Exhibit 13
Union Bankshares, Inc.
----------------------
2006 Annual Report
Union Bankshares, Inc.
Earnings Per Share & Dividends Paid to Stockholders by Year
[GRAPH]
*2000 *2001 *2002 *2003 2004 2005 2006
Dividends $0.65 $0.71 $0.76 $0.82 $0.90 $1.38** $1.06
EPS $1.05 $1.06 $1.14 $1.18 $1.28 $1.37 $1.38
* Dividend amounts have been adjusted for 2003 stock split
** Includes a $.040 per share special dividend
Working for the Common Cause
3 Photos
Charitable giving at
Union Bank extends beyond pure financial support
to the active volunteer
participation of our
entire Team.
From events to raise funds for cancer research, to our
United Way donations,
our support of local
hospitals, cultural events
and athletic endeavors,
to our sponsorship of
community facilities,
we continue to be an active
participant in the life of the neighborhoods we serve.
Top to Bottom:
St. Johnsbury Foliage Parade
Northeastern Vermont
Regional Hospital
Meeting Room Dedication
March of Dimes
Achievement Award
1
Letter to Shareholders
Dear Shareholder, March 30, 2007
We are pleased to provide you our 2006 Annual Report to Shareholders with
audited financial statements and other pertinent information about your company
and its activities.
In 2006 the Federal Reserve increased the short-term interest rates four times,
with the last increase on June 30th. This resulted in a prime rate of 8.25%
which has remained unchanged through today. While short term rates have
increased, long term rates have not, leaving us with an inverted yield curve.
For example, the recent 13 week Treasury bill yielded 5.16%, while the 10 year
Treasury note yielded 4.52%. While the prime rate today is 8.25%, a home
mortgage loan for 30 years could be as low as a fixed rate of 6.75%. As you can
imagine, managing the interest margin has, and will continue to be, of
significant importance.
Earnings for 2006 slightly exceeded 2005. We plan to closely monitor the
interest margin and also work diligently on growing the loan portfolio,
increasing deposits and aggressively work on controlling and reducing overhead
costs. In previous communications with you we discussed the challenges
community banks face in the area of increasing deposits. During the last two
years, we revamped much of our deposit product line to ensure our offerings are
very competitive and offer value to the customer. Competition from other banks,
money funds, brokerage houses and credit unions will continue to put pressure
on attracting deposits.
In 2006 we engaged outside expertise to assist us in developing a comprehensive
Information Technology Strategic Plan. We have already implemented some of the
efficiencies identified and during the next 12 months will install new
"platform" software, document imaging, Check 21 imaging, remote image capture
and a new internal computer network. A number of staff have been working
diligently to implement these various enhancements as we believe these efforts
will add substantially to our productivity and information security.
In late 2005 we reopened the renovated Portland Street office in St. Johnsbury
and in March 2006 opened our newest full-service office in Littleton, NH. We
are pleased with the performance and growth of both these offices. Part of our
strategic plan has been, and will continue to be, to identify areas which offer
opportunity for a branch office.
Although nationally the banking industry has seen a decline in banks from
17,325 in 1987 to 8,832 at the end of 2005, branch offices have increased from
80,340 in 1987 to 93,542 in 2005. Clearly there continues to be consolidation
within the industry; however, the demand for branch offices, in spite of the
proliferation of electronic banking options, is important to note. Clearly,
delivery of our services must continue as a three pronged approach: bricks and
mortar, electronic banking AND the right people.
On November 25th we lost one of our greatest assets when Bill Costa passed
away. Bill became a director of Citizens Savings Bank and Trust in 1972 and of
Union Bankshares in 1999 after the acquisition of Citizens. Bill was very
active in the St. Johnsbury area, serving on numerous boards and organizations
as well as operating a number of successful business entities. His insight into
this market, institutional knowledge, mentoring and ability to work with
everyone will be difficult to replace.
We would like to take this opportunity to thank each of our shareholders,
customers and our employees for contributing to the continued success of Union
Bankshares.
Sincerely,
/s/ Richard C. Sargent /s/ Kenneth D. Gibbons
Richard C. Sargent Kenneth D. Gibbons
Chairman President & CEO
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
Helping Neighborhoods Succeed
"Working with the Commercial Lending team at Union Bank proved to be a very
positive experience. Everyone involved showed a sincere interest to better
understand our business and its needs. With the Bank's support, we have been
able to meet the growing demand for our specialized products & services."
- Michael Boudreau
Sterling Technologies, Inc.
"Union Bank was a godsend for Waterville Fire District #1. When our water
system (which serves forty families) began to fail, we needed to replace our
entire distribution system by State order. Union Bank was instrumental in
providing the short-term financing that we required in this $400,000 project.
We now have a clean, safe and plentiful drinking water supply; in no small part
thanks to the caring folks at Union Bank."
- Susan Chamberlain
Clerk/Treasurer
Waterville Fire District #1
Sterling Technologies brings the cutting edge to Lamoille County
Sterling Technologies, Inc. a manufacturing/engineering/service provider
was established in January 2005 in co-founder Jeff Walker's home, located in
Morrisville, Vermont. In the spring of 2006, Sterling Technologies was awarded
a substantial contract. As a result, the company needed to move quickly to
identify a new facility and relocate while minimizing impact on current
production capacity. Ideally this transition would allow Sterling to remain in
the area while further investing in the local community.
Union Bank's Commercial Team helped Sterling identify a suitable space to
lease within the former Cabot Creamery Building on Wilkins Street in
Morrisville. A lease arrangement for the 3,500 sq.ft. facility was soon
negotiated. The Bank was instrumental in providing the financing for renovating
and equipping the newly leased space, creating a complete manufacturing
facility. The Bank also provided a line of credit to finance the raw materials
required by Sterling's new contract as well as assisting in carrying the
resulting accounts receivable. Using the Bank's SBA Preferred Lender Status,
the Commercial Team worked with the SBA to provide the financing needed by
Sterling to move quickly into a new facility and fulfill its contractual
commitments. Sterling's continued success has allowed for an increase in the
company's talented workforce with additional employment opportunities in the
immediate future.
[Photo]
Bob Jones, Jeff Walker and Mike Boudreau of Sterling Technologies
Waterville installs new Water Systems Upgrade
Waterville had a real problem. Their existing municipal water system
didn't meet State and Federal safe drinking water regulations. The solution was
to install a 9,000 gallon concrete water storage tank, approximately 3,100 feet
of new distribution lines, disinfection and corrosion control measures, and a
brand new control facility. Union Bank provided both interim financing and
working capital in order for the needed improvements to be made. The project
was approved for long-term financing through the Municipal Bond Bank and the
Agency of Natural Resources, which will administer the funds. The Bank will be
repaid from funds the Waterville Fire District receives from the Vermont State
Agency of Natural Resources.
St. Albans gets advanced Water Metering systems
The City of St. Albans, Vermont now has advanced metering systems that
improve the municipality's efficiency. Union Bank provided funding for the City
to replace all metering devices in its water system and to install new radio
equipment and computers that measure water usage. The new equipment will also
generate monthly bills for water users.
4
Helping Neighborhoods Succeed
New Home Ownership Education Programs
Union Bank is an active partner with the NeighborWorks Home Ownership
Center (NWHOC) in Lyndonville. The Bank sponsors two annual seminars in
Lyndonville that are, in essence, a "home buyer's workshop." The seminars
prepare future homeowners and aid in their understanding of the home buying
process. Participants learn how to qualify for a loan, and identify what
further steps they need to take in order to be ready to purchase a home.
Union Bank lenders attend the seminars, introducing participants to
different types of mortgages, land loans, and construction loan programs. The
Bank's lenders also answer numerous participant questions during the
interactive presentations.
In addition, the Bank also partners with NWHOC in providing the community
with Individual Development Accounts (IDA). An IDA is a matched savings
account. Every dollar a customer saves towards buying a home is matched by a $2
deposit provided jointly by the Vermont Housing Finance Agency, the U.S.
Department of Health and Human Services and Central Vermont Community Action
Council. The IDA program helps provide many prospective home buyers with funds
needed to purchase their own home.
[Photo]
Lyndonville with Burke Mountain in background
Little Dippers Doodle Daycare
Betsy Bailey had an idea. If she could expand her existing daycare center
to accommodate a wider range of work schedules, she could not only grow her
business, she could provide a much needed service to the Northeast Kingdom
communities. With her current facility serving 53 families (and employing nine
individuals) she started discussing this idea with her Union Bank Commercial
Lender. After conferring with Kingdom Child Care Connection, it was determined
that there was significant demand for a 24 hour daycare service-a facility
and program that would accommodate parents working second and third shifts, as
well as those working past the typical 6:00 PM child pick-up time. Working with
the Bank, a financing package was created, and included Vermont Community Loan
Fund and Northern Community Investment Corporation as funding partners.
The new facility has been designed for 150 children and to fulfill the 24
hour operational goal. The completion of the project will have a significant,
positive effect in the community. First, it allows parents to work second and
third-shift jobs; work that may not have been available to them due to child
care needs. Second, the new daycare will increase the size of the late-shift
labor pool available to local employers. Finally, the new facility is projected
to create 30 new jobs when operating at full capacity.
With construction moving forward, Little Dippers Doodle Daycare
anticipates opening its new facility in May 2007. The project was aided greatly
by the assistance of USDA Rural Development and by exclusively using local
contractors.
"The support of Gilman Housing Trust's NeighborWorks Home Ownership Center by
Union Bank--in both money and personal commitment--is critical to the
continuance of these programs; educating hundreds and sustaining housing for
hundreds more each year."
- George Mathias,
Manager,
Gilman Housing Trust
"My project wouldn't have been possible if it wasn't for Union Bank. They kept
me going in the right direction and have been a great source in helping find
money from other sources. Union Bank has always been there for me--from my
first business loan in 1997 to start my business -- and now with my dream
daycare center. Thank you!"
- Betsy Bailey, Owner
Little Dippers Doodle Daycare
5
Helping Neighborhoods Succeed
"An important part of our strategic plan was accomplished with Union Bank
acting as Agent in the private placement of a tax exempt bond issue which
included three other local banks. This transaction could not have been
completed in the timely and cost effective manner that was achieved without the
professional advice and counsel of Union Bank's commercial lending team. They
were truly our partners throughout a long and complex process."
- W. Page Dame,
Assistant Head for Finance
Lyndon Institute
"As a parent volunteer I love working with the young students in Union Bank's
Save for Success program. It's fun watching their excitement as they drop a
large pile of change in front of us to deposit with a big smile on their faces.
We know our regulars but every week we seem to be adding students who feel they
are 'missing some fun.' They show up and want part of the action. I am
surprised at how much fun I have doing this--it's such a great program and I
love being a part of it."
- Anita B. Lotto,
Parent
Local Banks close Financing Package For Lyndon Institute Expansion
Union Bank led a consortium of local community banks in arranging and
completing a financing package for the long term expansion of Lyndon Institute
(L.I.), a private, preparatory school serving the towns of Lyndon, Lyndonville
and many surrounding towns. The project consists of constructing a new 26-bed
dormitory which will include a multi-function common area, a physical exercise
room, two faculty apartments and will allow L.I. to increase the maximum
capacity of boarding students from 45 to 80 over a several year period. To
finance the project, a municipal bond was created through the assistance of
Vermont Economic Development Authority (VEDA). In the spirit of community
commitment, the bond was then divided equally among Community National Bank,
LyndonBank, Passumpsic Savings Bank, and Union Bank. The new construction is to
be completed in August 2007.
[Photo]
Left to Right:
Kristine Lepine, Lyndon Institute; Tracey Holbrook,
Union Bank; W. Page Dame, Lyndon Institute.
Union Bank's Save For Success program helps youngsters learn to save
The Bank's Save for Success (SFS) program, an in-school banking program
run by adult volunteers, is aimed at teaching youth the value of saving for the
future. The program continues to be a terrific opportunity for children (and
their parents/care givers) to discuss the importance of saving. It teaches
youngsters the life-long skill of saving and the benefits of personal thrift.
With SFS, students can open a savings account with "kid-friendly"
requirements:
* $1.00 minimum balance
* The Bank gives each student one dollar to start an account
* no minimum deposit required
* no service charges
These minimal requirements provide every child an opportunity to save.
Participating schools host a weekly "banking day" at which students (with
the assistance of adult volunteers) make deposits to their savings account.
This banking day is usually held before school and does not interfere with
instructional hours.
As of December 31, 2006, there was a total of 2,973 SFS student savings
and CD accounts representing a total savings investment of $1,168,072 from the
student participants of the 27 local schools which SFS serves. Over the past
two years, Union Bank has had 19 employees provide 24 in-class presentations
for the national Teach Children to Save day.
6
Helping Neighborhoods Succeed
Mansfield Orthopaedics builds state-of-the-art Treatment Facility
In July of 2006, doctors Glen Neale, Bryan Huber, Eric Mullins, Richard
James and Certified Physician Assistant Nella Wennberg started operating from a
brand new medical facility located at 555 Washington Highway in Morrisville,
Vermont. Relocating to the new facility has allowed the practice to expand
services in combination with physical therapy. Many high tech features have
been built into the new facility, including on-site digital radiology (which
allows the treating provider to see x-rays within minutes) and additional
clinic rooms to reduce the wait time for patients. In addition to physical and
occupational therapy, the facility offers aquatic (pool) therapy, due to the
generosity of the Freeman Foundation. Union Bank worked with Mansfield
Orthopaedics to develop a funding package for the construction and furnishing
of the facility, which offers north-central Vermont communities the very latest
in Orthopedic Treatment, Sports Medicine and Physical Therapy options.
[Photo]
Union Bank's Peter Jones and Ken Gibbons listen as Dr. Bryan Huber
explains the wireless communication systems of the new Mansfield
Orthopaedics facility in Morrisville
Vermont Milk Company aims to provide better returns to Family Farmers
Union Bank created a financing package to assist the new Vermont Milk
Company (VMC). VMC recently purchased an existing cheese making facility in the
Hardwick Industrial Park. VMC is a stock company formed to execute a specific
business model based on making Vermont farmers the sole source of milk, as well
as paying those farmers a livable wage for the milk. Vermont Milk Company has
supply contracts with value-added fluid milk processors. These processors will
pay a premium for Vermont Milk's product, enabling VMC to pass along that
premium and pay dairy farmers at rates substantially higher than market norms.
The creative loan package includes a USDA Rural Development guaranty of its
real estate loan, together with participation of VEDA and the Vermont Community
Loan Fund.
Housing Partnerships work for the Community
Union Bank helps support the communities it serves by investing in
several affordable housing partnerships. These partnerships include Highland
Hills Housing Partnership of Hardwick, Portland & Main Housing LP of
Morrisville, Jeffersonville Bond Housing LP of Jeffersonville, Cabot Commons LP
of Cabot, and Mountainview-St. Jay Housing LP of St. Johnsbury. These
partnerships are formed with the express purpose of developing, owning, and
operating affordable housing for low and moderate income Vermonters. Currently,
Union Bank has a financial interest in housing partnerships in Lamoille,
Washington, and Caledonia counties. The Bank's recorded investment in these
projects is over $2 Million. Union Bank has committed to investing in the Bemis
Block Housing LP of Hardwick in 2007.
"Union Bank did more than lend us money, they really made the project happen.
All banks 'talk' about supporting the Vermont economy. Union Bank is the real
thing. I don't know if we would be in business today without the Bank's
commitment to their local community and rural economy."
- Anthony Pollina,
Vermont Milk Company -
Dairy Farmers of Vermont
"It's rare when you are able to describe buying a business as a completely
smooth and swift transition. It's even rarer to be able to say you are thrilled
with the bank you chose. Shanon and I chose Union Bank for its strong community
presence and personal customer service. We can be sure they will offer
unmatched support and longevity for Great Big Graphics over the next few
decades, not only the next few years."
- Julie Ruth,
Great Big Graphics
7
Union Bankshares, Inc. and Subsidiary
Selected Financial Information
At or For The Years Ended December 31
-----------------------------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------------
(Dollars in thousands, except per share data)
Balance Sheet Data
Total assets $ 381,149 $ 374,746 $ 359,529 $ 356,557 $ 343,492
Investment securities available-for-sale 23,675 32,408 40,966 44,370 45,824
Loans, net of unearned income 317,452 307,071 280,069 271,561 255,907
Allowance for loan losses (3,338) (3,071) (3,067) (3,029) (2,908)
Deposits 319,822 313,299 306,598 305,381 293,004
Borrowed funds 14,596 16,256 7,934 7,223 7,536
Stockholders' equity (1) 41,923 41,603 42,403 40,987 39,169
Income Statement Data
Total interest income $ 25,197 $ 22,249 $ 20,171 $ 20,368 $ 22,167
Total interest expense (6,821) (4,499) (3,310) (4,209) (6,364)
-----------------------------------------------------------------
Net interest and dividend income 18,376 17,750 16,861 16,159 15,803
Provision for loan losses (180) (60) (30) (114) (356)
Noninterest income 4,058 4,063 3,781 3,607 3,562
Noninterest expenses (13,814) (13,056) (12,319) (12,060) (11,761)
-----------------------------------------------------------------
Income before provision for income taxes 8,440 8,697 8,293 7,592 7,248
Provision for income taxes (2,185) (2,460) (2,458) (2,205) (2,068)
-----------------------------------------------------------------
Net income $ 6,255 $ 6,237 $ 5,835 $ 5,387 $ 5,180
=================================================================
Per Common Share Data
Net income (2)(3) $ 1.38 $ 1.37 $ 1.28 $ 1.18 $ 1.14
Cash dividends paid (3) 1.06 1.38 0.90 0.82 0.76
Book value (1)(3) 9.25 9.16 9.31 9.01 8.62
Weighted average number of shares
outstanding (3) 4,539,641 4,554,055 4,551,469 4,547,366 4,543,113
Number of shares outstanding (3) 4,531,977 4,542,663 4,554,663 4,550,313 4,545,288
- --------------------
(1) Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale" and 2006 includes the unfunded liability for pension
benefits, net of taxes for the defined benefit pension plan.
(2) Computed using the weighted average number of shares outstanding for the
period.
(3) Per common share data and number of shares outstanding for all applicable
periods have been restated to reflect the three-for-two stock split
effected in the form of a 50% stock dividend to shareholders of record on
July 26, 2003.
8
Union Bankshares, Inc. and Subsidiary
Management's Responsibility
Union Bankshares, Inc.'s management is responsible for preparation, integrity
and fair presentation of the annual consolidated financial statements,
Management's Discussion and Analysis ("MD&A") and all other information in the
Annual Report. The consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and the
requirements of the Securities and Exchange Commission ("SEC"), as applicable.
The MD&A has been prepared in accordance with the requirements of securities
regulators including Item 303 of Regulation S-K of the Securities Exchange Act,
and their related published requirements.
The consolidated financial statements and information in the MD&A necessarily
include amounts based on informed judgments and estimates of the expected
effects of current events and transactions with appropriate consideration to
materiality. In addition, in preparing the financial information we must
interpret the requirements described above, make determinations as to the
relevancy of information to be included, and make estimates and assumptions
that affect reported information. The MD&A also includes information regarding
the estimated impact of current transactions and events, sources of liquidity
and capital resources, operating trends, risks and uncertainties. Actual
results in the future may differ materially from our present assessment of this
information because future events and circumstances may not occur as expected.
The financial information presented elsewhere in the Annual Report is
consistent with that in the consolidated financial statements.
In meeting our responsibility for the reliability of financial information, we
maintain and rely on a comprehensive system of internal control and internal
audit, including organizational and procedural controls, internal accounting
controls and internal controls over financial reporting. Our system of internal
control includes communication of our policies and procedures governing
corporate conduct and risk management; comprehensive business planning;
effective segregation of duties; delegation of authority and personal
accountability; careful selection and training of personnel; and sound and
conservative accounting policies which we regularly update. This structure
ensures appropriate internal control over transactions, assets and records. We
also regularly audit internal controls. These controls and audits are designed
to provide us with reasonable assurance that the financial records are reliable
for preparing financial statements and other financial information, assets are
safeguarded against unauthorized use or disposition, liabilities are
recognized, and we are in compliance with all regulatory requirements.
We have established a Disclosure Control Committee to assist us in ensuring
that all public disclosures made by us are accurate and complete, and fairly
present the Company's financial condition and results of operations. The
members of the committee consist of select members of management and the
financial expert from the Audit Committee. Representatives from the Company's
external independent auditors and legal counsel normally participate. The
Disclosure Control Committee shall review each annual and quarterly Exchange
Act report prior to the Company filing them with the SEC to assess the quality
of the disclosures made in the report, including but not limited to whether the
report is accurate and complete in all material respects.
We, as Union Bankshares, Inc.'s Chief Executive Officer and Chief Financial
Officer, will be certifying Union Bankshares, Inc.'s annual disclosure document
filed with the SEC as required by the federal Sarbanes-Oxley Act of 2002.
In order to provide their report on our consolidated financial statements, the
Company's Independent Auditors review our system of internal control and
conduct their work to the extent that they consider appropriate.
