compared to 1.65% for 2004, and 1.56% for 2003. Return
on average equity was 15.23% for 2005 compared to 14.17% for 2004, and
13.50% for 2003.
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 $890 thousand, or 5.3%, to $17.8 million for the year
ended December 31, 2005, from $16.9 million for the year ended December 31,
2004. 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 year. Generally, variable rate loans responded to
the increases in the prime rate at their repricing dates, while increases
in rates paid on interest bearing deposits lagged the increases in the
prime rate.
On average for the year 93.0% of assets earned interest in 2005 versus
92.3% in 2004 as non-interest bearing balances maintained at the Federal
Reserve Bank of Boston were decreased. In accordance with Federal Reserve
banking regulations, the Company decided in 2005 to reclassify transaction
deposit accounts which meet certain criteria to savings accounts for
purposes of reporting deposits subject to reserve requirements and as a
result the daily reserve requirement has been reduced. The net interest
spread increased to 4.99% for the year ended December 31, 2005, from 4.98%
for the year ended December 31, 2004. The net interest margin for the 2005
period increased 9 basis points to 5.33% from 5.24% for the 2004 period.
44
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 interest-earning
assets, the related average yields, the interest expense associated with
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 income or expense item for the period by the average balances 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,
---------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Average Assets:
Federal funds sold and
overnight deposits $ 5,560 $ 188 3.34% $ 3,851 $ 47 1.20% $ 7,733 $ 73 0.95%
Interest bearing
deposits in banks 8,073 280 3.47% 6,631 207 3.12% 4,864 177 3.63%
Investment securities
(1), (2) 35,080 1,491 4.51% 42,787 1,944 4.75% 39,014 1,878 5.08%
Loans, net (1), (3) 288,854 20,247 7.08% 272,204 17,948 6.65% 263,149 18,204 6.98%
FHLB of Boston stock 1,241 50 3.94% 1,241 32 2.56% 1,239 40 3.23%
---------------------------------------------------------------------------------------------
Total interest-earning
assets (1) 338,808 22,256 6.66% 326,714 20,178 6.25% 315,999 20,372 6.53%
Cash and due from banks 12,360 14,925 16,728
Premises and equipment 5,439 4,855 4,558
Other assets 7,840 7,350 8,005
---------------------------------------------------------------------------------------------
Total assets $364,447 $353,844 $345,290
=============================================================================================
Average Liabilities and Stockholders' Equity:
NOW accounts $ 51,813 267 0.51% $ 45,619 185 0.41% $ 43,349 223 0.51%
Savings/money market
accounts 109,669 1,297 1.18% 111,893 836 0.75% 108,991 1,036 0.95%
Time deposits 96,852 2,421 2.50% 92,656 1,927 2.08% 99,432 2,607 2.62%
Borrowed funds 11,335 514 4.47% 9,674 362 3.66% 7,529 342 4.54%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 269,669 4,499 1.67% 259,842 3,310 1.27% 259,301 4,208 1.62%
Non-interest bearing
deposits 50,007 49,638 42,341
Other liabilities 3,812 3,172 3,739
---------------------------------------------------------------------------------------------
Total liabilities 323,488 312,652 305,381
Stockholders' equity 40,959 41,192 39,909
---------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $364,447 $353,844 $345,290
=============================================================================================
Net interest income $17,757 $16,868 $16,164
==================================================================================
Net interest spread (1) 4.99% 4.98% 4.91%
Net interest margin (1) 5.33% 5.24% 5.20%
<FN>
- -------------------
<F1> Average yields reported on a tax-equivalent basis.
<F2> Average balances of investment securities are calculated on the
amortized cost basis.
<F3> Includes loans held for sale and is net of unearned income and
allowance for loan losses.
</FN>
45
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 interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest
income and interest expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume); and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2005 Year Ended December 31, 2004
Compared to Year Ended Compared to Year Ended
December 31, 2004 Increase/ December 31, 2003 Increase/
(Decrease) Due to change In (Decrease) Due to Change In
------------------------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest-earning assets:
Federal funds sold and overnight deposits $ 28 $ 113 $ 141 $ (36) $ 10 $ (26)
Interest bearing deposits in banks 47 26 73 64 (34) 30
Investment securities (352) (101) (453) 199 (133) 66
Loans, net 1,117 1,182 2,299 637 (893) (256)
FHLB of Boston stock - 18 18 - (8) (8)
-----------------------------------------------------------
Total interest-earning assets $ 840 $1,238 $2,078 $ 864 $(1,058) $ (194)
Interest-bearing liabilities:
NOW accounts $ 28 $ 54 $ 82 $ 11 $ (49) $ (38)
Savings/money market accounts (17) 478 461 28 (228) (200)
Time deposits 90 404 494 (178) (502) (680)
Borrowed funds 67 85 152 105 (85) 20
-----------------------------------------------------------
Total interest-bearing liabilities $ 168 $1,021 $1,189 $ (34) $ (864) $ (898)
-----------------------------------------------------------
Net change in net interest income $ 672 $ 217 $ 889 $ 898 $ (194) $ 704
===========================================================
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
46
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 and Dividend Income 2004 versus 2003. The Company's interest and
dividend income decreased by $0.2 million or 1.0% to $20.2 million for the
year ended December 31, 2004 from $20.4 million for the year ended December
31, 2003. Average earning assets increased by $10.7 million or 3.4% from
$316.0 million at December 31, 2003 to $326.7 million at December 31, 2004.