The Board of Directors is responsible for reviewing and approving the financial
information contained in the Annual Report, including the MD&A, and overseeing
management's responsibilities for the presentation and preparation of financial
information, maintenance of appropriate internal controls, management and
control of major risk areas and assessment of significant and related party
transactions. The Board delegates these responsibilities to its Audit
Committee, comprised solely of non-management, independent directors. The Audit
Committee meets periodically with management, internal auditors and the
independent public accountants.
The Company's Independent Auditors and the Company's Internal Auditors have
direct full and free access to the Board of Directors and its committees to
discuss audit, financial reporting and related matters with or without
management present.
/s/ Marsha A. Mongeon /s/ Kenneth D. Gibbons
Marsha A. Mongeon Kenneth D. Gibbons
Chief Financial Officer Chief Executive Officer
9
Union Bankshares, Inc. and Subsidiary
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Union Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Union
Bankshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Union Bankshares,
Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ UHY LLP
Albany, New York
March 27, 2007
VT Reg. No. 092-0000-648
10
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2006 and 2005
2006 2005
-----------------------------
ASSETS
Cash and due from banks $ 11,694,471 $ 14,018,842
Federal funds sold and overnight deposits 9,262,770 189,587
-----------------------------
Cash and cash equivalents 20,957,241 14,208,429
Interest bearing deposits in banks 5,416,961 8,597,835
Investment securities available-for-sale 23,675,261 32,407,973
Loans held for sale 3,750,186 6,546,019
Loans 313,821,920 300,677,096
Allowance for loan losses (3,337,768) (3,071,421)
Unearned net loan fees (120,139) (152,338)
-----------------------------
Net loans 310,364,013 297,453,337
Accrued interest receivable 2,000,719 1,971,924
Premises and equipment, net 6,079,715 5,898,424
Other assets 8,905,107 7,661,722
-----------------------------
Total assets $381,149,203 $374,745,663
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 54,875,163 $ 52,616,912
Interest bearing 264,946,884 260,682,182
-----------------------------
Total deposits 319,822,047 313,299,094
Borrowed funds 14,596,130 16,256,274
Liability for pension benefits 1,317,352 95,405
Accrued interest and other liabilities 3,490,477 3,492,079
-----------------------------
Total liabilities 339,226,006 333,142,852
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2006 and 2005 9,837,222 9,837,222
Paid-in capital 150,146 139,861
Retained earnings 35,202,735 33,760,610
Treasury stock at cost; 386,634 shares in 2006 and 375,948 shares in 2005 (2,264,181) (2,036,931)
Accumulated other comprehensive loss (1,002,725) (97,951)
-----------------------------
Total stockholders' equity 41,923,197 41,602,811
-----------------------------
Total liabilities and stockholders' equity $381,149,203 $374,745,663
=============================
See accompanying notes to consolidated financial statements.
11
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2006, 2005, and 2004
2006 2005 2004
-------------------------------------------
Interest income
Interest and fees on loans $23,459,344 $20,239,924 $17,941,333
Interest on debt securities:
Taxable 941,219 1,261,344 1,692,097
Tax exempt 191,484 191,549 214,449
Dividends 122,806 87,814 68,953
Interest on federal funds sold and overnight deposits 213,662 188,080 47,149
Interest on interest bearing deposits in banks 268,665 280,348 207,163
-------------------------------------------
Total interest income 25,197,180 22,249,059 20,171,144
-------------------------------------------
Interest expense
Interest on deposits 5,906,623 3,984,868 2,948,477
Interest on borrowed funds 914,640 513,951 362,101
-------------------------------------------
Total interest expense 6,821,263 4,498,819 3,310,578
-------------------------------------------
Net interest income 18,375,917 17,750,240 16,860,566
Provision for loan losses 180,000 60,000 30,000
-------------------------------------------
Net interest income after provision for loan losses 18,195,917 17,690,240 16,830,566
-------------------------------------------
Noninterest income
Trust income 304,444 300,491 204,392
Service fees 3,108,720 2,905,235 2,809,062
Net gains on sales of investment securities 134,558 144,673 23,443
Net gains on sales of loans held for sale 288,138 192,073 443,965
Net gains on sales of other real estate owned -- 336,153 90,191
Other income 221,953 183,920 210,387
-------------------------------------------
Total noninterest income 4,057,813 4,062,545 3,781,440
-------------------------------------------
Noninterest expenses
Salaries and wages 6,011,727 5,627,296 5,401,332
Pension and employee benefits 2,344,464 2,044,870 1,972,948
Occupancy expense, net 802,192 788,672 737,386
Equipment expense 1,038,246 1,040,797 930,939
Other expenses 3,617,462 3,554,249 3,276,681
-------------------------------------------
Total noninterest expense 13,814,091 13,055,884 12,319,286
-------------------------------------------
Income before provision for income taxes 8,439,639 8,696,901 8,292,720
Provision for income taxes 2,184,364 2,459,532 2,457,593
-------------------------------------------
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
===========================================
Earnings per common share $ 1.38 $ 1.37 $ 1.28
Dividends per common share $ 1.06 $ 1.38 $ 0.90
See accompanying notes to consolidated financial statements.
12
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2006, 2005, and 2004
Common Stock Accumulated
----------------------- other Total
Shares, net Paid-in Retained Treasury comprehensive stockholders'
of Treasury Amount Capital earnings stock income (loss) equity
-------------------------------------------------------------------------------------------
Balances, December 31, 2003 4,550,313 $9,822,522 $ 54,576 $32,070,843 $(1,721,931) $ 760,654 $40,986,664
Comprehensive income:
Net income -- -- -- 5,835,127 -- -- 5,835,127
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (383,366) (383,366)
-----------
Total comprehensive income 5,451,761
-----------
Cash dividends declared -- -- -- (4,096,514) -- -- (4,096,514)
Exercise of stock options 4,350 8,700 52,413 -- -- -- 61,113
-----------------------------------------------------------------------------------------
Balances, December 31, 2004 4,554,663 9,831,222 106,989 33,809,456 (1,721,931) 377,288 42,403,024
-----------
Comprehensive income:
Net income -- -- -- 6,237,369 -- -- 6,237,369
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (475,239) (475,239)
-----------
Total comprehensive income 5,762,130
-----------
Cash dividends declared -- -- -- (6,286,215) -- -- (6,286,215)
Issuance of stock options -- -- 862 -- -- -- 862
Exercise of stock options 3,000 6,000 32,010 -- -- -- 38,010
Purchase of treasury stock (15,000) -- -- -- (315,000) -- (315,000)
-----------------------------------------------------------------------------------------
Balances, December 31, 2005 4,542,663 9,837,222 139,861 33,760,610 (2,036,931) (97,951) 41,602,811
-----------
Comprehensive income:
Net income -- -- -- 6,255,275 -- -- 6,255,275
Change in net unrealized gain
(loss) on investment securities
available-for-sale, net of
reclassification adjustment and
tax effects -- -- -- -- -- (55,821) (55,821)
-----------
Total comprehensive income 6,199,454
Adjustment to initially apply
SFAS No. 158, net of tax effect
(see Note 1) -- -- -- -- -- (848,953) (848,953)
Cash dividends declared -- -- -- (4,813,150) -- -- (4,813,150)
Issuance of stock options -- -- 10,285 -- -- -- 10,285
Purchase of treasury stock (10,686) -- -- -- (227,250) -- (227,250)
-----------------------------------------------------------------------------------------
Balances, December 31, 2006 4,531,977 $9,837,222 $150,146 $35,202,735 $(2,264,181) $(1,002,725) $41,923,197
=========================================================================================
See accompanying notes to consolidated financial statements.
13
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004
2006 2005 2004
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 781,717 772,971 696,686
Provision for loan losses 180,000 60,000 30,000
(Credit) provision for deferred income taxes (21,433) 93,290 197,939
Net amortization of investment securities 59,665 135,638 205,571
Equity in losses of limited partnerships 297,209 221,884 140,104
Issuance of stock options 10,285 862 --
Net gains on sales of investment securities (134,558) (144,673) (23,443)
Net gains on sales of loans held for sale (288,138) (192,073) (443,965)
Net gains on sales of other real estate owned -- (336,153) (90,191)
Net gains on disposals of premises and equipment (12,475) (1,995) (7,395)
Write-down of impaired investment securities -- 47,500 41,501
Decrease in unamortized loan fees (32,199) (13,316) (19,542)
Proceeds from sales of loans held for sale 18,047,445 15,208,927 26,269,537
Origination of loans held for sale (14,963,474) (12,748,963) (16,115,144)
(Increase) decrease in accrued interest receivable (28,795) (444,116) 123,698
(Increase) decrease in other assets (427,661) (135,134) 90,814
(Decrease) increase in income taxes (79,203) 7,742 4,653
Increase (decrease) in accrued interest payable 417,747 200,046 (51,046)
(Decrease) increase in other liabilities (57,038) 81,661 (326,142)
----------------------------------------------
Net cash provided by operating activities 10,004,369 9,051,467 16,558,762
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits in banks
Maturities and redemptions 3,971,874 5,374,868 3,562,529
Purchases (791,000) (6,464,000) (4,551,539)
Investment securities available-for-sale
Sales 7,823,788 2,453,236 1,761,346
Maturities, calls and pay downs 3,848,588 15,245,085 13,161,672
Purchases (2,949,349) (9,898,930) (12,323,253)
Net purchase of Federal Home Loan Bank stock (226,400) -- --
Net increase in loans (13,642,749) (29,624,052) (18,259,344)
Recoveries of loans charged off 170,454 54,972 124,164
Purchase of premises and equipment (965,809) (1,551,164) (1,377,719)
Investments in limited partnerships (347,454) (640,107) (100)
Proceeds from sales of premises and equipment 15,276 2,810 14,548
Proceeds from sales of other real estate owned -- 615,552 --
Proceeds from sales of repossessed property 14,815 11,370 12,684
----------------------------------------------
Net cash used in investing activities (3,077,966) (24,420,360) (17,875,012)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in borrowings outstanding (1,660,144) 8,322,622 711,122
Proceeds from exercise of stock options -- 38,010 61,113
Net increase (decrease) in noninterest bearing deposits 2,258,251 (4,604,277) 8,855,595
Net increase (decrease) in interest bearing deposits 4,264,702 11,305,230 (7,638,873)
Purchase of treasury stock (227,250) (315,000) --
Dividends paid (4,813,150) (6,286,215) (4,096,514)
----------------------------------------------
Net cash (used in) provided by financing activities (177,591) 8,460,370 (2,107,557)
----------------------------------------------
Increase (decrease) in cash and cash equivalents 6,748,812 (6,908,523) (3,423,807)
Cash and cash equivalents:
Beginning 14,208,429 21,116,952 24,540,759
----------------------------------------------
Ending $ 20,957,241 $ 14,208,429 $ 21,116,952
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 6,403,516 $ 4,298,773 $ 3,361,624
==============================================
Income taxes paid $ 2,285,000 $ 2,186,544 $ 2,283,094
==============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING & FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 399,254 $ 243,665 $ 319,368
==============================================
Repossessed property acquired in settlement of loans $ 14,564 $ 13,500 $ 8,916
==============================================
Loans originated to finance the sale of other real estate owned $ -- $ -- $ 283,634
==============================================
Investment in limited partnerships acquired by capital
contributions payable $ -- $ 703,817 $ --
==============================================
Change in unrealized losses on investment securities available-for-sale $ (84,577) $ (720,059) $ (580,858)
==============================================
Unrealized loss on defined benefit pension plan, adjustment to initially
apply SFAS No. 158, (See Note 1) $ 1,286,293 $ -- $ --
==============================================
Transfer of loans held for sale to portfolio $ -- $ 1,983,458 $ --
==============================================
See accompanying notes to consolidated financial statements.
14
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
The accounting and reporting policies of Union Bankshares, Inc. and Subsidiary
(the "Company") are in conformity with U.S. generally accepted accounting
principles (GAAP) and general practices within the banking industry. The
following is a description of the more significant policies.
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Union Bankshares,
Inc., and its wholly owned subsidiary, Union Bank ("Union") headquartered in
Morrisville, Vermont. All significant intercompany transactions and balances
have been eliminated. The Company utilizes the accrual method of accounting for
financial reporting purposes.
Nature of operations
The Company provides a variety of financial services to individuals,
municipalities, commercial and nonprofit customers through its branches, ATMs,
telebanking, and internet banking systems in northern Vermont and Littleton,
New Hampshire and its loan production office in St. Albans, Vermont. This
market area encompasses primarily retail consumers, small businesses,
municipalities, agricultural producers, and the tourism industry. The Company's
primary deposit products are checking, savings, money market accounts, and
certificates of deposit and its primary lending products are commercial, real
estate, municipal, and consumer loans.
Concentration of risk
The Company's operations are affected by various risk factors, including
interest rate risk, credit risk, and risk from geographic concentration of
lending activities. Management attempts to manage interest rate risk through
various asset/liability management techniques designed to match maturities/
repricing of assets and liabilities. Loan policies and administration are
designed to provide assurance that loans will only be granted to credit-worthy
borrowers, although credit losses are expected to occur because of subjective
factors and factors beyond the control of the Company. Although the Company has
a diversified loan portfolio and economic conditions are relatively stable and
a substantial portion of the Company's loans are secured by real estate and/or
are Small Business Administration ("SBA") guaranteed, most of its lending
activities are conducted within the Northern Vermont and New Hampshire market
area where it is located. As a result, the Company and its borrowers may be
especially vulnerable to the consequences of changes in the local economy and
real estate market conditions. Note 6 discusses the types of lending which the
Company engages in.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could materially differ from those estimates. Material estimates that
are particularly susceptible to significant change relate to the determination
of the allowance for losses on loans, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, deferred tax assets,
judgments regarding impairment of assets and pension plan accounting. These
estimates involve a significant degree of complexity and subjectivity and the
amount of the change that is reasonably possible, should any of these estimates
prove inaccurate, cannot be estimated.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents includes cash on hand, amounts due from banks (including
cash items in process of clearing), federal funds sold (generally purchased and
sold for one day periods), and overnight deposits.
Trust operations
Assets held by the Trust & Asset Management Division of Union in a fiduciary or
agency capacity, other than trust cash on deposit with Union, are not included
in these consolidated financial statements because they are not assets of Union
or the Company.
15
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Investment securities
Investment securities purchased and held primarily for resale in the near
future are classified as trading securities and are carried at fair value with
unrealized gains and losses included in earnings. Debt securities the Company
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Debt and equity securities not
classified as either held-to-maturity or trading are classified as available-
for-sale. Investments classified as available-for-sale are carried at fair
value.
Accretion of discounts and amortization of premiums arising at acquisition are
included in income using the effective interest method over the life of the
securities. Unrealized gains and losses are excluded from earnings and reported
in other comprehensive income, net of tax and reclassification adjustment, as a
separate component of stockholders' equity. The specific identification method
is used to determine realized gains and losses.
Declines in the fair value of held-to-maturity and available-for-sale
investment securities below their cost that are deemed by management to be
other-than-temporary are reflected in earnings as realized losses in other
expenses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than the amortized cost basis, (2) the financial condition and near
and medium-term prospects of the issuer, (3) whether the decline is
attributable to changes in interest rates or credit quality and (4) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Loans transferred
from held for sale to portfolio are transferred at the lower of cost or market
value in the aggregate. Sales are normally made without recourse. Gains and
losses on the disposition of loans held for sale are determined on the specific
identification basis. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their unpaid
principal balances adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. Delinquency
status is determined based on contractual terms. The accrual of interest is
discontinued when a loan is specifically determined to be impaired and/or
management believes, after considering collection efforts and other factors,
that the borrowers' financial condition is such that collection of interest is
doubtful. Normally, any unpaid-interest previously accrued on those loans is
reversed against interest income. A loan may be restored to accrual status when
its financial status has been significantly improved and there is no principal
or interest past due. A loan may also be restored to accrual status if the
borrower makes six consecutive monthly payments or the lump sum equivalent.
Income on nonaccrual loans is generally not recognized unless a loan is placed
back in accrual status or after all principal has been collected. Interest
income generally is not recognized on impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are generally
applied as a reduction of the loan principal balance.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related
loan's yield using methods that approximate the interest method. The Company
generally amortizes these amounts over the contractual life of the related
loans.
Allowance for loan losses
The allowance for loan losses is established for estimated losses in the loan
portfolio through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the loan balance is
uncollectible or in accordance with federal guidelines. Subsequent recoveries,
if any, are credited to the allowance.
16
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
The allowance for loan losses is maintained at a level which, by management's
best estimate, is adequate to absorb probable credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's periodic
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions. The ultimate collectibility of a substantial portion of the
Company's loan portfolio is dependent upon general economic and real estate
market conditions in Northern Vermont. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their examination,
which may not be currently available to management.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as economic
conditions change.
Other real estate owned
Real estate properties acquired through or in lieu of loan foreclosure are to
be sold and are initially recorded at the lesser of the recorded loan or
estimated fair value at the date of acquisition establishing a new carrying
basis. Thereafter, valuations are periodically performed by management, and the
real estate is carried at the lower of carrying amount or fair value, less cost
to sell. Revenue and expenses from operations and changes in valuation are
included in other income and expenses.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight line method over the
estimated useful lives of the assets. The cost of assets sold or otherwise
disposed of and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the income
statement. Maintenance and repairs are charged to current expense as incurred
and the costs of major renewals and betterments are capitalized. Construction
in progress is stated at cost, which includes the cost of construction and
other direct costs attributable to the construction. No provision for
depreciation is made on construction in progress until such time as the
relevant assets are completed and put into use.
Federal Home Loan Bank stock
As a member of the Federal Home Loan Bank ("FHLB") of Boston, Union is required
to invest in common stock of the FHLB of Boston. Effective April 19, 2004, to
comply with the Gramm-Leach-Bliley Act, the FHLB of Boston adopted a capital
plan that redeemed its Class A common stock and issued Class B common stock in
its place. While there was no change in the dollar value of Union's investment
upon conversion, the Class B common stock has a five year notice requirement
for redemption and there is no guarantee of future redemption. Also, there is
the possibility of future capital calls by the FHLB of Boston on member banks
to ensure compliance with its capital plan. FHLB of Boston stock is reported in
Other Assets at its par value of $1,466,500 at December 31, 2006 and $1,240,500
at December 31, 2005. The stock is nonmarketable, and if redeemed, Union would
receive from the FHLB of Boston an amount equal to the par value of the stock.
Company-owned life insurance
Company-owned life insurance ("COLI") represents life insurance on the lives of
certain directors or employees who have provided positive consent allowing the
Company to be the beneficiary of such policies. The Company utilizes COLI as
tax-efficient financing for the benefit obligations to its employees and
directors, including obligations under one of the Company's nonqualified
deferred compensation plans. See Note 14. Since the Company is the primary
beneficiary of the insurance policies, increases in the cash value of the
policies, as well as insurance proceeds received, are recorded in noninterest
income, and are not subject to income taxes. COLI is recorded at the cash value
of the policies, less any applicable cash surrender charges of which there are
currently none. The COLI is reflected as an Other asset in the accompanying
consolidated balance sheets. The Company reviews the financial
17
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
strength of the insurance carriers prior to the purchase of COLI to ensure
minimum credit ratings of at least investment grade. The financial strength of
the carriers is reviewed annually and COLI with any individual carrier is
limited to 10% of capital plus reserves.
Servicing
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of loans with servicing rights retained.
Capitalized servicing rights are reported in other assets and are amortized
against noninterest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying loans. Servicing assets
are evaluated regularly for impairment based upon the fair value of the rights
as compared to amortized cost. Impairment is determined by stratifying rights
by predominant characteristics, such as interest rates and terms. Fair value of
a stratum is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
Investments carried at equity
The Company has purchased various limited partnership interests in low income
housing partnerships. These partnerships were established to acquire, own and
rent residential housing for low and moderate income Vermonters located in
Northern Vermont. The investments are accounted for under a method
approximating the equity method of accounting. These equity investments, which
are included in other assets, are recorded at cost and adjusted for the
Company's proportionate share of the partnerships' undistributed earnings or
losses.
Pension plans
Union maintains a noncontributory defined benefit pension plan covering all
eligible employees who meet certain service requirements. The costs of this
plan, based on actuarial computations of current and estimated future benefits
for employees, are charged to pension and other employee benefits as a current
operating expense. The Company adopted the Financial Accounting Board's (FASB)
Statement of Financial Accounting Standard (SFAS) No. 158, Employers Accounting
for Defined Benefit Pension and other Post retirement Plans-an Amendment of
SFAS Statements No. 87, 88, 106 and 132R in 2006. The Statement requires the
Company to recognize the funded status of the Defined Benefit Pension Plan,
which is the difference between the fair value of the plan assets and the
projected benefit obligation as of the period end. The following is the
incremental effect of applying SFAS No. 158 on individual line items in the
Consolidated Balance Sheet as of December 31, 2006:
Before After
Application Application of
of SFAS No. 158 Adjustments SFAS No. 158
--------------------------------------------------
Other Assets (Deferred tax assets) $ 1,020,576 $ 437,340 $ 1,457,916
Total assets 380,711,863 437,340 381,149,203
Liability for pension benefits 31,059 1,286,293 1,317,352
Total liabilities 337,939,713 1,286,293 339,226,006
Accumulated other comprehensive loss (153,772) (848,953) (1,002,725)
Total stockholders' equity 42,772,150 (848,953) 41,923,197
Total liabilities and stockholders' equity 380,711,863 437,340 381,149,203
Union also has a contributory 401(k) pension plan covering all employees who
meet certain service requirements. The plan is voluntary, and Union, through
the discretionary matching component of the plan, contributed fifty cents for
every dollar contributed by participants, up to six percent of each
participant's salary in 2006, 2005 and 2004.