Average loans were $272.2 million for the year ended December 31, 2004
compared to $263.1 million for the year ended December 31, 2003 which was
an increase of $9.1 million or 3.5% . Increases in construction, commercial
real estate, and municipal loans, were partially offset by a decline in the
installment loan portfolio, a reduction in the home equity portfolio as a
consequence of refinancing activities, and a shrinkage in the residential
mortgage portfolio as the Company sold fixed low rate loans into the
secondary market. Increases in loan volume partially offset the effects of
a lower long-term interest rate environment. The yield on the loan
portfolio decreased from 6.98% for the year ended December 31, 2003 to
6.65% for the year ended December 31, 2004 or a decrease of 33 basis points
as the interest rate environment didn't start to improve until halfway
through 2004.
The average balance of investment securities (including mortgage-backed
securities) increased by $3.8 million or 9.7% from $39.0 million for the
year ended December 31, 2003 to $42.8 million for the year ended December
31, 2004. This increase was in part due to the decision to move funds out
of non-interest bearing balances maintained at the Federal Reserve Bank of
Boston and various correspondent banks when it was decided to pay for
services utilized in hard dollars instead of through soft dollars by
maintaining compensating balances. The yield on the investment portfolio
dropped from 5.08% for 2003 to 4.75% for 2004 or 33 basis points as the
duration of the portfolio was kept short in anticipation of the rise in
interest rates which started mid-2004 and to fund the Company's ordinary
liquidity needs. The average level of federal funds sold and overnight
deposits decreased $3.9 million or 50.2% from $7.7 million for the year
ended December 31, 2003 to $3.9 million for the year ended December 31,
2004. The average balance of interest bearing deposits in banks increased
by $1.7 million or 36.3% to $6.6 million for the year ended December 31,
2004 from $4.9 million for the year ended December 31, 2003. The yield on
interest bearing deposits in banks dropped from 3.63% for 2003 to 3.12% for
2004 or 51 basis points as a number of long-term higher rate certificates
matured during the year and were replaced with lower rate certificates.
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 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.
Interest Expense 2004 versus 2003. The Company's interest expense declined
$0.9 million or 21.3% from $4.2 million for the year ended December 31,
2003 to $3.3 million for the year ended December 31, 2004. Interest rates
paid in 2004 dropped for all categories of liabilities as market rates
dropped even lower during the majority of the year. Average interest-
bearing liabilities increased $0.6 million from $259.3 million for the year
ended December 31, 2003 to $259.8 million for the year ended December 31,
2004. Average NOW accounts increased $2.3 million or 5.2% from $43.3
million for the year ended December 31, 2003 to $45.6 million for the year
ended December 31, 2004 as the economy continued to improve and customers
had more disposable income. The average balances of savings and money
market accounts increased $2.9 million or 2.7%, from $109.0 million for the
year ended December 31, 2003 to $111.9 million for the year ended December
31, 2004. The decrease of $6.8 million or 6.8% in the time deposit category
dropped balances from an average of $99.4 million for the year ended
December 31, 2003 to $92.7 million for the year ended December 31, 2004.
The average balance of borrowed funds increased $2.2 million or 29.1%, from
$7.5 million to $9.7 million to fund loan growth since lower cost deposits
weren't available as a
47
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
funding source. The average rate paid for borrowed funds decreased from
4.54% for the year ended December 31, 2003 to 3.66% for the year ended
December 31, 2004 as some lower rate borrowings were taken down during
2004.
Provision for Loan Losses. Due to the growth in the loan portfolio, and
management's assessment of the credit quality of the Company's loan
customers, economic conditions and risks, the provision for loan losses was
increased from $30 thousand in 2004 to $60 thousand in 2005. The provisions
had been dropped from $114 thousand in 2003 to $30 thousand in 2004,
because of continued improvements in nearly all indicators of the Company's
credit quality, the reduced level of net charge-offs, and management's
assessment of economic conditions and risks.
Noninterest income. The following table sets forth changes from 2004 to
2005 and 2003 to 2004 for the components of noninterest income:
For The Year Ended December 31,
------------------------------------------
2005 2004 $ Variance % Variance
------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
Trust income $ 300 $ 204 $ 96 47.1 %
Service fees 2,898 2,802 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 $4,055 $3,774 $ 281 7.4 %
========================================
For The Year Ended December 31,
------------------------------------------
2004 2003 $ Variance % Variance
------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
Trust income $ 204 $ 163 $ 41 25.2 %
Service fees 2,802 2,661 141 5.3 %
Net gains on sales of investment securities 24 - 24 100.0 %
Net gains on sales of loans held for sale 444 525 (81) (15.4)%
Net gains on sales of other real estate owned 90 23 67 291.3 %
Other 210 231 (21) (9.1)%
----------------------------------------
Total noninterest income $3,774 $3,603 $ 171 4.7 %
========================================
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 managed. For 2004
compared to 2003, the increase was primarily due to a fee increase in July
2003 being in place for a full year during 2004.
Net gains on sales of loans held for sale. Gains decreased from 2004 to
2005 and from 2003 to 2004 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 $29.7 million in
2003 to $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.