Advertising costs
The Company expenses advertising costs as incurred.
18
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Earnings per common share
Earnings per common share are computed based on the weighted average number of
shares of common stock outstanding during the period, retroactively adjusted
for stock splits and stock dividends and reduced for shares held in treasury.
The weighted average shares outstanding were 4,539,641, 4,554,055 and 4,551,469
for the years ended December 31, 2006, 2005 and 2004, respectively.
Income taxes
The Company prepares its Federal income tax return on a consolidated basis.
Federal income taxes are allocated to members of the consolidated group based
on taxable income. The Company recognizes income taxes under the asset and
liability method. This involves estimating the Company's actual current tax
exposure as well as assessing temporary differences resulting from differing
treatment of items, such as timing of the deduction of expenses, for tax and
GAAP purposes. These differences result in deferred tax assets and liabilities,
which are included in the Company's consolidated balance sheets. The Company
must also assess the likelihood that any deferred tax assets will be recovered
from future taxable income and to the extent that recovery is not likely, a
valuation allowance must be established. Significant management judgment is
required in determining income tax expense, and deferred tax assets and
liabilities. Low income housing tax credits and historic rehabilitation credits
are recognized as a reduction of income tax expense in the year they are
earned.
Off-balance-sheet financial instruments
In the ordinary course of business, the Company is a party to off-balance-
sheet financial instruments consisting of commitments to originate credit,
unused lines of credit, commitments under credit card arrangements, commitments
to purchase investment securities, commercial letters of credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on investment securities
available-for-sale and the unfunded liability for the defined benefit pension
plan, are not included in net income, the cumulative effect of such items, net
of tax effect, is reported as a separate component of the equity section of the
balance sheet as Accumulated other comprehensive income loss. Such items, along
with net income, are components of comprehensive income.
Other comprehensive income (loss) components and related tax effects at
December 31 are as follows:
Unrealized gains and losses on investment securities available-for-sale:
2006 2005 2004
--------------------------------------
Unrealized holding gains (losses) on investment
securities available-for-sale $ 49,980 $(622,886) $(598,916)
Reclassification adjustment for (gains) losses
realized in income (134,558) (97,173) 18,058
--------------------------------------
Net unrealized losses (84,578) (720,059) (580,858)
Tax effect 28,757 244,820 197,492
--------------------------------------
Net of tax amount $ (55,821) $(475,239) $(383,366)
======================================
19
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
Items not yet recognized as a component of net periodic pension cost:
2006
-----------
Prior service cost $ (40,767)
Net actuarial loss (1,245,526)
-----------
Total (1,286,293)
-----------
Tax effect 437,340
-----------
Net of tax amount $(848,953)
===========
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Segment reporting
The Company's operations are solely in the commercial banking industry and
consist of providing traditional banking and trust services to its customers.
The Company operates primarily in the geographical regions of northern Vermont
and New Hampshire. Management makes operating decisions and assesses
performance based on an ongoing review of its traditional banking operations,
which constitute the Company's only reportable segment.
Stock option plan
In December 2005 the Company adopted the FASB's SFAS No. 123R Share Based
Payment, using the modified prospective application. Under SFAS No. 123R, the
Company must recognize as compensation expense the grant date fair value of
stock based awards over the vesting period of the awards. Under the modified
prospective application, SFAS No. 123R applies to new awards and to awards
modified, repurchased or cancelled after the application date. Prior to the
adoption of SFAS No. 123R the Company had accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees as allowed under SFAS
No. 123 Accounting for Stock Based Compensation. Under APB Opinion No. 25 the
Company has provided pro forma net income disclosures for employee stock based
awards granted on or after January 1, 1995 as if the fair value based method
defined in SFAS No. 123 had been applied, along with related pro forma
disclosures of net income, earnings per share and other disclosures. The pro
forma effects on net income and earnings per share were not material in 2004.
See Note 19--Stock Option Plan for additional information.
Recent accounting pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge accounting provisions. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. This Statement does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value. This
Statement does not establish requirements for recognizing and measuring
dividend income, interest income, or interest expense. This Statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included
in SFAS Statements No. 157, Fair Value Measurements, and No. 107, Disclosures
about Fair Value of Financial Instruments. This Statement is effective
prospectively for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently
20
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
evaluating the impact of this new standard on the Company's consolidated
financial statements but does not expect that such impact will be material.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans-an Amendment of SFAS
Statements No. 87, 88, 106 and 132R. This Statement requires the Company to (1)
recognize the funded status of a benefit plan--measured as the difference
between plan assets at fair value (with limited exceptions) and the benefit
obligation--in its statement of financial position. For a pension plan, the
benefit obligation is the projected benefit obligation. (2) Recognize as a
component of other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost pursuant to SFAS
Statement No. 87, Employers' Accounting for Pensions. Amounts recognized in
accumulated other comprehensive income, including the gains or losses and prior
service costs or credits, are adjusted as they are subsequently recognized as
components of net periodic benefit cost pursuant to the recognition and
amortization provisions of those Statements. (3) Measure defined benefit plan
assets and obligations as of the date of the employer's fiscal year-end
statement of financial position (with limited exceptions). (4) Disclose in the
notes to financial statements additional information about certain effects on
net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses and prior service costs or credits. The
Company adopted SFAS No. 158 in 2006 and was required to initially recognize
the funded status of the defined benefit pension plan and to provide the
required disclosures. See Notes 1 and 14 to these financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of this new standard to determine its effects on the Company's
consolidated financial statements but does not expect that such impact will be
material.
In September 2006, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin (SAB) No. 108--Financial Statements--Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements. SAB No. 108 addresses the diversity in
practice of evaluating and quantifying financial statement misstatements and
the related accumulation of such misstatements. SAB No.108 states that both a
balance sheet and an income statement approach should be used when quantifying
and evaluating the materiality of a potential misstatement and contains
guidance for correcting errors under this dual approach. SAB No. 108 was
adopted for the Company's 2006 financial statements and there was no material
impact on the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48 (FIN 48) Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 will be adopted for 2007 and there
will be no impact from this new standard on the Company's consolidated
financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. The Statement requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain situations. It
requires all separately recognized servicing assets and liabilities to be
initially measured at fair value, if practicable. It permits an entity to
choose either the amortization method or the fair value measurement method for
each class of separately recognized servicing assets and liabilities and
requires additional disclosures in the financial statements under the fair
value measurement method. SFAS No. 156 is effective for fiscal years beginning
after September 15, 2006, with early adoption permitted. The Company
21
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
does not expect the adoption of SFAS No. 156 to have a material impact on the
Company's financial position or results of operations as the Company will
continue with the amortization method.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Statements, an amendment of SFAS Statements No. 133 and 140. This
Statement permits but does not require fair value measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation and clarifies which interest only strips and principal only
strips are not subject to the requirements of SFAS No. 133. The Statement also
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are free standing derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation
and clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. However, in January 2007, the FASB issued
interpretive guidance in SFAS No. 133, Derivatives Implementation Group (DIG)
Issue B40, Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets. In DIG Issue B40, the FASB concluded that a
securitized interest in prepayable financial assets was not subject to the
bifurcation requirements of SFAS No. 155 provided that the interest met both
the following criteria: (1) the right to accelerate the settlement of the
securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which
bifurcation would be required other than an embedded derivative that results
solely from the embedded call options in the underlying financial assets. The
guidance in DIG issue B40 is effective upon the adoption of SFAS No. 155. SFAS
No. 155 is effective for all financial instruments acquired or issued after
December 31, 2006 as well as to those hybrid financial instruments that had
been previously bifurcated under SFAS No. 133. As of December 31, 2006, the
Company did not have any hybrid financial instruments which were previously
bifurcated under SFAS No. 133. Furthermore the guidance provided for in DIG
issue B40 is expected to allow the Company to continue to purchase mortgage-
backed securities without applying the bifurcation requirements of SFAS No.
155. The Statement amends SFAS No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. The adoption of SFAS No. 155 will not have a material
impact on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the 2005 and 2004 financial statements have been
reclassified to conform to the current year presentation.
Note 2. Restrictions on Cash and Due From Banks
The Company is required to maintain vault cash or noninterest bearing reserve
balances with Federal Reserve Bank of Boston. Total reserve balance required at
December 31, 2006 was $2,301,000 and $330,000 at December 31, 2005, which were
both satisfied by vault cash.
The nature of the Company's business requires that it maintain amounts due from
banks which, at times, may exceed federally insured limits. The balance in
these accounts at December 31, is as follows:
2006 2005
-------------------------
Noninterest bearing accounts $1,399,389 $1,767,171
Federal Reserve Bank of Boston 7,157,918 9,087,433
Federal funds sold 9,213,881 --
Federal Home Loan Bank of Boston 48,889 189,587
No losses have been experienced in these accounts. The Company was required to
maintain contracted clearing balances of $1,000,000 at both December 31, 2006
and 2005, which are included in the Federal Reserve Bank balances above.
22
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 3. Interest Bearing Deposits in Banks
Interest bearing deposits in banks consist of certificates of deposit purchased
from various financial institutions. Deposits at each institution are
maintained at or below the FDIC insurable limits of $100,000. Certificates are
held with rates ranging from 2.70% to 6.50% and mature at various dates through
2011, with approximately $2,662,000 scheduled to mature in 2007.
Note 4. Investment Securities
Investment securities available-for-sale consists of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
December 31, 2006:
Debt securities:
U.S. Government sponsored enterprises $ 2,497,084 $ -- $ (43,745) $ 2,453,339
Mortgage-backed 11,658,513 1,097 (276,829) 11,382,781
State and political subdivisions 4,460,491 20,255 (10,425) 4,470,321
Corporate 5,095,769 5,928 (81,667) 5,020,030
---------------------------------------------------------
Total debt securities 23,711,857 27,280 (412,666) 23,326,471
Marketable equity securities 196,392 152,398 -- 348,790
---------------------------------------------------------
Total $23,908,249 $179,678 $(412,666) $23,675,261
=========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
December 31, 2005:
Debt securities:
U.S. Government and agencies $ 500,000 $ -- $ -- $ 500,000
U.S. Government sponsored enterprises 2,495,068 -- (41,568) 2,453,500
Mortgage-backed 15,948,823 3,434 (341,890) 15,610,367
State and political subdivisions 4,742,086 42,283 (14,922) 4,769,447
Corporate 8,329,751 59,472 (155,269) 8,233,954
---------------------------------------------------------
Total debt securities 32,015,728 105,189 (553,649) 31,567,268
Marketable equity securities 540,654 300,051 -- 840,705
---------------------------------------------------------
Total $32,556,382 $405,240 $(553,649) $32,407,973
=========================================================
Investment securities with a carrying amount of $2,607,245 and $2,978,647 at
December 31, 2006 and 2005, respectively, were pledged as collateral for public
deposits and for other purposes as required or permitted by law.
23
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (Continued)
Information pertaining to investment securities available-for-sale with gross
unrealized losses at December 31, 2006, aggregated by investment category and
length of time that individual securities have been in a continuous loss
position, follows:
Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------------
Debt securities:
U.S. Government sponsored
enterprises $ -- $ -- $ 2,453,339 $ (43,745) $ 2,453,339 $ (43,745)
Mortgage-backed 1,937,692 (8,997) 8,723,090 (267,832) 10,660,782 (276,829)
State and political
subdivisions -- -- 1,013,741 (10,425) 1,013,741 (10,425)
Corporate 1,499,442 (3,664) 2,798,770 (78,003) 4,298,212 (81,667)
---------------------------------------------------------------------------------------
Total debt securities $ 3,437,134 $(12,661) $14,988,940 $(400,005) $18,426,074 $(412,666)
=======================================================================================
There were no marketable equity securities with unrealized losses at December
31, 2006.
Information pertaining to investment securities available-for-sale with gross
unrealized losses at December 31, 2005, aggregated by investment category and
length of time that individual securities have been in a continuous loss
position, follows:
Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------------
Debt securities:
U.S. Government sponsored
enterprises $ 1,477,687 $ (17,381) $ 975,813 $ (24,187) $ 2,453,500 $ (41,568)
Mortgage-backed 6,070,158 (98,130) 8,230,510 (243,760) 14,300,668 (341,890)
State and political
subdivisions 1,009,164 (14,922) -- -- 1,009,164 (14,922)
Corporate 3,469,505 (98,797) 1,461,659 (56,472) 4,931,164 (155,269)
---------------------------------------------------------------------------------------
Total debt securities $12,026,514 $(229,230) $10,667,982 $(324,419) $22,694,496 $(553,649)
=======================================================================================
There were no U.S. Government and agency securities or marketable equity
securities with unrealized losses at December 31, 2005.
Management evaluates debt securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation and on a monthly basis for marketable equity
securities. In analyzing an issuer's financial condition, management considers
whether the securities are issued by the federal government, its agencies or a
government sponsored enterprise, whether downgrades by bond rating agencies
have occurred, and industry analysts' reports. Consideration is given to the
length of time and the extent to which the fair value has been less than the
amortized cost basis, the financial condition and near and medium-term
prospects of the issuer, whether the decline is attributable to changes in
interest rates or credit quality and the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
At December 31, 2006, forty-five debt securities had unrealized losses totaling
$412,666. This amounts to aggregate depreciation of 1.7% of the Company's
amortized cost of the entire portfolio. Thirty-eight of these securities have
been in an unrealized loss position for more than twelve months. The primary
factor causing the unrealized losses on debt securities is the increase in
market interest rates over the last 30 months as the Federal Reserve discount
rate and the commercial prime rate rose seventeen times or 425 basis points
since June 30, 2004; and not
24
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (Continued)
from deterioration in the creditworthiness of the issuer. Instances when
creditworthiness may be a consideration, an individual analysis of the issuer
is performed. As management has the ability to hold debt securities until
maturity, or for the foreseeable future if classified as available-for-sale, no
declines were deemed by management to be other-than-temporary at December 31,
2006.
During 2005, the Company recognized other-than-temporary impairment on one
corporate debt security of $47,500 to its quoted fair market value. The
security was sold in 2006 for a small gain.
Proceeds from the sale of securities available-for-sale were $7,823,788,
$2,453,236 and $1,761,346 in 2006, 2005, and 2004, respectively. Gross realized
gains from sales of investments available-for-sale were $284,668, $160,040 and
$35,673 with gross realized losses of $150,110, $15,367 and $12,230 for the
years 2006, 2005, and 2004, respectively.
The scheduled maturities of debt securities available-for-sale as of December
31, 2006 were as follows:
Amortized Fair
Cost Value
---------------------------
Due in one year or less $ 1,640,111 $ 1,614,218
Due from one to five years 6,573,061 6,554,318
Due from five to ten years 1,939,642 1,917,316
Due after ten years 1,900,530 1,857,838
---------------------------
12,053,344 11,943,690
Mortgage-backed securities 11,658,513 11,382,781
---------------------------
Total debt securities $23,711,857 $23,326,471
===========================
Actual maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be called or
repaid usually without any penalties. Therefore, these securities are not
included in the maturity categories in the above maturity summary.
Note 5. Loans Held for Sale and Loan Servicing
At December 31, 2006 and 2005, loans held for sale consisted of conventional
residential mortgages and commercial real estate mortgages originated for
subsequent sale as well as one commercial loan at December 31, 2005. At
December 31, 2006 and 2005, the estimated fair value of these loans was in
excess of their carrying value, and therefore no valuation reserve was
necessary for loans held for sale. There were no guarantees to repurchase loans
for any amount at December 31, 2006.
Commercial and mortgage loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of commercial and
mortgage loans serviced for others were $97,741,211 and $85,044,568 at December
31, 2006 and 2005, respectively.
The Company generally retains the servicing rights on loans sold. At December
31, 2006 and 2005, the unamortized balance of servicing rights on loans sold
with servicing retained was not material. The estimated fair value of these
servicing rights was in excess of their carrying value at both December 31,
2006 and 2005, and therefore no impairment reserve was necessary. Loan
servicing rights of $154,855, $112,254 and $194,601 were capitalized in 2006,
2005, and 2004, respectively. Amortization of servicing rights was $139,580,
$134,786 and $146,445 for 2006, 2005, and 2004, respectively.
25
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 6. Loans
The composition of net loans at December 31 is as follows:
2006 2005
-----------------------------
Residential real estate $114,138,833 $106,469,996
Construction real estate 22,568,467 18,066,108
Commercial real estate 130,848,192 130,482,781
Commercial 19,252,471 20,650,229
Consumer 7,717,150 7,998,500
Municipal loans 19,296,807 17,009,482
-----------------------------
Gross loans (1) 313,821,920 300,677,096
Deduct:
Allowance for loan losses (3,337,768) (3,071,421)
Net deferred loan fees, premiums,
and discounts (120,139) (152,338)
-----------------------------
Net loans $310,364,013 $297,453,337
=============================
- --------------------
(1) Includes loans in nonaccrual status of $2,547,346 and $1,269,148 and
loans past due 90 days or more and still accruing of $2,203,291 and
$3,338,168 as of December 31, 2006 and 2005, respectively.
Residential real estate loans aggregating $14,074,788 and $7,621,904 at
December 31, 2006 and 2005, respectively, were pledged as collateral on
deposits of municipalities.
Information regarding impaired loans as of or for the years ended December 31
is as follows:
2006 2005 2004
----------------------------------
Impaired loans $234,837 $670,558 $872,829
Total allowance for loan losses related to impaired loans 35,503 81,788 121,108
Interest income recognized on impaired loans 8,506 23,652 46,625
Average investment in impaired loans 360,829 542,699 981,566
At December 31, 2006, the Company was not committed to lend any additional
funds to borrowers whose loans are nonperforming, impaired or restructured.
Aggregate interest on nonaccrual loans not recognized was $370,674, $268,463
and $338,456 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Note 7. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, are
as follows:
2006 2005 2004
----------------------------------------
Balance, beginning $3,071,421 $3,066,871 $3,028,813
Provision for loan losses 180,000 60,000 30,000
Recoveries of amounts charged off 170,453 54,973 124,164
----------------------------------------
3,421,874 3,181,844 3,182,977
Amounts charged off (84,106) (110,423) (116,106)
----------------------------------------
Balance, ending $3,337,768 $3,071,421 $3,066,871
========================================
26
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 8. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at
December 31 are as follows:
2006 2005
---------------------------
Land and land improvements $ 1,009,473 $ 901,220
Building and improvements 6,106,523 5,387,775
Furniture and equipment 6,603,998 7,684,481
Construction in progress 204,579 363,491
---------------------------
13,924,573 14,336,967
Less accumulated depreciation (7,844,858) (8,438,543)
---------------------------
$ 6,079,715 $ 5,898,424
===========================
Depreciation included in occupancy and equipment expenses amounted to $781,717,
$772,971 and $696,686 for the years ended December 31, 2006, 2005, and 2004,
respectively.
The Company is obligated under noncancelable operating leases for premises that
expire in various years through the year 2011. Options to renew for additional
periods are available with these leases. Future minimum rental commitments for
these leases with original or remaining terms of one year or more at December
31, 2006 were as follows:
2007 $ 95,401
2008 73,951
2009 66,422
2010 47,297
2011 33,297
--------
$316,368
========
Rent expense for 2006, 2005, and 2004 amounted to $104,301, $132,050 and
$107,841, respectively.
Occupancy expense is shown in the consolidated statements of income net of
rental income of $104,688, $97,674 and $73,983 in 2006, 2005 and 2004,
respectively.
Note 9. Other Real Estate Owned
There were four properties valued at $399,254 in other real estate owned at
December 31, 2006, which were included in Other assets and none at December 31,
2005. There was no allowance for losses on other real estate owned at December
31, 2006.
Note 10. Investments Carried at Equity
The carrying values of investments carried at equity were $2,241,063 and
$2,538,272 at December 31, 2006 and 2005, respectively consisting of
investments in limited partnerships for low income housing projects. The
capital contributions payable related to these investments were $356,363 and
$703,817 at December 31, 2006 and 2005, respectively. The provision for
undistributed net losses of the partnerships charged to earnings was $297,209,
$221,884 and $140,104 for 2006, 2005 and 2004, respectively.
27
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 11. Deposits
The following is a summary of interest bearing deposits at December 31:
2006 2005
-----------------------------
NOW accounts $ 52,957,973 $ 58,279,020
Saving and money market accounts 95,164,005 105,377,154
Time deposits, $100,000 and over 44,238,353 35,581,736
Other time deposits 72,586,553 61,444,272
-----------------------------
$264,946,884 $260,682,182
=============================
The following is a summary of time deposits by maturity at December 31, 2006:
2007 $ 97,411,167
2008 10,183,781
2009 7,961,015
2010 1,089,404
2011 179,539
------------
$116,824,906
============
Note 12. Borrowed Funds
At December 31, 2006 and 2005, borrowed funds were comprised of option advance
borrowings from the FHLB of Boston of $14,596,130, and $16,256,274,
respectively. The option advance borrowings are a mix of bullets, balloons and
amortizers with maturities through 2026. At both December 31, 2006 and 2005,
all of the borrowings had fixed interest rates ranging from 2.22% to 6.06 %.
The weighted average interest rates on the borrowings were 4.82% and 4.51% at
December 31, 2006 and 2005, respectively.
The contractual payments for borrowed funds as of December 31, 2006 are as
follows:
2007 $ 1,966,383
2008 772,151
2009 586,703
2010 615,512
2011 and thereafter 10,655,381
-----------
$14,596,130
===========
Additionally, Union maintains an IDEAL Way Line of Credit with the FHLB of
Boston. As of December 31, 2006, the total amount of this line approximated
$551,000. There were no borrowings outstanding on this line at December 31,
2006. Interest on this line is chargeable at a rate determined by the FHLB of
Boston and payable monthly based on daily balances outstanding.
Collateral on these borrowings consists of FHLB of Boston stock purchased by
Union, all funds placed on deposit with the FHLB of Boston, and qualified first
mortgages held by Union, and any additional holdings which may be pledged as
security.
Union also maintains a line of credit with a correspondent bank for the
purchase of overnight Federal Funds. As of December 31, 2006, the total amount
of this line approximated $7.5 million with no outstanding borrowings. Interest
on this borrowing is chargeable at the Federal Funds rate at the time of the
borrowing and is payable daily.
28
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 13. Income Taxes
The components of the provision for income taxes for the years ended December
31 were as follows:
2006 2005 2004
-----------------------------------------
Currently paid or payable $2,162,931 $2,552,822 $2,259,654
Deferred 21,433 (93,290) 197,939
-----------------------------------------
$2,184,364 $2,459,532 $2,457,593
=========================================
The total provision for income taxes differs from the amounts computed at the
statutory federal income tax rate of 34% primarily due to the following at
December 31:
2006 2005 2004
-----------------------------------------
Computed "expected" tax expense $2,869,477 $2,956,946 $2,819,525
Tax exempt interest (305,760) (238,456) (203,901)
Increase in cash surrender value life insurance (39,577) (35,988) (36,644)
Tax credits on limited partnership investments (319,921) (243,019) (135,986)
Other (19,855) 20,049 14,599
-----------------------------------------
$2,184,364 $2,459,532 $2,457,593
=========================================
Listed below are the significant components of the net deferred tax asset at
December 31:
2006 2005
-------------------------
Components of the deferred tax asset
Bad debts $ 907,386 $ 846,186
Mark-to-market loans 16,604 28,755
Nonaccrual loan interest 126,029 91,278
Deferred compensation 393,203 422,798
Unrealized loss on investment securities
available-for-sale 79,216 50,459
Defined benefit pension plan 447,070 32,438
Other 12,770 15,145
-------------------------
Total deferred tax asset 1,982,278 1,487,059
Valuation allowance -- --
-------------------------
Total deferred tax asset, net of valuation
allowance 1,982,278 1,487,059
-------------------------
Components of the deferred tax liability
Depreciation (166,136) (180,131)
Mortgage servicing rights (105,540) (100,346)
Limited partnership investments (251,148) (188,398)
Other (1,538) (47,798)
-------------------------
Total deferred tax liability (524,362) (516,673)
-------------------------
Net deferred tax asset $1,457,916 $ 970,386
=========================
Deferred tax assets are recognized subject to management's judgment that
realization is more likely than not. Based on the temporary taxable items,
historical taxable income and estimates of future taxable income, the Company
believes that it is more likely than not that the deferred tax assets at
December 31, 2006 will be realized.
Net deferred income tax assets are included in Other assets on the balance
sheet at December 31, 2006 and 2005.
29
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits
Defined Benefit Pension Plan: Union sponsors a noncontributory defined benefit
pension plan covering all eligible employees. The Company adopted SFAS No. 158
(see Note 1) as of December 31, 2006. The plan provides defined benefits based
on years of service and final average salary. Union measures defined benefit
plan assets and obligations as of December 31, its fiscal year-end. Union's
policy is to accrue annually an amount equal to the actuarially calculated
expense. Union made additional tax deductible voluntary contributions of
$450,000 and $250,000 to the pension plan in December 2006 and 2005,
respectively, and are included in employer contributions below. Information
pertaining to the activity in the plan is as follows:
Obligations and funded status at December 31:
Change in projected benefit obligation 2006 2005
- -------------------------------------- ---------------------------
Projected benefit obligation at beginning of year $ 9,202,470 $ 8,041,022
Service cost 505,301 438,989
Interest cost 532,409 481,277
Actuarial loss 153,739 416,838
Benefits paid (193,840) (175,656)
---------------------------
Projected benefit obligation at end of year $10,200,079 $ 9,202,470
===========================
Change in fair value of plan assets
- -----------------------------------
Fair value of plan assets at beginning of year $ 7,196,729 $ 6,255,300
Actual return on plan assets 1,173,466 395,201
Employer contributions 706,372 721,884
Benefits paid (193,840) (175,656)
---------------------------
Fair value of plan assets at end of year $ 8,882,727 $ 7,196,729
===========================
Liability for Pension benefits $(1,317,352) $(2,005,741)
Unrecognized prior service cost -- 47,083
Unrecognized net actuarial loss -- 1,863,253
---------------------------
Net amount recognized as accrued benefit cost $(1,317,352) $ (95,405)
===========================
2006 2005
===========================
Accumulated benefit obligation at December 31 $ 7,900,249 $ 7,042,311
---------------------------
The Company uses the alternate amortization method for prior service costs, as
provided in paragraph 26 of SFAS 87, "Employers' Accounting for Pensions."
Net periodic pension benefit cost for 2006, 2005, and 2004 consisted of the
following components:
2006 2005 2004
-------------------------------------
Service cost $ 505,301 $ 438,989 $ 408,422
Interest cost on projected benefit obligation 532,409 481,277 436,429
Expected return on plan assets (485,902) (423,662) (363,526)
Amortization of prior service cost 6,158 6,158 6,158
Amortization of net loss 84,060 61,401 81,804
-------------------------------------
Net periodic benefit cost $ 642,026 $ 564,163 $ 569,287
=====================================
It is estimated that the net periodic benefit cost for 2007 will include
approximately $6 thousand of amortization of prior service cost and $20
thousand of amortization of net actuarial loss.
30
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Weighted average assumption used to determine benefit obligation at December
31:
2006 2005
----------------
Discount rate 5.75% 5.75%
Wage base rate 3.50% 3.50%
Consumer Price Index rate 2.25% 2.25%
Weighted average assumptions used to determine net period benefit cost for
years ended December 31:
2006 2005
----------------
Discount rate 5.75% 5.75%
Rate of increase in compensation levels 4.25% 4.25%
Expected long-term rate of return on plan assets 6.75% 6.75%
The overall expected long-term rate of return on assets was derived to be
consistent with a 2.25% future inflation assumption and returns expected in
that inflation environment. The return is more conservative than the plan's
long-term actual results and is at a level that management believes is
sustainable.
Union's pension plan weighted average asset allocations at December 31, 2006
and 2005, by asset category based on their fair values are as follows:
Percentage of
Plan Assets
----------------
Asset Category 2006 2005
- -------------- ----------------
Cash & Equivalents 10.3 2.3
Debt Securities 21.9 27.0
Equity Securities 54.0 57.4
International Mutual Funds 13.8 13.3
----------------
Total 100.0 100.0
================
The investment philosophy for the pension plan is to prudently invest the
assets of the plan and future contributions received in a diversified manner
that will ensure the future benefits due to participants and beneficiaries over
a long-term horizon as well as provide liquidity to pay current benefits. The
Trustees of the plan seek to protect the pension plan assets through prudent
asset allocation, FDIC insurance, manager selection and periodic reviews.
Investments in stocks and fixed income investments should be diversified in a
way consistent with risk tolerance and investment objectives. In order to
obtain this goal the investment objective is to maintain a mix of growth and
income investments with allocation as follows, and no more than 20% of the
equity portion of the portfolio invested in foreign equities:
Equity Securities & International Mutual Funds 60-85%
Debt Securities 15-35%
Cash & Equivalents 0-5%
The Company made a year-end contribution of $550,000 that had not yet been
invested as of December 31, 2006, which was the cause of the Cash & Equivalents
percentage being elevated at year-end. There are no securities of the Company
or Union held by the pension plan. The assets of the plan are managed by the
Trust & Asset Management Division of Union under the guidance of the plan's
trustees. The estimated employer contribution for 2007 is $700,000.
The following table summarizes the estimated future benefit payments expected
to be paid under the Plan:
2007 $ 194,649
2008 181,536
2009 183,938
2010 201,282
2011 261,620
Years 2012 to 2016 2,729,549
31
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Nonqualified Deferred Compensation Plans: Additionally, Union Bankshares, Inc.
and Union have two nonqualified Deferred Compensation Plans for Directors and
certain key officers. For the old plan, the future amount of payouts have been
frozen at their current amounts for participants in payout status, and no
deferrals were allowed in 2006 or 2005 for the four participants not yet in
payout status. This deferred compensation plan will be re-evaluated during 2007
based on final rules under the federal American Jobs Creation Act of 2004,
which are expected to be issued by the Internal Revenue Service ("IRS") during
2007. Prior to 2005 current participants could defer compensation that would
otherwise be currently payable. Amounts deferred accrue interest at the prime
rate less 100 basis points and benefits are payable over a 15 year period upon
attainment of a certain age or death. The benefit obligations under the plan
represent general unsecured obligations of the Company and no assets are
segregated for such payments. However, Union Bankshares, Inc. and Union have
purchased life insurance contracts on the lives of each participant in order to
fund these benefits. The benefits accrued under this plan aggregated $1,156,481
and $1,193,906 at December 31, 2006 and 2005, respectively, and are included in
the financial statement caption "Accrued interest and other liabilities". The
cash surrender value of the life insurance policies purchased to fund the plan
aggregated $1,898,139 and $1,781,737 at December 31, 2006 and 2005,
respectively. These amounts are included in Other assets on the Company's
balance sheets.
A new Executive Nonqualified Excess Plan was adopted in 2006 for Directors and
certain key officers. The plan is a defined contribution plan to provide a
means by which participants may elect to defer receipt of current compensation
from the Company or its subsidiary in order to provide retirement or other
benefits as selected in the individual adoption agreements. Participants may
select among designated reference investments consisting of investment funds,
with the performance of the participant's account mirroring the selected
reference investment. Distributions are made only upon a qualifying
distribution event, which may include a separation from service, death,
disability or unforeseeable emergency, or upon a date specified in the
participant's deferral election form. The plan is intended to comply with the
provisions of Section 409A of the Internal Revenue Code. The plan is an
unfunded plan representing a general unsecured obligation of the Company. As of
December 31, 2006, $7,375 has been deferred under the plan.
401(k) Plan: Union maintains a defined contribution 401(k) plan under which
employees may elect to make tax deferred contributions of up to the IRS maximum
from their annual salary. All employees meeting service requirements are
eligible to participate in the plan. Company contributions fully vest after
three years of service. Union's employer matching contributions to the plan are
at the discretion of the Board of Directors. Employer matching contributions to
the plan were $131,681, $122,520 and $113,637 for 2006, 2005, and 2004,
respectively.
Note 15. Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
interest rate caps and floors written on adjustable rate loans, commitments to
participate in or sell loans and commitments to buy or sell securities. Such
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable rate
loans, the contract or notional amounts do not represent exposure to credit
loss. The Company controls the risk of interest rate cap agreements through
credit approvals, limits, and monitoring procedures.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
32
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 15. Financial Instruments With Off-Balance-Sheet Risk (Continued)
The following table shows financial instruments whose contract amount
represents credit risk:
Contract or
Notional Amount
---------------------------
2006 2005
---------------------------
Commitments to originate loans $12,175,976 $ 9,722,166
Unused lines of credit 36,573,909 35,348,616
Standby letters of credit 1,045,752 918,000
Credit card arrangements 1,457,287 1,453,254
Equity commitments to affordable housing
limited partnerships 917,170 --
---------------------------
Total $52,170,094 $47,442,036
===========================
Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates within 90 days of the commitment. Unused
lines of credit are renewable at least annually except for home equity lines
which have an indefinite expiration date. Unused lines may have other
termination clauses and may require payment of a fee.
Since many of the commitments and lines are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company, upon issuance of a commitment to extend credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support customer's private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 2006, the Company has a commitment to invest up to $917,170 in
a tax advantaged limited partnership involved in a low income housing
investment tax credit project in its market area.
Note 16. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, after consulting with the Company's
legal counsel, any liability resulting from such proceedings would not have a
material adverse effect on the Company's financial statements.
Note 17. Fair Values of Financial Instruments
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Management's estimates and assumptions are inherently subjective and involve
uncertainties and matters of significant judgement. Changes in assumptions
could dramatically affect the estimated fair values. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the actual
underlying fair value of such instruments or the Company.
33
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 17. Fair Values of Financial Instruments (Continued)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities and interest bearing deposits: Fair values for
investment securities and interest bearing deposits are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or
discounted present values of cash flows.
Loans and loans held for sale: Fair values of loans are estimated for
portfolios of loans with similar financial characteristics and segregated by
loan type. For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed-rate
residential, commercial real estate, and rental property mortgage loans, and
commercial and industrial loans) are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss experience and
risk characteristics. The carrying amounts reported in the balance sheet for
loans that are held for sale approximate their fair market values. Fair
values for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits (for example,
checking and savings accounts) are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying amounts).
The carrying amounts of variable-rate time deposits approximate their fair
values at the reporting date. The fair values for fixed-rate time deposits
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on time deposits to a schedule of aggregated
contractual maturities on such time deposits.
Borrowed funds: The fair values of the Company's long-term debt are
estimated using discounted cash flow analysis based on interest rates
currently being offered on similar debt instruments.
Off-balance-sheet financial instruments: The estimated fair market value of
off-balance-sheet financial instruments approximates their contract or
notional values as the majority of the Company's credit commitments are
short-term (one year or less) in nature. The only commitments to extend
credit that are longer than one year in duration are the Home Equity Lines
whose interest rates are variable on a quarterly basis. The only fees
collected for commitments are an annual fee on credit card arrangements and
sometimes a flat fee on commercial lines of credit and standby letters of
credit. The fair value of the off-balance-sheet financial instruments is not
significant.
The estimated fair values and related carrying amounts of the Company's
significant financial instruments at December 31 were as follows:
2006 2005
---------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 20,957,241 $ 20,957,241 $ 14,208,429 $ 14,208,429
Interest bearing deposits in banks 5,416,961 5,345,689 8,597,835 8,509,897
Investment securities available-for-sale 23,675,261 23,675,261 32,407,973 32,407,973
Loans and loans held for sale, net 314,114,199 312,792,043 303,999,356 303,586,133
Financial liabilities
Deposits $319,822,047 $319,760,647 $313,299,094 $312,873,444
Borrowed funds 14,596,130 14,514,490 16,256,274 16,116,629
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
34
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 18. Transactions with Related Parties
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with principal stockholders,
directors, principal officers, their immediate families and affiliated
companies in which they are principal stockholders (commonly referred to as
related parties), all of which have been, in the opinion of management, on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others.
Aggregate loan transactions with related parties for the year ended December 31
were as follows:
2006 2005
---------------------------
Balance, beginning $ 584,151 $ 772,867
New loans and advances on lines 1,954,278 1,973,665
Repayments (1,428,768) (2,066,723)
Other, net (224,820) (95,658)
---------------------------
Balance, ending $ 884,661 $ 584,151
===========================
Balance available on lines of credit $ 679,383 $ 544,238
===========================
Deposit accounts with related parties were $1,760,161 and $1,710,109 at
December 31, 2006 and 2005, respectively.
Note 19. Stock Option Plan
Under the Company's 1998 Incentive Stock Option Plan, ("Plan") the Company's
Board of Directors, with shareholder approval, authorized the granting to
certain key employees incentive options to purchase up to 75,000 shares of the
Company's common stock. As of December 31, 2006, 45,450 shares remain available
for future option grants. The exercise price of the options is equal to the
market price of the stock at the date of grant therefore, the intrinsic value
of the options at the date of the grant is $0. These options have a one year
requisite service period, vest over one year, and have a five-year contractual
term. The compensation cost that has been charged against income for this plan
was $10,285, $862 and $0, for 2006, 2005, and 2004 respectively. See Note 1.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes based option valuation model. The estimated grant date fair
values, for options granted during 2006, 2005 and 2004, and the assumptions
used are presented in the following table:
2006 2005 2004
-------------------------------
Fair value per share $ 2.80 $ 3.19 $ 4.60
Expected volatility 19.25% 19.24% 22.41%
Expected dividends 4.98% 4.21% 3.10%
Risk free interest rate 4.56% 4.22% 3.36%
Expected term (in years) 5 5 5
Vesting periods (in years) 1 1 1
Expected volatilities are based on historical volatilities of the Company's
stock, and, possibly, other factors. The Company uses historical data to
estimate option exercise and employee termination within the valuation model.
The expected term of options granted is estimated from past exercise activity,
and represents the period of time that granted options are expected to be
outstanding. The risk free interest rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve at the time of
grant.
35
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Stock Option Plan (Continued)
A summary of the option activity under the Plan as of December 31, 2006, and
changes during the year then ended, as follows:
Weighted Average Period End
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Term Intrinsic Value
-----------------------------------------------------------------------
Outstanding at January 1, 2006 12,825 $22.63
Granted 3,250 $22.50
Exercised -- $ --
Forfeited or expired -- $ --
------
Outstanding at December 31, 2006 16,075 $22.60 2.77 $ --
-----------------------------------------------------------------------
Exerciseable at December 31, 2006 12,825 $22.63 2.22 $ --
=======================================================================
The aggregate exercise date intrinsic value of options exercised during 2005
and 2004 was $26 thousand and $41 thousand, respectively. Intrinsic value is
the amount by which the market price of the underlying stock exceeds the
exercise price of the stock option.
A summary of the status of the Company's nonvested options as of December 31,
2006 is as follows:
Weighted Average
Grant Date
Shares Fair Value
---------------------------
Nonvested at January 1, 2006 3,250 $3.19
Granted 3,250 $2.80
Vested (3,250) $3.19
Forfeited -- --
---------------------------
Nonvested at December 31, 2006 3,250 $2.80
===========================
As of December 31, 2006, there was $8,753 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized fully during 2007. The total
fair value of shares vested during the years ended December 31, 2006, 2005, and
2004, was $10,351, $14,950 and $12,900, respectively. The nonvested options at
December 31, 2006 are expected to vest during 2007.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, the effects on net income and earnings per common share for the
year ended December 31, 2004 would have been:
Net income as reported $5,835,127
Deduct: Total stock based compensation expense determined under
fair value based method for all awards, net of related tax effects (18,382)
-----------
Pro forma net income $5,816,745
-----------
Earnings per common share
As reported $1.28
Pro forma $1.28
36
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. Regulatory Capital Requirements
The Company (on a consolidated basis) and Union are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary-actions by regulators that, if
undertaken, could have a direct material effect on the Company's and Union's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, they must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and Union's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Union to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes that, as of December 31, 2006
and 2005, the Company and Union met all capital adequacy requirements to which
they were subject.
As of December 31, 2006 and 2005, the most recent notification from the FDIC
categorized Union as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized an institution must
maintain minimum total risk based, Tier I risk based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since
the date of the most recent notification that management believes might result
in an adverse change to Union's regulatory capital category.
Union's and the Company's actual capital amounts (000's omitted) and ratios are
presented in the following tables:
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 2006
Total capital to risk weighted assets
Union $45,955 17.34% $21,202 8.0% $26,502 10.0%
Company 46,307 17.44% 21,242 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $42,574 16.07% $10,597 4.0% $15,896 6.0%
Company 42,926 16.16% 10,625 4.0% N/A N/A
Tier I capital to average assets
Union $42,574 11.21% $15,191 4.0% $18,989 5.0%
Company 42,926 11.29% 15,209 4.0% N/A N/A
37
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. Regulatory Capital Requirements (Continued)
Minimum To
Be Well
Capitalized Under
Minimum for Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 2005
Total capital to risk weighted assets
Union $44,754 17.06% $20,987 8.0% $26,233 10.0%
Company 44,907 17.08% 21,034 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $41,548 15.84% $10,492 4.0% $15,738 6.0%
Company 41,701 15.86% 10,517 4.0% N/A N/A
Tier I capital to average assets
Union $41,548 11.08% $14,999 4.0% $18,749 5.0%
Company 41,701 11.10% 15,027 4.0% N/A N/A
Dividends paid by Union are the primary source of funds available to the
Company for payment of dividends to its shareholders. Union is subject to
certain requirements imposed by federal banking laws and regulations. These
requirements, among other things, establish minimum levels of capital and
restrict the amount of dividends that may be distributed by Union to the
Company.
Note 21. Treasury Stock
On November 18, 2005, Union Bankshares, Inc. announced the implementation of a
Stock Repurchase Program of up to $2.15 million or 100,000 shares of its common
stock. Repurchases under the program may be made in the open market or in
privately negotiated transactions as Management may deem conditions warrant.
The basis for the carrying value of the Company's treasury stock is the
purchase price of the shares at the time of purchase.