48
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Noninterest expense. The following table sets forth changes from 2004 to
2005 and 2003 to 2004 for the components of noninterest expense:
For The Year Ended December 31,
------------------------------------------
2005 2004 $ Variance % Variance
------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
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 %
========================================
For The Year Ended December 31,
------------------------------------------
2004 2003 $ Variance % Variance
------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
Salaries and wages $ 5,401 $ 5,303 $ 98 1.8
Pension and employee benefits 1,973 1,912 61 3.2
Occupancy expense, net 737 691 46 6.7
Equipment expense 931 903 28 3.1
Professional fees 201 171 30 17.5
Advertising 224 155 69 44.5
Vermont franchise tax 263 254 9 3.5
Equity in losses of limited partnerships 140 125 15 12.0
Other 2,449 2,546 (97) (3.8)
----------------------------------------
Total noninterest expense $12,319 $12,060 $ 259 2.1 %
========================================
Salaries, wages and benefits. 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. The increase in
2004 versus 2003 was due primarily to regular salary activity and increases
in the costs of the Defined Benefit Pension Plan caused by the addition,
January 1, 2004, of the eligible former Citizens employees to the plan,
partially offset by a decrease in medical insurance costs.
Occupancy and equipment expense. Occupancy expenses 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. Johns-bury, Vermont, branch was renovated as well as
increases in utility and heating fuel expenses. The increase in 2004 from
2003 was due mainly to maintenance on buildings and increasing utility
costs. The increases in equipment expenses for 2005 versus 2004 and 2004
versus 2003 were 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 non-qualified deferred
compensation plan. The Company also incurred professional fees related to
the development and launch of new retail deposit products during 2005. The
increase from 2003 to 2004 was mainly related to fees paid to a
professional search firm.
49
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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. Advertising expense rose from 2003 to 2004 as the
Company changed to a contract basis for most radio and print ads, brochures
and advertisements utilized were freshened, and new products or services
were added.
Vermont franchise tax. Vermont franchise tax, which are based on deposits,
decreased for 2005 compared to 2004, the result of franchise tax credits
acquired and applied during 2005 which were partially offset by increases
due to the increase in average deposits. The increase from 2003 to 2004 was
due to increases in average deposits.
Equity in losses of limited partnerships. These expenses increased due
primarily to equity in losses of new investments in affordable housing
projects. The Company invested in two additional affordable housing
projects during 2005 which resulted in the increase in expense for 2005
versus 2004. 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 was flat at $2.5 million for both 2005
and 2004. This is the result of the increase in federal income taxes from
increased taxable income being offset by the low income housing tax credits
received in the 2005 tax year related to the Company's new limited
partnership investments in two low income housing projects in its market
area. The increase from 2003 to 2004 was due to increases in taxable income
sources. The Company's effective tax rate for 2005 was 28.3% compared to
29.6% for 2004 and 29.0% for 2003.
FINANCIAL CONDITION
At December 31, 2005, the Company had total consolidated assets of $374.7
million, including net loans and loans held for sale of $304.0 million,
deposits of $313.3 million and stockholders' equity of $41.6 million. Based
on the most recent information published by the Vermont Banking
Commissioner, in terms of total assets at December 31, 2004, 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 $15.2 million, or 4.2% to $374.7
million at December 31, 2005 from $359.5 million at December 31, 2004.
Total net loans and loans held for sale increased by $27.0 million or 9.6%
to $304.0 million, representing 81.1% of total assets at December 31, 2005
as compared to $277.0 million or 77.0% of total assets at December 31,
2004. This was due to increases of $21.6 million in commercial real estate
loans, $4.5 million in residential real estate loans, and $3.6 million in
municipal loans. These increases were partially offset by a $0.7 million
decrease in loans to consumers and a $2.0 million decrease in construction
loans. Loan growth was strong during the year but was moderated by
accelerated prepayments during 2005 due to the continuing low long term
interest rate environment and management's decision to continue to sell
some fixed low rate loans into the secondary market during 2005 to mitigate
future interest rate risk.
Cash and due from banks decreased from $16.9 million at December 31, 2004
to $14.0 million at December 31, 2005. Federal funds sold and overnight
deposits decreased $4.0 million to $190 thousand at December 31, 2005 from
$4.2 million at December 31, 2004. Investment securities available-for-sale
decreased $8.6 million or 20.9% from $41.0 million at December 31, 2004 to
$32.4 million at December 31, 2005. The majority of the decrease was due to
funds maturing that were not reinvested in securities but were instead used
to support loan demand. There was also a reduction of $720 thousand in the
unrealized holding gains resulting in unrealized net losses of $148
thousand at December 31, 2005 due to the increase in interest rates during
2005 which resulted in a reduction in the value of debt securities held and
the recognition through the income statement of $97 thousand due to the
gain on sale of securities sold, partially offset by the write-down of one
debt security. In December 2005, the Company wrote down through Other
expenses one corporate debt security by $48 thousand to its quoted fair
market value. The value had been below the cost basis for an extended
period of time and management determined the decline in value was other
than temporary. The security remains on the Company's books as of December
31, 2005 but has subsequently been sold.
Total deposits increased $6.7 million or 2.2% to $313.3 million at December
31, 2005 from $306.6 million at December 31, 2004. Non-interest bearing
deposits decreased 8.0% or $4.6 million from $57.2 million at December 31,
2004 to $52.6 million at December 31, 2005. Interest bearing deposits
increased 4.5% or $11.3 million from $249.4 million to $260.7 million.
Based on the most recent information published by the Federal Reserve Bank
of Boston, in terms of total Vermont deposits as of
June 30, 2005, Union ranked as the fourth largest institution among the
nineteen commercial banks and savings institutions headquartered in
Vermont, and seventh out of twenty-four if out-of-state institutions with
operations in Vermont are included.