During 2006, the Company, under the authorized purchase program, repurchased
10,686 shares of its common stock at prices ranging from $20.73 to $22.00 per
share, for a total of $227,250, compared to the 2005 repurchase of 15,000
shares at $21.00 per share for a total of $315,000.
Note 22. Subsequent Events
On January 12, 2007, Union Bankshares, Inc. declared a $0.28 per share regular
dividend payable January 25, 2007 to stockholders of record on January 22,
2007.
38
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 23. Condensed Financial Information (Parent Company Only)
The following condensed financial statements are for Union Bankshares, Inc.
(Parent Company Only), and should be read in conjunction with the consolidated
financial statements of Union Bankshares, Inc. and Subsidiary.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005
---------------------------
ASSETS
Cash $ 415,144 $ 240,284
Investment in subsidiary-Union 41,570,863 41,450,452
Other assets 615,273 581,149
---------------------------
Total assets $42,601,280 $42,271,885
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 678,083 $ 669,074
---------------------------
Total liabilities 678,083 669,074
---------------------------
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 5,000,000 shares authorized;
4,918,611 shares issued in 2006 and 2005 9,837,222 9,837,222
Paid-in capital 150,146 139,861
Retained earnings 35,202,735 33,760,610
Treasury stock, at cost; 386,634 shares in 2006 and 375,948
shares in 2005 (2,264,181) (2,036,931)
Accumulated other comprehensive loss (1,002,725) (97,951)
---------------------------
Total stockholders' equity 41,923,197 41,602,811
---------------------------
Total liabilities and stockholders' equity $42,601,280 $42,271,885
===========================
The investment in the subsidiary bank is carried under the equity method of
accounting. The investment and cash, which is on deposit with Union, has been
eliminated in consolidation.
39
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 23. Condensed Financial Information (Parent Company Only) (Continued)
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
-------------------------------------------
Revenues
Dividends-bank subsidiary $ 5,400,000 $ 6,050,000 $ 4,230,000
Other income 29,468 27,324 25,476
-------------------------------------------
Total revenues 5,429,468 6,077,324 4,255,476
-------------------------------------------
Expenses
Interest 1,369 1,381 838
Administrative and other 294,995 301,132 298,520
-------------------------------------------
Total expenses 296,364 302,513 299,358
-------------------------------------------
Income before applicable income tax and equity in
undistributed net income of subsidiary 5,133,104 5,774,811 3,956,118
Applicable income tax benefit (96,985) (96,391) (101,352)
-------------------------------------------
Income before equity in undistributed net income
of subsidiary 5,230,089 5,871,202 4,057,470
Equity in undistributed net income-Union 1,025,186 366,167 1,777,657
-------------------------------------------
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
===========================================
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,255,275 $ 6,237,369 $ 5,835,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Union (1,025,186) (366,167) (1,777,657)
Issuance of stock options 10,286 862 --
Increase in other assets (34,124) (35,971) (42,705)
Increase in other liabilities 9,009 41,812 39,744
-------------------------------------------
Net cash provided by operating activities 5,215,260 5,877,905 4,054,509
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,813,150) (6,286,215) (4,096,514)
Proceeds from exercise of stock options -- 38,010 61,113
Purchase of treasury stock (227,250) (315,000) --
-------------------------------------------
Net cash used in financing activities (5,040,400) (6,563,205) (4,035,401)
-------------------------------------------
Increase (decrease) in cash 174,860 (685,300) 19,108
Beginning cash 240,284 925,584 906,476
-------------------------------------------
Ending cash $ 415,144 $ 240,284 $ 925,584
===========================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest $ 1,369 $ 1,381 $ 838
===========================================
Income taxes $ 250 $ 250 $ 250
===========================================
40
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 24. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 2006, 2005, and 2004 is
presented below (dollars in thousands):
Quarters in 2006 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 5,925 $ 6,242 $ 6,531 $ 6,499
Interest expense 1,447 1,610 1,819 1,945
Net interest income 4,478 4,632 4,712 4,554
Provision for loan losses 45 105 -- 30
Noninterest income 947 1,006 996 1,109
Noninterest expenses 3,397 3,451 3,423 3,543
Net income 1,473 1,534 1,662 1,586
Earnings per common share $ 0.32 $ 0.34 $ 0.37 $ 0.35
Quarters in 2005 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 5,131 $ 5,354 $ 5,779 $ 5,985
Interest expense 859 1,022 1,268 1,350
Net interest income 4,272 4,332 4,511 4,635
Provision for loan losses -- -- -- 60
Noninterest income 886 910 903 1,363
Noninterest expenses 3,181 3,277 3,352 3,246
Net income 1,395 1,433 1,494 1,915
Earnings per common share $ 0.31 $ 0.31 $ 0.33 $ 0.42
Quarters in 2004 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $ 4,866 $ 4,898 $ 5,114 $ 5,293
Interest expense 844 817 806 843
Net interest income 4,022 4,081 4,308 4,450
Provision for loan losses -- -- 30 --
Noninterest income 963 874 884 1,060
Noninterest expenses 3,176 3,149 3,022 2,972
Net income 1,274 1,305 1,499 1,757
Earnings per common share $ 0.28 $ 0.29 $ 0.33 $ 0.38
Note 25. Noninterest Other Income and Noninterest Other Expenses
The components of noninterest other income and noninterest other expenses which
are in excess of one percent of total revenues in any of the three years
presented are as follows:
2006 2005 2004
----------------------------------------
Expenses
Supplies $ 202,525 $ 208,373 $ 240,189
State franchise tax 278,539 235,588 262,836
Amortization of low income housing partnerships 297,209 221,884 140,104
Advertising 244,493 264,755 223,866
Professional fees 271,490 283,153 201,253
Other 2,323,206 2,340,496 2,208,433
----------------------------------------
Other Expenses $3,617,462 $3,554,249 $3,276,681
========================================
41
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The following discussion and analysis by Management focuses on those factors
that had a material effect on Union Bankshares, Inc.'s (Company's) financial
position as of December 31, 2006 and 2005, and its results of operations for
the years ended December 31, 2006, 2005, and 2004. This discussion is being
presented to provide a narrative explanation of the financial statements and
should be read in conjunction with the consolidated financial statements and
related notes and with other financial data in this report. The purpose of this
presentation is to enhance overall financial disclosures and to provide
information about historical financial performance and developing trends as a
means to assess to what extent past performance can be used to evaluate the
prospects for future performance. Management is not aware of the occurrence of
any events after December 31, 2006, which would materially affect the
information presented.
FORWARD-LOOKING STATEMENTS
The Company may from time-to-time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include financial projections, statements of plans and objectives for future
operations, estimates of future economic performance and assumptions relating
thereto. The Company may include forward-looking statements in its filings with
the Securities and Exchange Commission (SEC), in its reports to stockholders,
including this Annual Report, in other written materials, and in statements
made by senior management to analysts, rating agencies, institutional
investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are
subject to uncertainties, both general and specific, and risk exists that those
predictions, forecasts, projections and other estimates contained in
forward-looking statements will not be achieved. When management uses any of
the words "believes," "expects," "anticipates," "intends," "plans," "seeks,"
"estimates" or similar expressions, they are making forward-looking statements.
Many possible events or factors, including those beyond the control of
management, could affect the future financial results and performance of the
Company. This could cause results or performance to differ materially from
those expressed in the forward-looking statements. The possible events or
factors that might affect the forward-looking statements include, but are not
limited to, the following:
o uses of monetary, fiscal and tax policy by various governments;
o political, legislative or regulatory developments in Vermont, New Hampshire
or the United States including changes in laws concerning accounting,
taxes, financial reporting, banking and other aspects of the financial
services industry;
o developments in general economic or business conditions nationally, in
Vermont, or in northern New Hampshire including interest rate fluctuations,
market fluctuations and perceptions, job creation and unemployment rates,
ability to attract new business, and inflation and their effects on the
Company or its customers;
o changes in the competitive environment for financial services organizations
including increased competition from tax-advantaged credit unions and
out-of-market competitors offering financial services over the internet;
o acts or threats of terrorism or war and actions taken by the United States
or other governments that might adversely affect business or economic
conditions for the Company or its customers;
o the Company's ability to attract and retain key personnel;
o changes in technology including demands for greater automation which could
present operational issues or significant capital outlays
o unanticipated lower revenues or increased cost of funds, loss of customers
or business, or higher operating expenses;
o adverse changes in the securities market which could adversely affect the
value of the Company's stock;
o the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate;
o the failure of assumptions underlying the establishment of the allowance
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
o the failure of actuarial, investment, work force, salary and other
assumptions underlying the establishment of reserves for future pension
costs or changes in legislative or regulatory requirements;
o the amount invested in new business opportunities and the timing of these
investments;
o future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
42
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
o assumptions made regarding interest rate movement and sensitivity could
vary substantially if actual experience differs from historical experience
which could adversely affect the Company's results of operations;
o the Company's ability to attract and retain deposits;
o illegal acts of theft or fraud perpetuated against the bank or its
customers;
o any actual or alleged conduct which could harm the Company's reputation;
and
o natural or other disasters which could affect the ability of the Company to
operate under normal conditions.
When evaluating forward-looking statements to make decisions with respect to
the Company, investors and others are cautioned to consider these and other
risks and uncertainties and are reminded not to place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made
and the Company undertakes no obligation to update them to reflect new or
changed information or events, except as may be required by federal securities
laws.
RISK FACTORS
The Company, like other financial institutions, is subject to a number of
risks, many of which are outside of the Company's direct control, though
efforts are made to manage those risks while optimizing returns. Risk
identification and monitoring are key elements in overall risk management.
Among the risks assumed are: (1) credit risk, which is the risk that loan
customers or other counter parties will be unable to perform their contractual
obligations, (2) market risk, which is the risk that changes in market rates
and prices will adversely affect the Company's financial condition or results
of operation, (3) liquidity risk, which is the risk that the Company will have
insufficient funds or access to funds to meet operation needs, and (4)
operational risk, which is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. More
information on risk is set forth under the heading "Risk Factors" included in
Item 1A of our Annual Report on Form 10-K for the year-ended December 31, 2006.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the Company's financial statements. Certain
accounting policies involve significant judgments and assumptions by management
which have a material impact on the reported amount of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and accompanying notes.
The SEC has defined a company's critical accounting policies as the ones that
are most important to the portrayal of the company's financial condition and
results of operations, and which require the company to make its most difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, the Company
has identified the accounting policies and judgments most critical to the
Company. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from estimates and have a
material impact on the carrying value of assets, liabilities, or the results of
operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as well as
other factors including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers and changes in delinquent,
nonperforming or impaired loans. Changes in these factors may cause
management's estimate of the allowance for loan losses to increase or decrease
and result in adjustments to the Company's provision for loan losses in future
periods.
The Company's pension benefit obligations and net periodic benefit cost are
actuarially determined based on the following assumptions: discount rate,
estimated future return on plan assets, wage base rate, anticipated mortality
rates, Consumer Price Index rate, and rate of increase in compensation levels.
The determination of the pension benefit obligations and net periodic benefit
cost is a critical accounting estimate as it requires the use of estimates and
judgment related to the amount and timing of expected future cash out flows for
benefit payments and cash in flows for maturities and returns on plan assets.
Changes in estimates and assumptions could have a material impact to the
Company's financial condition or results of operations.
43
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company also has other key accounting policies, which involve the use of
estimates, judgments and assumptions, that are significant to understanding the
results including the valuation of deferred tax assets and investment
securities. The most significant accounting policies followed by the Company
are presented in Note 1 to these financial statements, and FINANCIAL CONDITION
- --Allowance for Loan Losses and Liability for Pension Benefits below. Although
management believes that its estimates, assumptions and judgments are
reasonable, they are based upon information presently available. Actual results
may differ significantly from these estimates under different assumptions,
judgments or conditions.
OVERVIEW
Beginning in July 2004 and continuing through June 2006, actions by the Federal
Reserve Bank (FRB) to raise target interest rates resulted in the Prime Rate
being increased from 4.00% to 8.25%. The Federal Reserve discount rate and the
prime rate have remained steady at 5.25% and 8.25%, respectively since June
2006.
Historically, the largest and most variable source of income for the Company is
net interest income. The results of operations for the years 2006, 2005 and
2004 reflect the impact of changes in short-term rates as well as growth in the
volume of both interest earning assets and interest bearing liabilities during
these periods.
The Company continued to grow and net income rose slightly during 2006 as the
impact of increases in the prime rate over the last 24 months became evident,
but an inverted yield curve and competitive pressure on interest rates paid on
deposits tempered that growth. Earnings per share grew to $1.38 in 2006 from
$1.37 in 2005. Dividends per share of $1.06 were paid out in 2006. With the
payment of a special cash dividend of $0.40 per share in January 2005,
dividends paid out to shareholders were $1.38 in 2005. The Company remained
well capitalized under regulatory guidelines after payment of dividends.
Dividend payouts, excluding the special dividend in 2005, increased $0.08 per
share or 8.2%.
The Company grew 3.0% in average assets from $364 million in 2005 to $375
million in 2006, as compared to 3.0% between 2004 and 2005 when average assets
grew from $354 million to $364 million. Average earning assets grew from $339
million in 2005 to $351 million in 2006 or 3.6% as compared to 3.7% from 2004
to 2005. The Company continued to manage growth and interest rate risk through
the sale of some long-term fixed-rate loans. Despite the fact that the Prime
Rate has increased from its low of 4% on June 30, 2004, to 7.25% at December
31, 2005, and to 8.25% at December 2006, the yield curve has inverted with
long-term rates flat during the same time frame. The 100 basis point increase
in the prime rate during 2006 helped to drive an increase in the net interest
margin to 5.35% for 2006 as compared to 5.33% for 2005, as variable-rate loans
have responded to these rate increases at their repricing intervals.
Loan demand was moderate in 2006 with total loan growth of $10.3 million or
3.4% over 2005, despite selling $17.8 million of loans in 2006. Growth for 2005
compared to 2004 was $27.0 million or 9.6%, net of loans sold of $15.0 million
in 2005. Loans in nonaccrual status were up between years at $2.5 million at
December 31, 2006 versus $1.3 million at December 31, 2005, of which $315
thousand was guaranteed by the U.S. Small Business Administration at December
31, 2006. Other nonperforming loans were down to $2.2 million at December 31,
2006 from $3.3 million at December 31, 2005. The ratio of net charge-offs to
average loans not held for sale was -0.03% for 2006 compared to 0.02% for 2005,
as recoveries exceeded charge-offs slightly during 2006. The Company's ratio of
allowance for loan losses to loans not held for sale was 1.06%, 1.02% and 1.13%
at December 31, 2006, 2005 and 2004, respectively. The ratio of allowance for
loan losses to nonperforming loans has increased to 70.3% at December 31, 2006
from 66.66% and 57.91% at December 31, 2005 and 2004, respectively. The
increase in the 2006 provision partially reflects management's concern during
the fourth quarter of 2006 because of the lack of snow in our market area and
the anticipated impact that may have on tourism dependent customers but the
main reason was due to management's assessment of credit quality and the growth
in the loan portfolio.
There has been significant competition in the financial services market place
during the last few years for loans. The improvement in the stock market and
the re-introduction of "special" deposit products and teaser rates have made
the competition for deposits intense. The growth in deposits was $1.2 million
or 0.4% in 2004, $6.7 million or 2.2% in 2005 and $6.5 million or 2.1% in 2006.
Of the net deposit growth in 2006, $5.0 million was generated by the new
Littleton, New Hampshire branch. These factors combined to reduce the net
interest spread from 4.99% in 2005 to 4.86% in 2006 as the average rate paid on
interest bearing liabilities rose from 1.67% to 2.43% from 2005 to 2006. The
Company completed a review of the deposit products it offers and introduced
streamlined offerings during the first quarters of 2005 and 2006 for consumers
and during 2006 for small businesses. The Company reduced
44
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
the investment security portfolio and utilized short-term liquidity advances
and longer term matched funded advances from the FHLB of Boston to fund loan
demand that could not be funded by the current deposit base. The Company will
continue to focus on customer service, its core business of community banking
to provide products and services to the communities it serves adopting new
technologies as appropriate, and the new Littleton branch market.
The regulatory environment of the past few years, including the federal
Sarbanes-Oxley Act of 2002, has placed an extensive burden on small publicly
traded companies as there is virtually no difference in the requirements
because of size, complexity of operations and products, or other regulatory
oversight which the banking industry already has from states, the FDIC and the
Federal Reserve. The additional requirements add to operating costs and divert
management somewhat from the objectives of growing and strengthening the
business. Banks also spend a significant amount of time and dollars complying
with the US Patriot Act and the Bank Secrecy Act to protect the U.S. financial
system and their customers against identity theft, anti-money laundering, and
terrorism.
On November 18, 2005, The Board of Directors of Union Bankshares, Inc. approved
a Stock Repurchase Program. Under this program, the Company may repurchase up
to $2.15 million or up to 100,000 shares of its common stock. During 2006, the
Company purchased 10,686 shares of its common stock totaling $227 thousand. See
Note 21 to the financial statements for additional information.
The Company's bank subsidiary maintains a noncontributory defined benefit
pension plan covering all eligible employees who meet certain service
requirements. During 2006 and 2005 contributions totaling $706 and $722
thousand, respectively were made to the pension plan. Minimum required
contribution under the ERISA guidelines was $256 and $472 thousand,
respectively and the Company made an additional tax deductible voluntary
contribution of $450 and $250 thousand in 2006 and 2005, respectively, in
anticipation of the impact of the implementation of SFAS No. 158, which will
now require companies to reflect the funded status of defined benefit pension
plans in their financial statements. See Notes 1 and 14 to the financial
statements for additional information.
The following per share information and key ratios depict several measurements
of performance or financial condition for or at the years ending December 31,
2006, 2005, and 2004 respectively:
12/31/06 12/31/05 12/31/04
----------------------------------
Return on average assets (ROA) 1.67% 1.71% 1.65%
Return on average equity (ROE) 14.96% 15.23% 14.17%
Net interest margin (1) 5.35% 5.33% 5.24%
Efficiency ratio (2) 60.89% 59.42% 59.02%
Net interest spread (3) 4.86% 4.99% 4.98%
Loan to deposit ratio 99.30% 98.06% 91.40%
Net loan (recoveries) charge-offs to average loans
not held for sale (0.03)% 0.02% 0.00%
Allowance for loan losses to loans not held for sale 1.06% 1.02% 1.13%
Nonperforming assets to total assets 1.35% 1.23% 1.48%
Equity to assets 11.00% 11.10% 11.79%
Total capital to risk weighted assets 17.44% 17.08% 18.57%
Book value per share $9.25 $9.16 $9.31
Earnings per share $1.38 $1.37 $1.28
Dividends paid per share (5) $1.06 $1.38 $0.90
Dividend payout ratio (4)(5) 76.81% 100.73% 70.31%
- --------------------
(1) The ratio of tax equivalent net interest income to average earning assets.
(2) The ratio of noninterest expense to tax equivalent net interest income and noninterest
income excluding securities gains and losses.
(3) The difference between the average rate earned on assets minus the average rate paid on
liabilities.
(4) Cash dividend declared and paid per share divided by consolidated net income per share.
(5) Includes a $0.40 special cash dividend in 2005.
45
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 2006, was $6.26
million compared with net income of $6.24 million for the year 2005, and $5.8
million for the year 2004.
Net Interest Income. The largest component of the Company's operating income is
net interest income, which is the difference between interest and dividend
income received from interest earning assets and the interest expense paid on
interest bearing liabilities. The Company's net interest income increased $626
thousand, or 3.5%, to $18.4 million for the year ended December 31, 2006, from
$17.8 million for the year ended December 31, 2005. This increase was due
primarily to larger growth in earning assets than interest bearing liabilities,
and the continued increases in the prime interest rate during the first half of
the year. Variable-rate loans responded to the increases in the prime rate at
their repricing dates. In addition, $15.6 million of lower rate investment
securities and interest bearing deposits matured or were sold and overnight
federal funds sold, while down in volume were up in yield.
On average for the year, 93.5% of assets earned interest in 2006 versus 93.0%
in 2005. The net interest spread decreased to 4.86% for the year-ended December
31, 2006, from 4.99% for the year ended December 31, 2005, reflecting the
continued challenging interest rate environment. The net interest margin for
the 2006 period increased two basis points to 5.35% from 5.33% for the 2005
period as variable-rate loans adjusted to higher rates at their repricing
dates.
46
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Yields Earned and Rates Paid. The following table shows for the periods
indicated, the total amount of income recorded from average interest earning
assets, the related average yields, the interest expense associated with
average interest bearing liabilities, the related average rates paid, and the
relative net interest spread and margin. Yield and rate information for a
period is average information for the period, and is calculated by dividing the
tax equivalent income or expense item for the period by the average balance of
the appropriate balance sheet item during the period. Nonaccrual loans are
included in asset balances for the appropriate periods, but recognition of
interest on such loans is discontinued and any remaining accrued interest
receivable is reversed, in conformity with federal regulations.
Years Ended December 31,
------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Average Assets
Federal funds sold and
overnight deposits $ 4,173 $ 214 5.05% $ 5,560 $ 188 3.34% $ 3,851 $ 47 1.20%
Interest bearing deposits
in banks 6,855 269 3.92% 8,073 280 3.47% 6,631 207 3.12%
Investment securities (1), (2) 26,179 1,157 4.75% 35,080 1,491 4.51% 42,787 1,944 4.75%
Loans, net (1), (3) 312,149 23,459 7.61% 288,854 20,240 7.08% 272,204 17,941 6.65%
FHLB of Boston stock 1,520 98 6.36% 1,241 50 3.94% 1,241 32 2.56%
------------------------------------------------------------------------------------------------
Total interest earning
assets (1) 350,876 25,197 7.29% 338,808 22,249 6.66% 326,714 20,171 6.25%
Cash and due from banks 10,338 12,360 14,925
Premises and equipment 6,068 5,439 4,855
Other assets 8,062 7,840 7,350
------------------------------------------------------------------------------------------------
Total assets $375,344 $364,447 $353,844
================================================================================================
Average Liabilities and
Stockholders' Equity
NOW accounts $ 52,937 391 0.74% $ 51,813 267 0.51% $ 45,619 185 0.41%
Savings/money market
accounts 102,347 1,673 1.63% 109,669 1,297 1.18% 111,893 836 0.75%
Time deposits 105,688 3,843 3.64% 96,852 2,421 2.50% 92,656 1,927 2.08%
Borrowed funds 18,907 914 4.77% 11,335 514 4.47% 9,674 362 3.66%
------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 279,879 6,821 2.43% 269,669 4,499 1.67% 259,842 3,310 1.27%
Noninterest bearing deposits 49,328 50,007 49,638
Other liabilities 4,315 3,812 3,172
------------------------------------------------------------------------------------------------
Total liabilities 333,522 323,488 312,652
Stockholders' equity 41,822 40,959 41,192
------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $375,344 $364,447 $353,844
================================================================================================
Net interest income $18,376 $17,750 $16,861
=====================================================================================
Net interest spread (1) 4.86% 4.99% 4.98%
Net interest margin (1) 5.35% 5.33% 5.24%
- --------------------
(1) Average yields reported on a tax equivalent basis.
(2) Average balances of investment securities are calculated on the amortized cost basis.
(3) Includes loans held for sale and is net of unearned income and allowance for loan losses.
47
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Rate/Volume Analysis. The following table describes the extent to which changes
in average interest rates and changes in volume of average interest earning
assets and interest bearing liabilities have affected the Company's interest
income and interest expense during the periods indicated. For each category of
interest earning assets and interest bearing liabilities, information is
provided on changes attributable to:
o changes in volume (change in volume multiplied by prior rate);
o changes in rate (change in rate multiplied by prior volume); and
o total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
Year-Ended December 31, 2006 Year-Ended December 31, 2005
Compared to Year-Ended Compared to Year-Ended
December 31, 2005 Increase/ December 31, 2004 Increase/
(Decrease) Due to Change In (Decrease) Due to Change In
--------------------------------------------------------------
Volume Rate Net Volume Rate Net
--------------------------------------------------------------
(Dollars in thousands)
Interest earning assets
Federal funds sold and overnight deposits $ (55) $ 81 $ 26 $ 28 $ 113 $ 141
Interest bearing deposits in banks (45) 34 (11) 47 26 73
Investment securities (415) 81 (334) (352) (101) (453)
Loans, net 1,668 1,551 3,219 1,117 1,182 2,299
FHLB of Boston stock 13 35 48 -- 18 18
--------------------------------------------------------------
Total interest earning assets $1,166 $1,782 $2,948 $ 840 $1,238 $2,078
--------------------------------------------------------------
Interest bearing liabilities
NOW accounts $ 6 $ 118 $ 124 $ 28 $ 54 $ 82
Savings/money market accounts (91) 467 376 (17) 478 461
Time deposits 238 1,184 1,422 90 404 494
Borrowed funds 364 36 400 67 85 152
--------------------------------------------------------------
Total interest bearing liabilities $ 517 $1,805 $2,322 $ 168 $1,021 $1,189
--------------------------------------------------------------
Net change in net interest income $ 649 $ (23) $ 626 $ 672 $ 217 $ 889
==============================================================
Interest and Dividend Income 2006 versus 2005. The Company's interest and
dividend income increased $2.9 million or 13.3% to $25.2 million for the year
ended December 31, 2006 from $22.3 million for the year ended December 31,
2005. Average earning assets increased $12.1 million or 3.6% from $338.8
million at December 31, 2005 to $350.9 million at December 31, 2006. Average
loans were $312.1 million for the year ended December 31, 2006 compared to
$288.9 million for the year ended December 31, 2005, which is an increase of
$23.3 million or 8.1%. Increases in average residential real estate, commercial
real estate, commercial and municipal loans, were partially offset by declines
in real estate construction loans and the installment loan portfolio. The yield
on the loan portfolio increased from 7.08% for the year ended December 31,
2005, to 7.61% for the year ended December 31, 2006, or an increase of 53 basis
points, as short-term interest rates and the prime rate continued to rise
during the first half of 2006 and adjustable-rate loans repriced accordingly.
The average balance of investment securities (including mortgage-backed
securities) decreased $8.9 million or 25.4% from $35.1 million for the year
ended December 31, 2005 to $26.2 million for the year ended December 31, 2006.
This decrease was due to a decision to utilize cash flows from existing
investments, and the sale of a portion of the Company's portfolio of debt and
equity securities to fund the loan demand which outpaced the growth in
deposits. The yield on the investment portfolio increased from 4.51% for 2005
to 4.75% for 2006 or 24 basis points as the duration of the portfolio has been
kept short in anticipation of the rise in interest rates which started mid-2004
but has not yet happened on longer term instruments and to fund the Company's
ordinary liquidity needs as well as anticipated loan growth. The average level
of federal funds sold and overnight deposits decreased $1.4 million or 24.9%
from $5.6 million for the year ended December 31, 2005 to $4.2 million for the
year ended December 31, 2006. The yield on federal funds sold and overnight
deposits increased from 3.34% for 2005 to 5.05% for 2006, or 171 basis points,
the result of continuing increases in short-term rates by the Federal Reserve
during
48
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
the first half of 2006. The average balance of interest bearing deposits in
banks decreased $1.2 million or 15.1% to $6.9 million for the year ended
December 31, 2006 from $8.1 million for the year ended December 31, 2005. These
deposit instruments are FDIC insured. The yield on interest bearing deposits in
banks increased from 3.47% for 2005 to 3.92% for 2006 or 45 basis points,
reflecting the rising rate environment and competitive pricing pressures.
Interest and Dividend Income 2005 versus 2004. The Company's interest and
dividend income increased $2.1 million or 10.3% to $22.3 million for the year
ended December 31, 2005 from $20.2 million for the year ended December 31,
2004. Average earning assets increased $12.1 million or 3.7% from $326.7
million at December 31, 2004 to $338.8 million at December 31, 2005. Average
loans were $288.9 million for the year ended December 31, 2005 compared to
$272.2 million for the year ended December 31, 2004, which is an increase of
$16.7 million or 6.1%. Increases in residential real estate, commercial real
estate, and municipal loans, were partially offset by declines in real estate
construction loans and the installment loan portfolio. The yield on the loan
portfolio increased from 6.65% for the year ended December 31, 2004 to 7.08%
for the year ended December 31, 2005, or an increase of 43 basis points, as
short-term interest rates continued to rise during 2005.
The average balance of investment securities (including mortgage-backed
securities) decreased $7.7 million or 18.0% from $42.8 million for the year
ended December 31, 2004 to $35.1 million for the year ended December 31, 2005.
This decrease was due to a decision to utilize cash flows from existing
investments, and the sale of a portion of the Company's portfolio of debt and
equity securities to fund the loan demand which outpaced the growth in
deposits. The yield on the investment portfolio dropped from 4.75% for 2004 to
4.51% for 2005 or 24 basis points as the duration of the portfolio has been
kept short in anticipation of the rise in interest rates which started mid-2004
and to fund the Company's ordinary liquidity needs as well as anticipated loan
growth. The average level of federal funds sold and overnight deposits
increased $ 1.7 million or 44.4% from $3.9 million for the year ended December
31, 2004 to $5.6 million for the year ended December 31, 2005. The yield on
federal funds sold and overnight deposits increased from 1.20% for 2004 to
3.34% for 2005, or 214 basis points, the result of continuing increases in
short-term rates by the Federal Reserve. The average balance of interest
bearing deposits in banks increased $1.4 million or 21.7% to $8.1 million for
the year ended December 31, 2005 from $6.6 million for the year ended December
31, 2004. These deposit instruments are FDIC insured. The yield on interest
bearing deposits in banks increased from 3.12% for 2004 to 3.47% for 2005 or 35
basis points.
Interest Expense 2006 versus 2005. The Company's interest expense increased
$2.3 million or 51.6% from $4.5 million for the year ended December 31, 2005 to
$6.8 million for the year ended December 31, 2006. Interest rates paid in 2006
increased for all categories of interest bearing liabilities as short-term
interest rates rose during the first half of the year and financial
institutions competed aggressively for deposits. Average interest bearing
liabilities increased $10.2 million or 3.8% from $269.6 million for the year
ended December 31, 2005 to $279.9 million for the year ended December 31, 2006.
Average NOW accounts increased $1.1 million or 2.2% from $51.8 million for the
year ended December 31, 2005 to $52.9 million for the year ended December 31,
2006 mainly due to the redesign of our deposit products which resulted in the
introduction of a free NOW account to customers 55 and older in May 2005 and
also the increase in funds held in NOW accounts by municipalities in 2006. The
average balances of savings and money market accounts decreased $7.3 million or
6.7% from $109.7 million for the year ended December 31, 2005 to $102.3 million
for the year ended December 31, 2006 as customers moved funds into time
deposits to take advantage of the higher interest rates offered. Time deposits
increased $8.8 million or 9.1% to $105.7 million for 2006 from $96.9 million
for 2005. The market for these deposits was very competitive throughout 2006
with brokerage firms and insurance companies pushing the interest rates offered
up dramatically. The average rate paid on interest bearing deposits increased
72 basis points from 1.54% in 2005 to 2.26% in 2006. This contributed
significantly to the reduction in the net interest spread from 4.99% in 2005 to
4.86% in 2006. The average balance of borrowed funds increased $7.6 million or
66.8%, from $11.3 million for the year ended December 31, 2005, to $18.9
million for the year ended December 31, 2006. The Company used this source of
monies to fund loan growth as lower cost deposits weren't always available as a
funding source due to the continuing competitive market for deposit dollars and
seasonal shifts in municipal deposits. The balance in borrowed funds, which are
all in the form of Federal Home Loan Bank advances, was down to $14.6 million
by December 31, 2006 as traditionally the fourth quarter of the year is the
strongest in terms of municipal deposit levels. The average rate paid for
borrowed funds increased from 4.47% for the year ended December 31, 2005 to
4.77% for the year ended December 31, 2006 reflecting the rising interest rate
environment during 2006.
Interest Expense 2005 versus 2004. The Company's interest expense increased
$1.2 million or 35.9% from $3.3 million for the year ended December 31, 2004 to
$4.5 million for the year ended December 31, 2005. Interest rates paid-in 2005
increased for all categories of interest bearing liabilities as short-term
interest rates rose during the year
49
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
and financial institutions competed aggressively for deposits. Average interest
bearing liabilities increased $9.8 million or 3.8% from $259.8 million for the
year ended December 31, 2004 to $269.6 million for the year ended December 31,
2005. Average NOW accounts increased $6.2 million or 13.6% from $45.6 million
for the year ended December 31, 2004 to $51.8 million for the year ended
December 31, 2005 mainly due to the redesign of our deposit products which
resulted in the offering of a new free NOW account to customers 55 and older.
The average balances of savings and money market accounts decreased $2.2
million or 2.0% from $111.9 million for the year ended December 31, 2004 to
$109.7 million for the year ended December 31, 2005. Time deposits increased
$4.2 million or 4.5%, as customers took advantage of increases in time deposit
rates resulting from a competitive market in these types of deposits during
2005, and the continuing increases in short-term interest rates. The average
balance of borrowed funds increased $1.7 million or 17.2%, from $9.7 million
for the year ended December 31, 2004, to $11.3 million for the year ended
December 31, 2005. The Company used this source of monies to fund loan growth
as lower cost deposits weren't as available as a funding source due to the
continuing competitive market for deposit dollars. The average rate paid for
borrowed funds increased from 3.66% for the year ended December 31, 2004 to
4.47% for the year ended December 31, 2005 reflecting the rising interest rate
environment during 2005.
Provision for Loan Losses. Due to management's assessment of the credit quality
of the Company's loan customers, the growth in the loan portfolio, and economic
conditions and risks, including the impact of the lack of snow in late 2006 in
our market area, the provision for loan losses was increased from $60 thousand
in 2005 to $180 thousand in 2006. The provision had increased from $30 thousand
in 2004 to $60 thousand in 2005.
Noninterest income. The following table sets forth changes from 2005 to 2006
and 2004 to 2005 for the components of noninterest income:
For The Year Ended December 31,
-------------------------------------------------
2006 2005 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Trust income $ 304 $ 301 $ 3 1.0
Service fees 3,109 2,905 204 7.0
Net gains on sales of investment securities 135 145 (10) (6.9)
Net gains on sales of loans held for sale 288 192 96 50.0
Net gains on sales of other real estate owned -- 336 (336) (100.0)
Other 222 184 38 20.7
-----------------------------------------------
Total noninterest income $ 4,058 $ 4,063 $ (5) (0.1)
===============================================
For The Year Ended December 31,
-------------------------------------------------
2005 2004 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Trust income $ 301 $ 204 $ 97 47.5
Service fees 2,905 2,809 96 3.4
Net gains on sales of investment securities 145 24 121 504.2
Net gains on sales of loans held for sale 192 444 (252) (56.8)
Net gains on sales of other real estate owned 336 90 246 273.3
Other 184 210 (26) (12.4)
-----------------------------------------------
Total noninterest income $ 4,063 $ 3,781 $ 282 7.5
===============================================
Trust income. For 2005 compared to 2004, the increase resulted from
approximately $46 thousand in fees for one-time services and increases in
regular fees due to the improved market value of assets under management.
Service fees. The increase in service fees for 2006 compared to 2005 is
primarily due to the increase in overdraft fees from $989 thousand in 2005 to
$1.136 million in 2006 and the increase in ATM and interchange fees from $615
thousand in 2005 to $676 thousand in 2006.
50
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net gains on sales of loans held for sale. Net gains increased from 2005 to
2006 by $96 thousand or 50.0% even though total loans sold only increased 18.7%
to $17.8 million in 2006 from $15.0 million in 2005. Gains decreased from 2004
to 2005 as the Company decided to hold more originated residential mortgages in
portfolio and there was a reduced volume of refinancings. Sales of loans held
for sale decreased from $25.8 million in 2004 to $15.0 million in 2005.
Net gains on sales of other real estate owned. The increase in 2005 compared to
2004 was due primarily to the transfer during 2005 of the value of the
collateral into OREO from nonperforming loans and the subsequent sale prior to
year end of the underlying properties from one mixed commercial and residential
loan relationship.
Noninterest expense. The following table sets forth changes from 2005 to 2006
and 2004 to 2005 for the components of noninterest expense:
For The Year Ended December 31,
-------------------------------------------------
2006 2005 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Salaries and wages $ 6,012 $ 5,627 $ 385 6.8
Pension and employee benefits 2,344 2,045 299 14.6
Occupancy expense, net 802 789 13 1.6
Equipment expense 1,038 1,041 (3) (0.3)
Professional fees 272 283 (11) (3.9)
Advertising 244 265 (21) (7.9)
Vermont franchise tax 279 236 43 18.2
Equity in losses of limited partnerships 297 222 75 33.8
Other 2,526 2,548 (22) (0.9)
-----------------------------------------------
Total noninterest expense $13,814 $13,056 $ 758 5.8
===============================================
For The Year Ended December 31,
-------------------------------------------------
2005 2004 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Salaries and wages $ 5,627 $ 5,401 $ 226 4.2
Pension and employee benefits 2,045 1,973 72 3.6
Occupancy expense, net 789 737 52 7.1
Equipment expense 1,041 931 110 11.8
Professional fees 283 201 82 40.8
Advertising 265 224 41 18.3
Vermont franchise tax 236 263 (27) (10.3)
Equity in losses of limited partnerships 222 140 82 58.6
Other 2,548 2,449 99 4.0
-----------------------------------------------
Total noninterest expense $13,056 $12,319 $ 737 6.0
===============================================
Salaries, wages and benefits. The salaries and wages increase in 2006 over 2005
was due primarily to regular salary activity and the expansion of the Littleton
loan production office to a full service branch. The increase in expenses for
the pension and employee benefits was partially due to growth but $176 thousand
was due to the increased cost of partially self insured medical plans and $78
thousand was due to the defined benefit pension plan expense increase. The
increase in 2005 over 2004 was due primarily to regular salary activity, and
the opening of the St. Albans, Vermont, loan production office during 2005, and
increases in 401(k) contributions and in the Company's medical insurance costs.
51
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Occupancy and equipment expense. Despite the construction and furnishing of the
new Littleton branch, occupancy and equipment expense both remained stable from
2005 to 2006. Occupancy expense increased in 2005 versus 2004 due to the
opening of the St. Albans, Vermont, loan production office, the setup and
utilization of a temporary branch location while the Portland Street, St.
Johnsbury, Vermont, branch was renovated as well as increases in utility and
heating fuel expenses. The increase in equipment expense for 2005 versus 2004
was due mainly to increased depreciation expense and maintenance contract
expense as computers, software, ATM's and other equipment, were upgraded to
remain current and competitive.
Professional fees. Professional fees increased in 2005 versus 2004 due
primarily to $36 thousand in expenses related to the Company's ongoing
implementation of provisions of the Sarbanes-Oxley Act of 2002, $31 thousand in
expenses related to information systems testing and management services, $9
thousand in fees related to strategic planning, and $9 thousand related to
review of the Company's nonqualified deferred compensation plan. The Company
also incurred professional fees related to the development and launch of new
retail deposit products during 2005.
Advertising expense. Advertising expense increased in 2005 versus 2004 due
primarily to marketing efforts related to the opening of the St. Albans,
Vermont, loan center and advertising programs related to the launch of new
retail deposit products.
Vermont franchise tax. Vermont franchise tax, which is based on deposits,
increased for 2006 compared to 2005 as $33 thousand of the net tax credits
purchased in 2005 applied to that year only and the remaining increase of $10
thousand was due to the increase in average deposits for 2006. The decrease for
2005 compared to 2004 is the result of franchise tax credits acquired and
applied during 2005, which were partially offset by increases due to the
increase in average deposits.
Equity in losses of limited partnerships. These expenses increased in both 2006
and 2005 due primarily to equity in losses of 2005 investments in affordable
housing projects. The Company invested in two additional affordable housing
projects during 2005. The Company receives income tax credits from these
investments as well as a reduction in income tax expense from the equity in
losses.
Income Tax Expense. The Company has provided for current and deferred federal
income taxes for the current and all prior periods presented. The Company's
provision for income taxes decreased to $2.2 million for 2006 from $2.5 million
for 2005. This is mainly the result of the decrease in federal income taxes
from decreased taxable income and the higher amount of low income housing tax
credits received in the 2006 tax year related to the Company's mid 2005 limited
partnership investments in two low income housing projects in its market area.
The provision was flat at $2.6 million for both 2005 and 2004 despite the
increase in federal income taxes from increased taxable income as that increase
was offset by increased low income housing credits for 2005 related to the new
investments. The Company's effective tax rate for 2006 was 25.9% compared to
28.3% for 2005 and 29.6% for 2004.
FINANCIAL CONDITION
At December 31, 2006, the Company had total consolidated assets of $381.1
million, including gross loans and loans held for sale ("total loans") of
$317.6 million, deposits of $319.8 million and stockholders' equity of $41.9
million. Based on the most recent information published by the Vermont Banking
Commissioner, in terms of total assets at December 31, 2005, Union Bank ranked
as the fifth largest institution of the nineteen commercial banks and savings
institutions headquartered in Vermont.
The Company's total assets increased by $6.4 million, or 1.7% to $381.1 million
at December 31, 2006 from $374.7 million at December 31, 2005. Total net loans
and loans held for sale increased by $10.1 million or 3.3% to $314.1 million,
representing 82.4% of total assets at December 31, 2006 as compared to $304.0
million or 81.1% of total assets at December 31, 2005. This was due to
increases of $7.7 million in residential real estate loans, $4.5 million in
real estate construction loans and $2.3 million in municipal loans. These
increases were partially offset by a $1.4 million decrease in commercial loans
and a $2.8 million decrease in loans held for sale. Loan growth was moderate
during the year and was lessened by management's decision to continue to sell
some low fixed-rate loans into the secondary market during 2006 to mitigate
future interest rate risk and to participate out a few of large commercial real
estate loans to mitigate the level of credit risk.