50
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Borrowed funds from the Federal Home Loan Bank of Boston increased $8.3
million or 104.9% to $16.3 million at December 31, 2005 from $7.9 million
at December 31, 2004 in order to fund loan demand.
Loan demand and net growth after loan sales outpaced the increase in
deposits during 2005. This differential was supported by the decrease in
investment securities and the increase in borrowed funds from the FHLB of
Boston. Refer back to the average balances on a year to year basis
presented in the Results of Operations section to see the overall picture.
Total equity decreased by $800 thousand or 1.9% to $41.6 million at
December 31, 2005 from $42.4 million at December 31, 2004. This reduction
reflected net income of $6.2 million and the exercise of employee stock
options for $38 thousand, offset by dividend payments of $6.3 million
(including a special cash dividend of $1.8 million), the purchase of
treasury stock for $315 thousand and a decrease of $475 thousand in the net
unrealized holding gain on investment securities available-for-sale.
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, multi-family residential or commercial real
estate. As of December 31, 2005, the gross loan portfolio totaled $307.2
million or 82.0% of assets compared to $280.2 million or 77.9% of assets as
of December 31, 2004. Gross loans and loans held for sale have increased
$27.0 million or 9.6% since December 31, 2004, despite selling $15.0
million of loans held for sale during 2005 resulting in a gain on sale of
loans of $192 thousand. Sales of loans in 2004 totaled $25.8 million for a
gain of $444 thousand and $29.7 million in 2003 for a gain of $525
thousand. Management expects to continue to use this strategy to manage
interest rate exposure in the future.
The composition of the Company's gross loan portfolio including loans held
for sale at year end, for each of the last five years was as follows:
Year Ended, December 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Residential Real Estate 106,470 34.7 100,130 35.7 89,974 33.1 94,977 37.1 100,762 40.1
Construction Real Estate 18,066 5.9 20,050 7.2 18,257 6.7 14,370 5.6 11,802 4.7
Commercial Real Estate 130,483 42.5 108,474 38.7 102,366 37.7 86,081 33.6 78,898 31.4
Commercial 20,650 6.7 20,584 7.4 17,877 6.6 19,919 7.8 20,659 8.2
Consumer & Other 7,999 2.6 8,729 3.1 9,402 3.5 10,758 4.2 12,201 4.9
Municipal 17,009 5.5 13,454 4.8 15,346 5.6 12,869 5.0 10,552 4.2
Loans Held for Sale 6,546 2.1 8,814 3.1 18,524 6.8 17,139 6.7 16,333 6.5
------------------------------------------------------------------------------------------------
Total Loans 307,223 100.0 280,235 100.0 271,746 100.0 256,113 100.0 251,207 100.0
================================================================================================
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"). The
Company serviced a residential real estate mortgage portfolio of $184.7
million and $174.9 million at December 31, 2005 and 2004, respectively. Of
that portfolio $78.3 million at December 31, 2005 and $74.8 million at
December 31, 2004 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. The
Company serviced approximately $6.8 million of commercial and commercial
real estate loans for unaffiliated third parties as of December 31, 2005
and $6.4 million at December 31, 2004. 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 $295 thousand as
of December 31, 2005 and $318 thousand as of December 31, 2004, with an
estimated market value in excess of their carrying value at both year ends.
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, 2005 was $6.5 million
and $5.8 million at December 31, 2004.
The majority of the Company's loan portfolio is secured by real estate
located throughout Northern Vermont and New Hampshire. Although the
Company's loan portfolio consists of different segments, there is a portion
of the loan portfolio centered in
51
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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/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.
The following table breaks down by classification the maturities of the
gross loans held in portfolio and held for sale as of December 31, 2005:
Within
1 2-5 Over 5
Year Years Years
-----------------------------
(Dollars in thousands)
<s> <c> <c> <c>
Residential Real Estate
Fixed Rate $ 3,962 $ 4,301 $ 42,868
Variable Rate 1,888 1,450 56,687
Construction Real Estate
Fixed Rate 14,094 303 208
Variable Rate 593 194 2,674
Commercial Real Estate
Fixed Rate 2,429 1,373 6,509
Variable Rate 11,086 10,777 100,135
Commercial
Fixed Rate 557 6,464 310
Variable Rate 5,365 5,902 2,087
Municipal
Fixed Rate 13,410 2,360 1,239
Variable Rate - - -
Consumer & Other
Fixed Rate 2,094 5,079 348
Variable Rate 376 101 -
------------------------------
Total $55,854 $38,304 $213,065
==============================
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.
The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors and includes a loan credit review
department supervised by an experienced, former regulatory examiner, low
individual lending limits for officers, Board approval for large credit
relationships and a quality control process for loan documentation 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 $21 thousand at December 31, 2005 and $656
thousand at December 31, 2004. At December 31, 2005, the Company was not
committed to lend any additional funds to borrowers whose terms have been
restructured.
52
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. Loans are designated as non-accrual 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 non-accrual status totaling $1.3 million at
December 31, 2005 and $1.2 million at December 31, 2004. The aggregate
interest on non-accrual loans not recognized for the years ended December
31, 2005, 2004 and 2003 was $268 thousand, $338 thousand and $393 thousand,
respectively.
The Company had $3.3 million and $4.1 million in loans past due 90 days or
more and still accruing at December 31, 2005 and 2004, respectively.
Certain loans past due 90 days or more and still accruing interest are
covered by guarantees of U.S. government or state agencies. Approximately
50% of the balances in this category are covered by such guarantees at
December 31, 2005. At December 31, 2005, the Company had internally
classified certain loans totaling $2.8 million and $1.6 million at December
31. 2004. In management's view, such loans represent a higher degree of
risk and could become non-performing loans in the future. While still on a
performing status, in accordance with the Company's credit policy, loans
are internally classified when a review indicates the existence of any of
the following conditions making the likelihood of collection questionable:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are to be sold and are initially recorded at
the lesser of the recorded loan or fair value via an appraisal for more
significant properties and management's estimate for minor properties at
the date of acquisition establishing a new carrying basis. The Company had
no property classified as OREO at December 31, 2005 and property valued at
$35 thousand on December 31, 2004.
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, in management's
judgment, is adequate to absorb 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 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, various regulatory agencies periodically
review the Company's allowance for loan losses as an integral part of their
examination process.
53
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 estimate of
inherent 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 non-accrual 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, 2005, 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, 2004, 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:
2005 2004 2003 2002 2001
----------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Balance at the beginning of period $3,067 $3,029 $2,908 $2,801 $2,863
Charge-offs:
Real Estate 28 37 17 108 70
Commercial 19 26 10 115 245
Consumer and other 63 53 65 136 161
----------------------------------------------
Total charge-offs 110 116 92 359 476
----------------------------------------------
Recoveries:
Real Estate 14 6 2 8 1
Commercial 4 72 28 24 23
Consumer and other 36 46 69 78 70
----------------------------------------------
Total recoveries 54 124 99 110 94
----------------------------------------------
Net (charge-offs) recoveries (56) 8 7 (249) (382)
Provision for loan losses 60 30 114 356 320
----------------------------------------------
Balance at end of period $3,071 $3,067 $3,029 $2,908 $2,801
==============================================
54
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:
2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real Estate
Residential $ 571 35.4% $ 585 34.4% $ 550 33.2% $ 534 37.4% $ 574 40.7%
Commercial 1,826 43.4% 1,733 42.5% 1,578 42.7% 1,409 37.3% 1,302 34.9%
Construction 181 6.0% 199 7.3% 183 7.2% 143 6.0% 116 4.9%
Other Loans
Commercial 343 6.9% 349 7.5% 336 7.1% 405 9.1% 419 9.6%
Consumer installment 123 2.6% 138 3.3% 145 3.7% 174 4.7% 208 5.4%
Municipal, Other
and Unallocated 27 5.7% 63 5.0% 237 6.1% 243 5.5% 182 4.5%
------------------------------------------------------------------------------------------------
Total $3,071 100.0% $3,067 100.0% $3,029 100.0% $2,908 100.0% $2,801 100.0%
================================================================================================
Ratio of Net Charge
Offs to Average
Loans Not Held for
Sale 0.02% 0.00% 0.00% 0.11% 0.17%
Ratio of Allowance
for Loan Losses to
Loans Not Held for
Sale 1.02% 1.13% 1.20% 1.22% 1.19%
Ratio of Allowance
for Loan Losses to
non-performing
loans (1) 66.66% 57.91% 91.65% 127.99% 57.59%
<FN>
- -------------------
<F1> Non-performing loans includes loans in non-accrual status plus loans
past due 90 days or more and still accruing.
</FN>
Management of the Company believes that the allowance for loan losses at
December 31, 2005 is adequate to cover 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, 2005.
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, 2005, the reported value of investment securities
available-for-sale was $32.4 million or 8.6% of assets compared to $41.0
million or 11.4% of assets at December 31, 2004. 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, 2005 reflects a negative
valuation adjustment of $148 thousand. The offset of this adjustment, net
of income tax effect, was $98 thousand in the Company's other comprehensive
income component of stockholders' equity and the net deferred tax asset was
$50 thousand.
At December 31, 2005, fifty-eight debt securities have 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 2005, only one corporate debt security was other-
than-temporarily impaired and written down by $47,500 to its quoted fair
value. That security has subsequently been sold.
55
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, 2005 and 2004 the amortized
cost, fair value and weighted average yield of the Company's investment
debt portfolio maturing within the stated period.
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)
<s> <c> <c> <c> <c> <c> <c>
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%
===========================================================
December 31, 2004
------------------------------------------------------------------
Maturities
------------------------------------------------------------------
Within One to Five to Over Total Weighted
One Year Five Years Ten Years Ten Years Cost Average Yield
------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Investment securities available-for-sale:
U.S. Government and agencies $4,494 $ - $ - $ - $ 4,494 1.81%
U.S. Government sponsored enterprises 500 2,000 1,499 496 4,495 4.28%
Mortgage backed - 2,819 6,429 7,277 16,525 4.16%
State and political subdivisions 753 1,863 1,670 851 5,137 5.78%
Corporate debt 2,609 5,352 927 - 8,888 5.62%
-----------------------------------------------------------
Total investment debt securities $8,356 $12,034 $10,525 $8,624 $39,539 4.44%
===========================================================
Fair Value $8,362 $12,224 $10,572 $8,635 $39,793
===========================================================
Weighted Average Yield 3.85% 4.54% 4.64% 4.65% 4.44%
===========================================================
The tables above exclude marketable equity securities, with a book value of
$541 thousand and a market value of $841 thousand at December 31, 2005 and
a book value of $855 thousand and a market value of $1.2 million at
December 31, 2004, which have no maturity but may be sold by the Company at
any time.