52
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash and due from banks decreased from $14.0 million at December 31, 2005 to
$11.7 million at December 31, 2006. Federal funds sold and overnight deposits
increased $9.1 million to $9.3 million at December 31, 2006 from $190 thousand
at December 31, 2005. Investment securities available-for-sale decreased $8.7
million or 27.0% from $32.4 million at December 31, 2005 to $23.7 million at
December 31, 2006. The decrease was due to funds maturing as well as the sale
of $7.8 million of debt and equity securities, at a net gain of $135 thousand,
that were not reinvested in securities but were instead used to support loan
demand. There was also an increase of $85 thousand in the unrealized holding
losses resulting in unrealized net losses of $233 thousand at December 31, 2006
due to the increase in interest rates during 2006 which resulted in a reduction
in the value of debt securities held.
Total deposits increased $6.5 million or 2.1% to $319.8 million at December 31,
2006 from $313.3 million at December 31, 2005. Noninterest bearing deposits
increased 4.3% or $2.3 million from $52.6 million at December 31, 2005 to $54.9
million at December 31, 2006. Interest bearing deposits increased 1.6% or $4.3
million from $260.7 million to $264.9 million.
Borrowed funds from the Federal Home Loan Bank of Boston decreased $1.7 million
or 10.2% to $14.6 million at December 31, 2006 from $16.3 million at December
31, 2005 as some of the short-term liquidity advances were repaid.
Loan demand and net growth after loan sales outpaced the increase in deposits
during 2006. This differential was supported by the decrease in investment
securities and interest bearing deposits in banks. Please refer back to the
discussion of average balances on a year-to-year basis presented in the Results
of Operations section above for additional information.
Total stockholders' equity increased by $320 thousand or 0.8% to $41.9 million
at December 31, 2006 from $41.6 million at December 31, 2005. This increase
reflected net income of $6.2 million, offset by dividend payments of $4.8
million, the purchase of treasury stock for $227 thousand, an increase of $56
thousand in the net unrealized holding loss on investment securities
available-for-sale and the adjustment to initially apply SFAS No. 158, net of
tax effect, of $849 thousand for the Company's defined benefit pension plan.
Loan Portfolio. The Company's loan portfolio (including loans held for sale)
primarily consists of adjustable-and fixed-rate mortgage loans secured by
one-to-four family, multifamily residential or commercial real estate. As of
December 31, 2006, the gross loan portfolio totaled $317.6 million or 83.3% of
assets compared to $307.2 million or 82.0% of assets as of December 31, 2005.
Total loans have increased $10.3 million or 3.4% since December 31, 2005,
despite selling $17.8 million of loans held for sale during 2006 resulting in a
gain on sale of loans of $288 thousand. Sales of loans in 2005 totaled $15.0
million for a gain of $192 thousand and $25.8 million for a gain of $444
thousand in 2004. Management expects to continue to use this strategy to manage
interest rate exposure in the future.
The composition of the Company's total loan portfolio at year-end for each of
the last five years was as follows:
Year Ended, December 31,
2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate 114,139 35.9 106,470 34.7 100,130 35.7 89,974 33.1 94,977 37.1
Construction real estate 22,568 7.1 18,066 5.9 20,050 7.2 18,257 6.7 14,370 5.6
Commercial real estate 130,848 41.2 130,483 42.5 108,474 38.7 102,366 37.7 86,081 33.6
Commercial 19,253 6.1 20,650 6.7 20,584 7.4 17,877 6.6 19,919 7.8
Consumer & other 7,717 2.4 7,999 2.6 8,729 3.1 9,402 3.5 10,758 4.2
Municipal 19,297 6.1 17,009 5.5 13,454 4.8 15,346 5.6 12,869 5.0
Loans held for sale 3,750 1.2 6,546 2.1 8,814 3.1 18,524 6.8 17,139 6.7
------------------------------------------------------------------------------------------------
Total loans 317,572 100.0 307,223 100.0 280,235 100.0 271,746 100.0 256,113 100.0
================================================================================================
53
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
For residential loans, the Company does not lend more than 80% of the appraised
value of the home without a government guaranty or the borrower purchasing
private mortgage insurance and never lends more than 100% of the value. The
Company lends up to 80% of the collateral value on small commercial real estate
loans to strong borrowers. The majority of commercial real estate loans do not
exceed 75% of the appraised collateral value. However, the loan to value may go
up to 90% on loans with government guarantees or other mitigating
circumstances. The Company does not make loans that are interest only or that
result in negative amortization of the principal, except for construction and
other short-term loans for either commercial or consumer purposes where the
credit risk is evaluated on a borrower by borrower basis. The Company evaluates
the borrower's ability to pay on variable-rate loans over a variety of interest
rate scenarios not just the current rate.
The Company originates and sells residential mortgages into the secondary
market, with most such sales made to the Federal Home Loan Mortgage Corporation
("FHLMC") and the Vermont Housing Finance Agency ("VHFA"). These loans are
classified as held for sale at the time of origination and accounted for at the
lower of cost or fair value and reviewed at least quarterly based on current
market pricing. The Company serviced a residential real estate mortgage
portfolio of $198.5 million and $184.7 million at December 31, 2006 and 2005,
respectively. Of that portfolio, $84.3 million at December 31, 2006 and $78.2
million at December 31, 2005 was serviced for unaffiliated third parties.
Additionally, the Company originates commercial real estate and commercial
loans under various Small Business Administration ("SBA") programs that provide
an agency guarantee for a portion of the loan amount. The Company occasionally
sells the guaranteed portion of the loan to other financial concerns and will
retain servicing rights, which generates fee income. These loans are classified
as held for sale as they are identified and accounted for at the lower of cost
or fair value and priced at least quarterly by an independent party. The
Company serviced approximately $7.9 million of commercial and commercial real
estate loans for unaffiliated third parties as of December 31, 2006 and $6.8
million at December 31, 2005. The Company capitalizes servicing rights on these
fees and recognizes gains and losses on the sale of the principal portion of
these notes as they occur. The unamortized balance of servicing rights on loans
sold with servicing retained was $310 thousand as of December 31, 2006 and $295
thousand as of December 31, 2005, with an estimated market value in excess of
their carrying value at both year ends. Management periodically evaluates and
measures the servicing assets for impairment.
In the ordinary course of business, the Company occasionally participates out a
portion of commercial/commercial real estate loans to other financial
institutions for liquidity or credit concentration management purposes. The
total of loans participated out as of December 31, 2006 was $9.5 million and
$6.5 million at December 31, 2005.
The majority of the Company's loan portfolio is secured by real estate located
throughout Northern Vermont and New Hampshire. Underlying real estate values
for both residential and commercial loans have only decreased slightly in the
Company's market area during the last year, though a quick sale may not be
possible in all cases should a sale of real estate collateral become necessary.
Although the Company's loan portfolio consists of different segments, there is
a portion of the loan portfolio centered in tourism related loans. The Company
has implemented risk management strategies to mitigate exposure in this
industry through utilizing government guaranty programs as well as
participations with other financial institutions as discussed above.
Additionally, the loan portfolio contains many seasoned and well established
and/or well secured loans which further reduce the Company's risk. Management
closely follows the local and national economies and their impact on the local
tourism industry as part of the Company's risk management program.
54
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table breaks down by classification the maturities of the gross
loans held in portfolio and held for sale as of December 31, 2006:
Within
1 2-5 Over 5
Year Years Years
--------------------------------
(Dollars in thousands)
Residential real estate
Fixed-rate $ 3,610 $ 4,515 $ 40,413
Variable-rate 3,644 1,263 63,396
Construction real estate
Fixed-rate 15,729 575 138
Variable-rate 1,002 2,398 2,726
Commercial real estate
Fixed-rate 1,808 2,260 9,007
Variable-rate 13,370 8,611 96,840
Commercial
Fixed-rate 1,489 6,197 507
Variable-rate 5,454 3,412 2,194
Municipal
Fixed-rate 14,531 2,058 1,370
Variable-rate -- -- 1,338
Consumer & Other
Fixed-rate 2,257 4,772 299
Variable-rate 328 61 --
--------------------------------
Total $63,222 $36,122 $218,228
================================
Asset Quality. The Company, like all financial institutions, is exposed to
certain credit risks including those related to the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors the Company's loan and investment portfolios and
other real estate owned for potential problems and reports to the Company's and
the subsidiary's Boards of Directors at regularly scheduled meetings. Policies
set forth portfolio diversification levels to mitigate concentration risk.
The Company's Board of Directors has set forth lending policies (which are
periodically reviewed and revised as appropriate) that include low individual
lending limits for officers, Board approval for large credit relationships, a
loan review program and other limits or standards deemed necessary and prudent.
The Company's loan credit review department is supervised by an experienced
former regulatory examiner and staffed by a Certified Public Accountant and
encompasses a quality control process for loan documentation and underwriting
that includes post-closing reviews. The Company also maintains a monitoring
process for credit extensions. The Company performs periodic concentration
analyses based on various factors such as industries, collateral types, large
credit sizes and officer portfolio loads. The Company has established
underwriting guidelines to be followed by its officers, exceptions are required
to be approved by a senior loan officer or the Board of Directors. The Company
monitors its delinquency levels for any negative or adverse trends. There can
be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general or local economic conditions.
Restructured loans include the Company's troubled debt restructurings that
involved forgiving a portion of interest or principal on any loans, refinancing
loans at a rate materially less than the market rate, rescheduling loan
payments, or granting other concessions to a borrower due to financial or
economic reasons related to the debtor's financial difficulties. Restructured
loans do not include qualifying restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period of time.
Restructured loans in compliance with modified terms totaled $1.3 million at
December 31, 2006 all of which are guaranteed by the U.S. Department of
Agriculture, and $21 thousand at December 31, 2005. At December 31, 2006, the
Company was not committed to lend any additional funds to borrowers whose terms
have been restructured.
55
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Management reviews the loan portfolio continuously for
evidence of problem loans. Such loans are placed under close supervision with
consideration given to placing the loan on nonaccrual status. Loans are
designated as nonaccrual when reasonable doubt exists as to the full collection
of interest and principal. Normally, when a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of interest
and principal is probable. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and principal and
when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
The Company had loans on nonaccrual status totaling $2.5 million at December
31, 2006 and $1.3 million at December 31, 2005. Of the $2.5 million in
nonaccrual status at December 31, 2006, there is a U.S. Small Business
Administration guarantee on $315 thousand. The aggregate interest on nonaccrual
loans not recognized for the years ended December 31, 2006, 2005 and 2004 was
$371, $268, and $338 thousand respectively.
The Company had $2.2 million and $3.3 million in loans past due 90 days or more
and still accruing at December 31, 2006 and 2005, respectively. Certain loans,
totaling $348 thousand, past due 90 days or more and still accruing interest
are covered by guarantees of U.S. government or state agencies. At December 31,
2006, the Company had internally classified certain loans totaling $319
thousand and $2.8 million at December 31, 2005. In management's view, such
loans represent a higher degree of risk and could become nonperforming loans in
the future. While still on a performing status, in accordance with the
Company's credit policy, loans are internally classified when a review
indicates the existence of any of the following conditions making the
likelihood of collection questionable:
o the financial condition of the borrower is unsatisfactory;
o repayment terms have not been met;
o the borrower has sustained losses that are sizable, either in absolute
terms or relative to net worth;
o confidence is diminished;
o loan covenants have been violated;
o collateral is inadequate; or
o other unfavorable factors are present.
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are held for sale and are initially recorded at
the lesser of the recorded loan or fair value at the date of the Company's
acquisition of the property, with fair value based on an appraisal for more
significant properties and on management's estimate for minor properties. The
Company had property classified as OREO at December 31, 2006 valued at $399
thousand and no property so classified on December 31, 2005.
Allowance for Loan Losses. Some of the Company's loan customers ultimately do
not make all of their contractually scheduled payments, requiring the Company
to charge off a portion or all of the remaining principal balance due. The
Company maintains an allowance for loan losses to absorb such losses. The
allowance is maintained at a level which, by management's best estimate, is
adequate to absorb probable credit losses inherent in the loan portfolio;
however, actual loan losses may vary from current estimates.
Adequacy of the allowance for loan losses is determined using a consistent,
systematic methodology, which analyzes the risk inherent in the loan portfolio.
In addition to evaluating the collectibility of specific loans when determining
the adequacy of the allowance, management also takes into consideration other
factors such as changes in the mix and size of the loan portfolio, historic
loss experience, the amount of delinquencies and loans adversely classified,
industry trends, and the impact of the local and regional economy on the
Company's borrowers. The adequacy of the allowance for loan losses is assessed
by an allocation process whereby specific loss allocations are made against
certain adversely classified loans and general loss allocations are made
against segments of the loan portfolio which have similar attributes. While the
Company allocates the allowance for loan losses based on the percentage
category to total loans, the portion of the allowance for loan losses allocated
to each category does not represent the total available for future losses which
may occur within the loan category since the total allowance for possible loan
losses is a valuation reserve applicable to the entire portfolio.
The allowance is increased by a provision for loan losses, which is charged to
earnings and reduced by charge-offs, net of recoveries. The provision for loan
losses represents the current period credit cost associated with maintaining an
appropriate allowance for loan losses. Based on an evaluation of the loan
portfolio, management presents a
56
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
quarterly analysis of the allowance to the Board of Directors, indicating any
changes in the allowance since the last review and any recommendations as to
adjustments in the allowance. Additionally, bank regulatory agencies
periodically review the Company's allowance for loan losses as an integral part
of their examination process.
Credit quality of the commercial portfolio is quantified by a corporate credit
rating system designed to parallel regulatory criteria and categories of loan
risk. Individual loan officers monitor their loans to ensure appropriate rating
assignments are made on a timely basis. Risk ratings and quality of commercial
and retail credit portfolios are also assessed on a regular basis by an
independent Credit Review Department. Credit Review personnel conduct ongoing
portfolio analyses and individual credit reviews to evaluate loan risk and
compliance with corporate lending policies. The level of allowance allocable to
each group of risk rated loans is then determined by applying a loss factor
that estimates the amount of probable loss in each category. The assigned loss
factor for each risk rating is based upon management's assessment of historical
loss data, portfolio characteristics, economic trends, overall market
conditions and past experience.
Consumer and residential real estate loan quality is evaluated on a portfolio-
wide basis including delinquency data and other available credit data due to
the large number of such loans and the relatively small size of individual
credits. Allocations for these loan categories are principally determined by
applying loss factors that represent management's best estimate of inherent
probable credit losses based upon historical loss data, portfolio
characteristics, economic trends, overall market conditions and past
experience. In addition, certain loans in these categories may be individually
risk rated if considered necessary by management.
The other method used to allocate the allowance for loan losses entails the
assignment of reserve amounts to individual loans on the basis of loan
impairment. Certain loans are evaluated individually and are judged to be
impaired when management believes it is probable that the Company will not
collect all the contractual interest and principal payments as scheduled in the
loan agreement. Under this method, loans are selected for evaluation based on
internal risk ratings or nonaccrual status. A specific reserve amount is
allocated to an individual loan when that loan has been deemed impaired on the
basis of its collateral value, the present value of anticipated future cash
flows, or its net realizable value.
For the year-ended December 31, 2006, the methodology used to determine the
provision for loan losses was unchanged from the prior year. The composition of
the Company's loan portfolio remained relatively unchanged from December 31,
2005, and there was no material change in the lending programs or terms during
the year.
The following table reflects activity in the allowance for loan losses for the
years ended December 31:
2006 2005 2004 2003 2002
--------------------------------------------------
(Dollars in thousands)
Balance at the beginning of period $3,071 $3,067 $3,029 $2,908 $2,801
Charge-offs
Real estate 8 28 37 17 108
Commercial 3 19 26 10 115
Consumer and other 73 63 53 65 136
--------------------------------------------------
Total charge-offs 84 110 116 92 359
--------------------------------------------------
Recoveries
Real estate 26 14 6 2 8
Commercial 18 4 72 28 24
Consumer and other 127 36 46 69 78
--------------------------------------------------
Total recoveries 171 54 124 99 110
--------------------------------------------------
Net (charge-offs) recoveries 87 (56) 8 7 (249)
Provision for loan losses 180 60 30 114 356
--------------------------------------------------
Balance at end of period $3,338 $3,071 $3,067 $3,029 $2,908
==================================================
57
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table shows the breakdown of the Company's allowance for loan
loss by category of loan (net of loans held for sale) and the percentage of
loans in each category to total loans in the respective portfolios at December
31:
2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate
Residential $ 640 34.8 $ 571 35.4 $ 585 34.4 $ 550 33.2 $ 534 37.4
Commercial 1,901 41.7 1,826 43.4 1,733 42.5 1,578 42.7 1,409 37.3
Construction 296 7.2 181 6.0 199 7.3 183 7.2 143 6.0
Other Loans
Commercial 312 6.1 343 6.9 349 7.5 336 7.1 405 9.1
Consumer installment 125 2.5 123 2.6 138 3.3 145 3.7 174 4.7
Municipal, other and
unallocated 64 7.7 27 5.7 63 5.0 237 6.1 243 5.5
----------------------------------------------------------------------------------------------------
Total $3,338 100.0 $3,071 100.0 $3,067 100.0 $3,029 100.0 $2,908 100.0
====================================================================================================
Ratio of net (recoveries)
charge-offs to average
loans not held for sale (0.03%) 0.02% 0.00% 0.00% 0.11%
Ratio of allowance for
loan losses to loans not
held for sale 1.06% 1.02% 1.13% 1.20% 1.22%
Ratio of allowance for
loan losses to
nonperforming loans (1) 70.26% 66.66% 57.91% 91.65% 127.99%
- --------------------
(1) Nonperforming loans includes loans in nonaccrual status plus loans past due 90 days or more and still accruing.
Management of the Company believes, in their best estimate, that the allowance
for loan losses at December 31, 2006 is adequate to cover probable credit
losses inherent in the Company's loan portfolio as of such date. However, there
can be no assurance that the Company will not sustain losses in future periods
which could be greater than the size of the allowance at December 31, 2006.
While the Company recognizes that an economic slowdown may adversely impact its
borrowers' financial performance and ultimately their ability to repay their
loans, management continues to be cautiously optimistic about the key credit
indicators from the Company's loan portfolio.
Investment Activities. The investment portfolio is used to generate interest
income, manage liquidity and mitigate interest rate sensitivity. At December
31, 2006, the reported value of investment securities available-for-sale was
$23.7 million or 6.2% of assets compared to $32.4 million or 8.6% of assets at
December 31, 2005. The Company had no investment securities classified as
held-to-maturity or trading. Current accounting guidance requires banks to
recognize all appreciation or depreciation of the investment portfolio either
on the balance sheet or through the income statement even though a gain or loss
has not been realized. Investment securities classified as available-for-sale
are marked-to-market with any unrealized gain or loss after taxes charged to
the equity portion of the balance sheet. The reported value of investment
securities available-for-sale at December 31, 2006 reflects a negative
valuation adjustment of $233 thousand. The offset of this adjustment, net of
income tax effect, was $154 thousand in the Company's accumulated other
comprehensive loss component of stockholders' equity and the related net
deferred tax asset was $79 thousand.
At December 31, 2006, forty-five debt securities had unrealized losses with
aggregate depreciation of 1.7% from the Company's amortized cost basis.
Securities are evaluated at least quarterly for other-than-temporary impairment
and during 2006, no security was other-than-temporarily impaired.
58
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following tables show as of December 31, 2006 and 2005 the amortized cost,
fair value and weighted average yield of the Company's investment debt
portfolio maturing within the stated periods:
December 31, 2006
----------------------------------------------------------------------------
Maturities
----------------------------------------------------------------------------
Within One to Five to Over Total Weighted
One Year Five Years Ten Years Ten Years Cost Average Yield
----------------------------------------------------------------------------
(Dollars in thousands)
Investment securities available-for-sale
U.S. Government sponsored enterprises $1,000 $ -- $ 998 $ 499 $ 2,497 4.36%
Mortgage-backed -- 3,982 1,726 5,951 11,659 4.47%
State and political subdivisions 140 2,675 941 704 4,460 5.86%
Corporate debt 500 3,898 -- 698 5,096 5.01%
---------------------------------------------------------------------------
Total investment debt securities $1,640 $10,555 $3,665 $7,852 $23,712 4.83%
===========================================================================
Fair value $1,614 $10,438 $3,618 $7,656 $23,326
==========================================================
Weighted average yield 3.63% 4.96% 5.05% 4.81% 4.83%
==========================================================
December 31, 2005
----------------------------------------------------------------------------
Maturities
----------------------------------------------------------------------------
Within One to Five to Over Total Weighted
One Year Five Years Ten Years Ten Years Cost Average Yield
----------------------------------------------------------------------------
(Dollars in thousands)
Investment securities available-for-sale
U.S. Government and agencies $ 500 $ -- $ -- $ -- $ 500 1.88%
U.S. Government sponsored enterprises -- 1,000 997 498 2,495 4.36%
Mortgage-backed -- 4,914 3,480 7,555 15,949 4.24%
State and political subdivisions 196 2,670 1,172 704 4,742 5.97%
Corporate debt 250 6,931 453 696 8,330 5.14%
---------------------------------------------------------------------------
Total investment debt securities $ 946 $15,515 $6,102 $9,453 $32,016 4.70%
===========================================================================
Fair value $ 948 $15,336 $6,034 $9,249 $31,567
==========================================================
Weighted average yield 3.85% 4.73% 4.85% 4.65% 4.70%
==========================================================
The tables above exclude marketable equity securities, with a book value of
$196 thousand and a market value of $349 thousand at December 31, 2006, and a
book value of $541 thousand and a market value of $841 thousand at December 31,
2005 which have no maturity but may be sold by the Company at any time.