56
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,
2005 and 2004:
2005 2004
-------------------------------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
-------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Non-time deposits:
Non-interest bearing deposits $ 50,007 16.2% - $ 49,638 16.6% -
NOW accounts 51,813 16.8% 0.51% 45,619 15.2% 0.41%
Money market accounts 59,300 19.2% 1.60% 64,668 21.6% 0.87%
Savings accounts 50,369 16.4% 0.69% 47,225 15.7% 0.58%
-----------------------------------------------------------
Total non-time deposits 211,489 68.6% 0.74% 207,150 69.1% 0.49%
-----------------------------------------------------------
Time deposits:
Less than $100,000 61,834 20.1% 2.23% 65,663 21.9% 2.00%
$100,000 and over 35,018 11.3% 2.98% 26,993 9.0% 2.28%
-----------------------------------------------------------
Total time deposits 96,852 31.4% 2.50% 92,656 30.9% 2.08%
-----------------------------------------------------------
Total deposits $308,341 100.0% 1.29% $299,806 100.0% 0.98%
===========================================================
A maturity distribution of time deposits in denominations of $100,000 or
more at December 31 is as follows:
2005 2004
------------------
(Dollars in thousands)
<s> <c> <c>
Three months or less $11,545 $ 8,149
Over three months through six months 6,941 11,717
Over six months through twelve months 15,660 6,298
Over twelve months 1,436 3,160
------------------
$35,582 $29,324
==================
57
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 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. 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.
The Company's interest rate sensitivity analysis (simulation) as of
December 2004 for a simulated increasing rate environment starting in
February of 2005 at 25 basis point intervals each month reaching an
anticipated prime rate of 7.25% by September 2005, projected Net Interest
Income of $19.3 million for 2005 based on average earning assets of $337.9
million compared to actual results of $17.8 million on average assets of
$338.8 million or an 8.0% negative variance in Net Interest Income. The
actual Prime rate rose 25 basis points eight times for a total of a 200
basis point rise to reach 7.25% by December 13, 2005. Average yields were
up in 2005 on interest-earning assets 41 basis points and average rates
were up 40 basis points on interest-paying liabilities. The Company
continued to have strong demand for loans (increased $16.7 million on
average for 2005 despite $15.0 million of loans sold during the year) which
resulted in the percentage of loans to interest earning assets increasing
from 76.9% on average for 2004 to 85.3% on average for 2005. The net
interest margin for 2005 was 5.33% compared to the projected net interest
margin of 5.76% . Projected loan interest income was $905 thousand or 4.4%
higher than actual due to actual average balances lagging projections
during the first half of 2005, the difference in timing of actual rate
increases from those predicted, and refinancings reflecting the stiff
competition for loans. Actual interest expense was $563 thousand or 14.3%
higher than projected due to actual balances in noninterest bearing
deposits and non-time deposits being lower than anticipated during 2005
which led the Company to compete for the more expensive certificates of
deposit and utilize advances from the FHLB of Boston to support loan
demand. Net income was projected to be $6.8 million in the simulated
increasing rate environment compared to actual results of $6.2 million.
Noninterest income changes between projections and actual were mainly
attributable to an $145 thousand increase on the Gain on sale of investment
securities, a $335 thousand Gain on the sale of OREO which was not
anticipated, a $62 thousand increase in Trust income, a reduction in
Employee benefits expense of $159
58
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
thousand, a reduction in Salary expense of $195 thousand, and a reduction
in Franchise tax expense of $37 thousand due to the purchase of Vermont
State tax credits. These increases were partially offset by the loss of $48
thousand on impaired assets, the increase in the Provision for loan losses
of $60 thousand, and the increase in Professional fees of $62 thousand.
Actual Return on Assets was 1.71% compared to the simulated increasing rate
projection of 1.86% . Actual Return on Equity was 15.23% compared to the
simulated increasing rate projection of 15.66% . These two ratios were
lower based on lower actual net income as explained above.
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. 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, 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
----------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter Total
----------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c>
Commitments to originate loans $ 9,722 $ - $ - $ - $ - $ - $ 9,722
Unused lines of credit 27,935 1,560 508 111 160 5,075 35,349
Standby letters of credit 504 378 6 - - 30 918
Credit card arrangements 2,236 - - - - - 2,236
----------------------------------------------------------------
Total $40,397 $1,938 $514 $111 $160 $5,105 $48,225
================================================================
Approximately $4.6 million of the unused lines of credit outstanding at
December 31, 2005 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 dropped from $13.8 million at December 31,
2004 to $9.7 million at December 31, 2005 mainly due to a large commercial
real estate commitment made in December of 2004 that was originated in mid
2005. Unused lines of credit grew from $31.9 million at December 31, 2004
to $35.3 million at December 31, 2005 as growth was experienced in all
business segments.
The Company may enter into commitments to sell loans or securities which
involve market and interest rate risk. There were no such commitments at
December 31, 2005.
59
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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, 2005, significant fixed
and determinable contractual obligations to third parties by payment date:
Payments Due By Period
----------------------------------------------------------
Less than 1
year 1-3 years 4-5 years Thereafter Total
----------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Operating lease commitments $ 101 $ 89 $ 42 $ - $ 232
Maturities on borrowed funds 7,870 1,427 852 6,107 16,256
Deposits without stated maturity (1) 216,273 - - - 216,273
Certificates of deposit (1) 75,657 18,997 2,372 - 97,026
Pension plan contributions (2) 498 - - - 498
Deferred compensation payouts 179 160 160 231 730
Construction contract (3) 318 - - - 318
Equity investment commitments 348 356 - - 704
---------------------------------------------------------
Total $301,244 $21,029 $3,426 $6,338 $332,037
=========================================================
<FN>
- -------------------
<F1> 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.
<F2> Funding requirements for pension benefits after 2006 are excluded due
to the significant variability in the assumptions required to project
the amount and timing of future cash contributions.
<F3> Contract to construct a new branch in Littleton, New Hampshire.
</FN>
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, 2005 was $330 thousand, 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, 2005 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:
* adjustable-rate loans, investment securities, and FHLB advances are
included in the period when they are first scheduled to adjust and
not in the period in which they mature;
* fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker
estimates, the results of a prepayment model utilized by the Company,
and empirical data;
* other non-mortgage related fixed-rate loans reflect scheduled
contractual amortization, with no estimated prepayments; and
60
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
* 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.
The following table shows the Company's rate sensitivity analysis as of
December 31, 2005:
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)
<s> <c> <c> <c> <c> <c> <c>
Interest sensitive assets:
Federal funds sold and overnight deposits $ 189 $ - $ - $ - $ - $ 189
Interest bearing deposits in banks 1,298 2,672 3,744 787 97 8,598
Investment securities available-for-sale (1) (3) 2,064 3,933 16,031 7,178 2,361 31,567
Loans (2) (3) 115,265 73,108 67,185 37,445 14,068 307,071
FHLB Stock - - - - 1,241 1,241
---------------------------------------------------------------------
Total interest sensitive assets $118,816 $ 79,713 $ 86,960 $ 45,410 $ 17,767 $348,666
=====================================================================
Interest sensitive liabilities:
Time deposits $ 27,298 $ 48,865 $ 18,519 $ 2,344 $ - $ 97,026
Money markets 12,453 - - - 44,043 56,496
Regular savings 9,017 - - - 39,864 48,881
NOW accounts 35,298 - - - 22,981 58,279
Borrowed funds 3,879 3,990 1,432 829 6,126 16,256
---------------------------------------------------------------------
Total interest sensitive liabilities $ 87,945 $ 52,855 $ 19,951 $ 3,173 $113,014 $276,938
=====================================================================
Net interest rate sensitivity gap $ 30,871 $ 26,858 $ 67,009 $ 42,237 $(95,247) $ 71,728
Cumulative net interest rate sensitivity gap $ 30,871 $ 57,729 $124,738 $166,975 $ 71,728
Cumulative net interest rate sensitivity gap as a
percentage of total assets 8.2% 15.4% 33.3% 44.6% 19.1%
Cumulative interest sensitivity gap as a percentage
of total interest-earning assets 8.9% 16.6% 35.8% 47.9% 20.6%
Cumulative net interest sensitivity gap as percent-
age of total interest-bearing liabilities 11.1% 20.8% 45.0% 60.3% 25.9%
<FN>
- -------------------
<F1> Investment securities available-for-sale exclude marketable equity
securities with a fair value of $841 million that may be sold by the
Company at any time.
<F2> Balances shown net of unearned income of $152 thousand.
<F3> Estimated repayment assumptions considered in Asset/Liability model.
</FN>
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 3 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.
61
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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. The projection utilizes
a rate shock of up 300 basis points and down 300 basis points from the
year-end prime rate of 7.25%; 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, 2005
(Dollars in thousands)
Year Prime Net Interest Change Net Return on Return on Net Fair
Ending Rate Income % Income Assets % Equity % Value Ratio
- ---------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
December-06 10.25 $22,212 14.3 $8,455 2.21 19.75 9.45
7.25 19,439 0.00 6,550 1.72 15.61 11.03
4.25 16,612 (14.5) 4,609 1.21 11.20 12.66
The resulting projected effect of these estimates on Net Interest Income
and the Net Fair Value Ratio for the year ending December 31, 2006 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 roll
over 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 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, 2005, the Company's ratio
of average loans to average deposits was 93.7% compared to the average for
the year ended December 31, 2004 of 90.8% reflecting 2005's 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 since year end has increased the Company's
borrowing capacity at the FHLB of Boston, have increased the interest rates
paid on certain deposit products, have implemented a new free small
business checking account and have opened a full service branch in
Littleton, New Hampshire which will be a new deposit market for the
Company.
In addition, as Union is a member of the FHLB of Boston, it has access to
preapproved lines of credit up to $1.9 million at December 31, 2005 over
and above the term advances already drawn on the line. This line of credit
could be used for either short term or long term liquidity or other needs.
Union maintains a $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, 2005. During 2005, Union joined 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, 2005 and $3.6
million at December 31, 2004. The balance on the overnight line was dropped
towards the end of 2005 so that longer term advances would be available.
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
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 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
Company's ALCO sets liquidity targets based on the Company's financial
condition and existing and projected economic and market conditions. The
ALCO measures the Company's marketable assets
62
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
and credit available to fund liquidity requirements and compares the
adequacy of that aggregate amount against the aggregate amount of the
Company's 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 commitment 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 78.0% of time deposits will mature within twelve
months, management believes, based upon past experience (percentage of time
deposits to mature within twelve months has ranged from 72% to 84% over the
preceding six years), 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 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. Capital management is designed to maintain an optimum
level of capital in a cost-effective structure that: meets target
regulatory ratios; supports management's internal assessment of economic
capital; funds the Company's business strategies; and builds long-term
stockholder value. Dividends are generally 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 was $41.6
million at December 31, 2005 reflecting net income of $6.2 million for
2005, less dividends paid of $6.3 million (including a special cash
dividend of $1.8 million), the purchase of Treasury stock during 2005
totaling $315 thousand, and a reduction in accumulated other comprehensive
income of $475 thousand; compared to stockholders' equity of $42.4 million
at year end 2004. The Company has 5,000,000 shares of $2.00 par value
common stock authorized. As of December 31, 2005, the Company had 4,918,611
shares issued, of which 4,542,663 were outstanding and 375,948 were held in
Treasury. Also as of December 31, 2005, there were outstanding employee
incentive stock options with respect to 12,825 shares of the Company's
common stock, granted pursuant to the Company's 1998 Incentive Stock Option
Plan, of which 9,575 were exercisable. Of the 75,000 shares authorized for
issuance under the 1998 Plan, 48,700 shares remained available for future
option grants at December 31, 2005.
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. The
repurchase program is open for an unspecified period of time. As of
December 31, 2005 the Company had repurchased 15,000 shares under this
program, for a total cost of $315 thousand.
For the Company and Union at December 31, 2005, total capital to risk
weighted assets was 17.08% and 17.06% respectively. Tier I capital to risk
weighted assets was 15.86%, and 15.84% respectively and Tier I capital to
average assets was 11.10% and 11.08%, 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, included in this document, 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. Until July of 2004, and
because of the uneven nature of the expansion of the U.S. economy, the
Federal Reserve had kept overnight rates at 40 year lows 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.
Interest rates do not necessarily move in the same direction or change in
the same
63
Union Bankshares, Inc. and Subsidiary
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 2005, the 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.
64
Union Bankshares, Inc. and Subsidiary
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Market for Union Bankshares' Common Shares and Related Stockholder Matters
On March 10, 2006, there were 4,541,032 shares of common stock outstanding
held by 674 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.
2005 2004
----------------------------------------------------------
High Low Dividends High Low Dividends
----------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
First Quarter (1) $24.99 $22.02 $0.64 $26.60 $24.81 $0.22
Second Quarter $23.20 $21.00 $0.24 $25.00 $21.75 $0.22
Third Quarter $22.50 $21.20 $0.24 $24.20 $22.45 $0.22
Fourth Quarter $23.40 $21.01 $0.26 $25.00 $23.20 $0.24
<FN>
- -------------------
<F1> First quarter 2005 included a $0.40 special dividend.
</FN>
On January 13, 2006, the Company declared a regular dividend of $0.26 per
share to stockholders of record as of January 23, 2006, payable January 26,
2006.
65
Union Bankshares, Inc. and Subsidiary
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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
66
UNION BANKSHARES, INC. & UNION BANK
Richard C. Sargent, Chairman Franklin G. Hovey II
Attorney at Law, President, Hovey Enterprises, Inc.
Richard Sargent 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 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.
[Photo]
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
William T. Costa, Jr. Franklin G. Hovey II
Dwight A. Davis
LITTLETON ADVISORY BOARD
Judy F. Aydelott Schuyler W. Sweet
Stanley T. Fillion Norrine A. Williams
Officers UNION BANK
Rhonda L. Bennett Vice President
John T. Booth, Jr. Finance Officer
Cynthia D. Borck Executive Vice President
Jennie H. Buchanan Assistant Vice President
Stacey L.B. Chase Assistant Treasurer
Jeffrey G. Coslett Vice President
Michael C. Curtis Vice President
Peter J. Eley Senior Vice President
Fern C. Farmer Assistant Vice President
Patsy S. French Assistant Vice President
Kenneth D. Gibbons President & CEO
Don D. Goodhue Information Systems Officer
Lorraine M. Gordon Assistant Vice President
Melissa A. Greene Assistant Treasurer
Claire A. Hindes Assistant Vice President
Patricia N. Hogan Vice President
Tracey D. Holbrook Vice President
Lynne P. Jewett Assistant Treasurer
Peter R. Jones Vice President
Stephen H. Kendall Vice President
Susan O. Laferriere Vice President
Dennis J. Lamothe Vice President
Susan F. Lassiter Assistant Vice President
Phillip L. Martin Vice President
Robert L. Miller Trust Officer
Marsha A. Mongeon Senior Vice President-Treasurer
Mildred R. Nelson Assistant Vice President
Barbara A. Olden Assistant Vice President
Deborah J. Partlow Trust Officer
Bradley S. Prior Assistant Treasurer
Colleen D. Putvain Assistant Treasurer
Robert P. Rollins Secretary
Brian K. Savage Assistant Vice President
Ruth P. Schwartz Vice President
Robyn A. Sheltra Assistant Treasurer
David S. Silverman Senior Vice President
Sara J. Small Assistant Treasurer
Karen C. Sylvester Assistant Treasurer
JoAnn A. Tallman Assistant Secretary
Alycia R. Vosinek Commercial Loan Officer
Francis E. Welch Assistant Vice President
[Map]
The Bank's Service Area extends from greater St. Albans Vermont, to greater
Littleton New Hampshire and includes parts of six Vermont counties and
three New Hampshire counties.
For more Company information, please visit Union Bank's
web pages at www.unionbankvt.com.
<s> <c> <c> <c> <c>
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 - 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
Union Bankshares, Inc. * 20 Lower Main Street, P.O. Box 667 * Morrisville VT 05661