59
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Deposits. The following table shows information concerning the Company's
average deposits by account type, and the weighted average nominal rates at
which interest was paid on such deposits for the years ended December 31, 2006
and 2005:
2006 2005
-----------------------------------------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
-----------------------------------------------------------------------
(Dollars in thousands)
Nontime deposits
Noninterest bearing deposits $ 49,328 15.9 -- $ 50,007 16.2 --
NOW accounts 52,937 17.1 0.74% 51,813 16.8 0.51%
Money market accounts 56,286 18.1 2.48% 59,300 19.2 1.60%
Savings accounts 46,061 14.8 0.60% 50,369 16.4 0.69%
---------------------------------------------------------------------
Total nontime deposits 204,612 65.9 1.01% 211,489 68.6 0.74%
---------------------------------------------------------------------
Time deposits
Less than $100,000 66,982 21.6 3.34% 61,834 20.1 2.23%
$100,000 and over 38,706 12.5 4.14% 35,018 11.3 2.98%
---------------------------------------------------------------------
Total time deposits 105,688 34.1 3.64% 96,852 31.4 2.50%
---------------------------------------------------------------------
Total deposits $310,300 100.0% 1.90% $308,341 100.0% 1.29%
=====================================================================
A maturity distribution of time deposits in denominations of $100,000 or more
at December 31 is as follows:
2006 2005
----------------------
(Dollars in thousands)
Three months or less $13,466 $11,545
Over three months through six months 17,254 15,660
Over six months through twelve months 11,299 6,941
Over twelve months 2,219 1,436
----------------------
$44,238 $35,582
======================
Liability for Pension Benefits. The Company has a Liability for Pension
Benefits for its defined benefit pension plan of $1.3 million at December 31,
2006 and $95 thousand at December 31, 2005. The adjustment to initially apply
SFAS No. 158 for the unfunded liability at December 31, 2006 was $1.286
million. Note 14 to the Consolidated Financial Statements includes further
discussion and information on the Company's Employee benefits and is
incorporated herein by reference.
The Company's pension benefit obligation and net periodic cost are actuarially
determined based on the following assumptions: discount rate, expected future
return on plan assets, change in the Social Security wage base rate, the
Consumer Price Index rate, mortality tables, and the expected rate of increase
in compensation levels. While a change in any of the assumptions would have an
impact on financial condition and future results of operations, a change in the
discount rate and future rate of return on plan assets could be material. The
discount rate is used both to determine the present value of future benefit
obligations and the net periodic benefit cost. The expected rate of return on
plan assets is only used to determine net period benefit cost.
In determining the discount rate to be utilized the following factors were
considered: average age and anticipated longevity of current plan participants,
the inversion of the current yield curve and the resulting yields available on
long-term investments by review of Moody's Corporate Bond Indexes, yield on 15
and 30 year mortgages, and the Lehman US Corporate and Agency Bond Indexes. The
determination was made to leave the Discount rate at 5.75%.
The Company bases it's expected rate of return on plan assets on past history,
current earning rates available on investments and economic forecasts of where
rates are headed in the future. The expected rate of return is conservative as
the plan has typically taken short-term risk by investing heavily in equity and
international mutual fund markets which over the long-term have proven to be
good decisions. Through the end of 2005, our actual net investment returns
averaged 8.4% over the last 15 years with a high of 20.35% and a low of
negative 6.6%. The latest one year return as of December 31, 2006 was 13.33%.
Therefore, the conservative expectation of 6.75%, which is consistent with the
2.25% inflation assumption, is balanced by our aggressive discount rate of
5.75% since the plan has a very long-term (40+ years) horizon.
60
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the potential of
loss in a financial instrument arising from adverse changes in market prices,
interest rates, foreign currency exchange rates, commodity prices and equity
prices. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, deposit taking, and borrowing activities as
yields on assets change in a different time period or in a different amount
from that of interest costs on liabilities. Many other factors also affect the
Company's exposure to changes in interest rates, such as general and local
economic and financial conditions, competitive pressures, customer preferences,
and historical pricing relationships.
The earnings of the Company and its subsidiary are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System. The monetary
policies of the Federal Reserve System influence to a significant extent the
overall growth of loans, investments, deposits and borrowings; the level of
interest rates earned on assets and paid for liabilities; and interest rates
charged on loans and paid on deposits. The nature and impact of future changes
in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as to
the level of risk assumed by the Company in its balance sheet. The Board of
Directors reviews and approves risk management policies, including risk limits
and guidelines, and reviews quarterly the current position in relationship to
those limits and guidelines. Daily oversight functions are delegated to the
Asset Liability Management Committee ("ALCO"). The ALCO, consisting of senior
business and finance officers, actively measures, monitors, controls and
manages the interest rate risk exposure that can significantly impact the
Company's financial position and operating results. The ALCO sets liquidity
targets based on the Company's financial condition and existing and projected
economic and market conditions. The Company does not have any market risk
sensitive instruments acquired for trading purposes. The Company attempts to
structure its balance sheet to maximize net interest income and shareholder
value while controlling its exposure to interest rate risk and strategies might
include selling or participating out loans held for sale or investments
available-for-sale. The ALCO formulates strategies to manage interest rate risk
by evaluating the impact on earnings and capital of such factors as current
interest rate forecasts and economic indicators, potential changes in such
forecasts and indicators, liquidity, and various business strategies. The
ALCO's methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap", which provides a static analysis of
the maturity and repricing characteristics of the Company's entire balance
sheet, and a simulation analysis, which calculates projected net interest
income based on alternative balance sheet and interest rate scenarios,
including "rate shock" scenarios involving immediate substantial increases or
decreases in market rates of interest.
Members of ALCO meet at least weekly to set loan and deposit rates, make
investment decisions, monitor liquidity and evaluate the loan demand pipeline.
Deposit runoff is monitored daily and loan prepayments evaluated monthly. The
Company historically has maintained a substantial portion of its loan portfolio
on a variable-rate basis and plans to continue this Asset/Liability/ Management
(ALM) strategy in the future. Portions of the variable-rate loan portfolio have
interest rate floors and caps which are taken into account by the Company's ALM
modeling software to predict interest rate sensitivity including prepayment
risk. The investment portfolio is all classified as available-for-sale and the
modified duration is relatively short. The Company does not utilize any
derivative products or invest in any "high risk" instruments.
61
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's interest rate sensitivity analysis (simulation) as of December
2005 for a simulated, immediate, and proportional 100 basis point shock from
7.25% to the anticipated prime rate of 8.25%, maintained throughout 2006,
projected the following 2006 results compared to the actual:
2006 2006 %
Projected Actual Variance
-----------------------------------
(Dollars in thousands)
Average earning assets $357,518 $350,876 (1.86)
Average loans $310,896 $312,149 0.40
% of loans to interest earning assets 87.0% 89.0% 2.30
Average interest bearing liabilities $285,219 $279,879 (1.87)
Noninterest bearing deposits $50,776 $49,328 (2.85)
Interest and fees on loans $24,558 $23,459 (4.48)
Other interest income 2,084 1,738 (16.60)
Interest expense 6,267 6,821 (8.84)
---------------------------------
Net interest income 20,375 18,376 (9.81)
Provision for loan losses 180 180 --
Noninterest income 3,488 4,058 16.34
Noninterest expense 13,690 13,814 (0.91)
Provision for income taxes 2,800 2,185 22.00
---------------------------------
Net income $7,193 $6,255 (13.04)
Net interest margin 5.61% 5.35% (4.63)
Yield on interest earning assets 7.45% 7.29% (2.19)
Rates paid on interest bearing liabilities 2.20% 2.43% (10.45)
Net interest spread 5.25% 4.86% (7.43)
Return on assets 1.88% 1.67% (11.17)
Return on equity 17.03% 14.96% (12.16)
In actuality, interest rates moved up on short-term assets and variable-rate
loans in conjunction with the four prime rate increases on January 31st, March
28th, May 10th and June 29th while long-term rates remained almost flat
throughout the year. Rates paid on deposits moved up more quickly than
projected in response to competitive pressures. Also, due to the difficulty in
attracting new, low-cost deposits during the year, the investment securities
portfolio did not grow as anticipated and therefore Average earning assets were
down $6.6 million from projections.
Noninterest income was $570 thousand or 16.34% higher than projected mainly due
to increased overdraft fees, $135 thousand in gain on the sale of securities,
and an increase of $174 thousand in the gain on sale of loans held for sale as
long-term interest rates stayed low and mortgages continued to be sold to
mitigate interest rate risk. The increase of $124 thousand in noninterest
expense was over many categories. The reduction in taxes from projection to
actual is due to three causes, reduction in income before taxes, increase in
non tax exempt municipal income and an increase in tax credits available for
2006 from ongoing investments in low income housing partnerships.
Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuation in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
interest rate caps and floors written on adjustable-rate loans, commitments to
participate in or sell loans and commitments to buy or sell securities or
certificates of deposit. Such instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable-rate
loans,
62
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
the contract or notional amounts do not represent exposure to credit loss. The
Company controls the risk of interest rate cap agreements through credit
approvals, limits, and monitoring procedures.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
The following table shows financial instruments whose contract amount
represents credit risk in each of the future periods presented:
Contract or Notional Amount
------------------------------------------------------------------------
2007 2008 2009 2010 2011 Thereafter Total
------------------------------------------------------------------------
(Dollars in thousands)
Commitments to originate loans $12,176 $ -- $ -- $ -- $ -- $ -- $12,176
Unused lines of credit 28,447 923 776 888 236 5,304 36,574
Standby letters of credit 532 409 70 5 30 -- 1,046
Credit card arrangements 1,457 -- -- -- -- -- 1,457
Equity investment commitment to
housing limited partnership -- 917 -- -- -- -- 917
------------------------------------------------------------------------
Total $42,612 $2,249 $846 $893 $266 $5,304 $52,170
========================================================================
Approximately $5.1 million of the unused lines of credit outstanding at
December 31, 2006 relate to real estate construction loans that are expected to
fund within the next twelve months. The remaining lines primarily relate to
revolving lines of credit for other real estate or commercial loans, and many
of these lines may expire without being fully drawn upon and therefore the
commitment amounts do not necessarily represent future cash needs.
Commitments to originate loans increased from $9.7 million at December 31, 2005
to $12.2 million at December 31, 2006 due primarily to increases in commitments
for commercial loans. Unused lines of credit grew from $35.3 million at
December 31, 2005 to $36.6 million at December 31, 2006 as growth was
experienced in all business segments.
The Company may, from time-to-time, enter into commitments to sell loans,
securities or certificates of deposit which involve market and interest rate
risk. There were no such commitments at December 31, 2006.
Contractual Obligations: The Company has various financial obligations,
including contractual obligations that may require future cash payments. The
following table presents, as of December 31, 2006, significant fixed and
determinable contractual obligations to third parties by payment date:
Payments Due By Period
-----------------------------------------------------------
Less than 2 & 3 4 & 5
1 year years years Thereafter Total
-----------------------------------------------------------
(Dollars in thousands)
Operating lease commitments $ 95 $ 140 $ 81 $ -- $ 316
Maturities on borrowed funds 1,966 1,359 2,912 8,359 14,596
Deposits without stated maturity (1) 202,997 -- -- -- 202,997
Certificates of deposit (1) 97,411 18,145 1,269 -- 116,825
Pension plan contributions (2) 700 -- -- -- 700
Deferred compensation payouts 80 160 160 151 551
Construction related contract (3) 28 -- -- -- 28
Equity housing limited partnership 356 -- -- -- 356
-----------------------------------------------------------
Total $303,633 $19,804 $4,422 $8,510 $336,369
===========================================================
- --------------------
(1) While Union Bank has a contractual obligation to depositors should they wish to withdraw all
or some of the funds on deposit, management believes, based on historical analysis, that the
majority of these deposits will remain on deposit for the foreseeable future. The amounts
exclude interest payable.
(2) Funding requirements for pension benefits after 2007 are excluded due to the significant
variability in the assumptions required to project the amount and timing of future cash
contributions.
(3) Contract to install central air conditioning in one location.
63
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's subsidiary bank is required (as are all banks) to maintain vault
cash or a noninterest bearing reserve balance as established by Federal Reserve
Board regulations. The average total reserve for the 14-day maintenance period
ended December 31, 2006 was $2.3 million, which was satisfied by vault cash.
The Company has also committed to maintain a noninterest bearing contracted
clearing balance of $1 million at December 31, 2006 with the Federal Reserve
Bank of Boston.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is
defined as the difference between interest earning assets and interest bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling
interest earning assets and interest bearing liabilities into periods based
upon the next date on which such assets and liabilities could mature or
reprice. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except that:
o adjustable-rate loans, investment securities, variable-rate time deposits,
and FHLB of Boston advances are included in the period when they are first
scheduled to adjust and not in the period in which they mature;
o fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker estimates,
the results of a prepayment model utilized by the Company, and empirical
data;
o other nonmortgage related fixed-rate loans reflect scheduled contractual
amortization, with no estimated prepayments; and
o NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by the Company of the sensitivity of each such category of
deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and
considers them reasonable. However, the interest rate sensitivity of the
Company's assets and liabilities in the tables could vary substantially if
different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
64
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table shows the Company's rate sensitivity analysis as of
December 31, 2006:
Cumulative repriced within
-------------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------------------------------------------------------------------------
(Dollars in thousands by repricing date)
Interest sensitive assets
Federal funds sold and overnight deposits $ 9,263 $ -- $ -- $ -- $ -- $ 9,263
Interest bearing deposits in banks 197 2,466 2,362 392 -- 5,417
Investment securities available-
for-sale (1)(3) 1,085 4,136 10,600 3,755 3,750 23,326
Loans (2)(3) 107,002 70,109 75,412 50,971 13,958 317,452
FHLB Stock -- -- -- -- 1,467 1,467
-------------------------------------------------------------------------
Total interest sensitive assets $117,547 $76,711 $ 88,374 $ 55,118 $ 19,175 $356,925
=========================================================================
Interest sensitive liabilities
Time deposits $35,325 $63,108 $ 17,123 $ 1,269 $ -- $116,825
Money markets 10,170 -- -- -- 41,157 51,327
Regular savings 4,320 -- -- -- 39,517 43,837
NOW accounts 13,421 -- -- -- 39,537 52,958
Borrowed funds 241 1,725 1,359 2,912 8,359 14,596
-------------------------------------------------------------------------
Total interest sensitive liabilities $ 63,477 $64,833 $ 18,482 $ 4,181 $ 128,570 $279,543
=========================================================================
Net interest rate sensitivity gap $ 54,070 $11,878 $ 69,892 $ 50,937 $(109,395) $ 77,382
Cumulative net interest rate sensitivity gap $ 54,070 $65,948 $135,840 $186,777 $ 77,382
Cumulative net interest rate sensitivity gap
as a percentage of total assets 14.2% 17.3% 35.6% 49.0% 20.3%
Cumulative interest sensitivity gap as a
percentage of total interest earning assets 15.1% 18.5% 38.1% 52.3% 21.7%
Cumulative net interest sensitivity gap as
percentage of total interest bearing
liabilities 19.3% 23.6% 48.6% 66.8% 27.7%
- --------------------
(1) Investment securities available-for-sale exclude marketable equity securities with a fair value of $349 million
that may be sold by the Company at any time.
(2) Balances shown net of unearned income of $120 thousand.
(3) Estimated repayment assumptions considered in Asset/Liability model.
65
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and capital
(Net Fair Value) under various interest rate scenarios, balance sheet trends,
and strategies over a relatively short time horizon. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, product pricing, prepayment speeds on mortgage related assets,
principal maturities on other financial instruments, and changes in funding
mix. While such assumptions are inherently uncertain as actual rate changes
rarely follow any given forecast and asset-liability pricing and other model
inputs usually do not remain constant in their historical relationships,
management believes that these assumptions are reasonable. Based on the results
of these simulations, the Company is able to quantify its estimate of interest
rate risk and develop and implement appropriate strategies.
The following chart reflects the results of the Company's latest simulation
analysis for next year-end on net interest income, net income, return on
assets, return on equity and net fair value ratio. Stocks are intended to
capture interest rate risk under extreme conditions by immediately shifting.
The projection utilizes a proportional rate shock of up 300 basis points and
down 300 basis points from the year-end prime rate of 8.25%; this is the
highest and lowest internal slopes monitored. This slope range was determined
to be the most relevant during this economic cycle.
INTEREST RATE SENSITIVITY SIMULATION ANALYSIS
DECEMBER 31, 2006
(Dollars in thousands)
Year Prime Net Interest Change Net Return on Return on Net Fair
Ending Rate Income % Income Assets % Equity % Value Ratio
- -------------------------------------------------------------------------------------------------------
December-07 11.25 $19,401 12.3 $6,985 1.85 16.31 12.89
8.25 17,279 0.0 5,498 1.46 13.05 11.16
5.25 15,004 (13.2) 3,906 1.04 9.44 9.35
The resulting projected effect of these estimates on net interest income and
the net fair value ratio for the year ending December 31, 2007 are within the
approved ALCO guidelines. The simulations of earnings do not incorporate any
management actions, which might moderate the negative consequences of interest
rate deviations. Therefore, they do not reflect likely actual results, but
serve as conservative estimates of interest rate risk.
Liquidity. Managing liquidity risk is essential to maintaining both depositor
confidence and stability in earnings. Liquidity is a measurement of the
Company's ability to meet potential cash requirements, including ongoing
commitments to fund deposit withdrawals, repay borrowings, fund investment and
lending activities, and for other general business purposes. The Company's
principal sources of funds are deposits, amortization and prepayment of loans
and securities, maturities of investment securities and other short-term
investments, sales of securities and loans available-for-sale, earnings, and
funds provided from operations. Maintaining a relatively stable funding base,
which is achieved by diversifying funding sources, competitively pricing
deposit products, and extending the contractual maturity of liabilities,
reduces the Company's exposure to rollover risk on deposits and limits reliance
on volatile short-term purchased funds. Short-term funding needs arise from
declines in deposits or other funding sources, funding of loan commitments,
draws on unused lines of credit and requests for new loans. The Company's
strategy is to fund assets, to the maximum extent possible, with core deposits
that provide a sizable source of relatively stable and low-cost funds. For the
year ended, December 31, 2006, the Company's ratio of average loans to average
deposits was 100.6% compared to the average for the year ended December 31,
2005 of 93.7% reflecting 2006's moderately strong loan demand and stiff
competition for deposit dollars.
Management understands the implication of the increase in the average loans to
average deposits ratio and during 2006 took several steps to address the
deposit funding shortfall, including increasing the Company's borrowing
capacity at the FHLB of Boston, increasing the interest rates paid on certain
deposit products, and implementing a new free small business checking account
to help attract and retain deposits. In addition, management has sought to
expand its deposit gathering market area by opening a full service branch in
Littleton, New Hampshire which was a new deposit market for the Company. That
branch has generated $5.0 million in new deposits since it opened in late March
2006, accounting for 76.9% of the Company's deposit growth over 2005. The
Company also increased its preapproved Federal Funds line and now offers two
tiered variable-rate certificates of deposit products that allow customers
flexibility in making additional deposits or a one-time withdrawal.
In addition, as Union is a member of the FHLB of Boston, it has access to
preapproved lines of credit up to $7.2 million at December 31, 2006 over and
above the term advances already drawn on the line. This line of credit could
66
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
be used for either short-term or long-term liquidity or other needs. Union
maintains a $7.5 million preapproved Federal Funds line of credit with an
upstream correspondent bank and a repurchase agreement line with a brokerage
house. There were no balances outstanding on either line at December 31, 2006.
Union is a member of the Certificate of Deposit Account Registry Service
("CDARS") of Promontory Interfinancial Network which allows Union to provide
higher FDIC deposit insurance to customers by exchanging deposits with other
members and allows Union to purchase deposits from other members as another
source of funding.
Union maintains an IDEAL Way Line of Credit with the FHLB of Boston. The total
line available was $551 thousand at December 31, 2006 and 2005. There were no
borrowings against this line of credit at either year-end. Interest on these
borrowings is chargeable at a rate determined by the FHLB of Boston and payable
monthly. Should Union utilize this line of credit, qualified portions of the
loan and investment portfolios would collateralize these borrowings.
While scheduled loan and securities payments and FHLB of Boston advances are
relatively predictable sources of funds, deposit flows and prepayments on loans
and mortgage-backed securities are greatly influenced by general interest
rates, economic conditions, and competition. The Company's liquidity is
actively managed on a daily basis, monitored by the ALCO, and reviewed
periodically with the subsidiary's Board of Directors. The ALCO measures the
Company's marketable assets and credit available to fund liquidity requirements
and compares the adequacy of that aggregate amount against the aggregate amount
of the Company's interest sensitive or volatile liabilities, such as core
deposits and time deposits in excess of $100,000, borrowings and term deposits
with short maturities, and credit commitments outstanding. The primary
objective is to manage the Company's liquidity position and funding sources in
order to ensure that it has the ability to meet its ongoing commitments to its
depositors, to fund loan commitments and unused lines of credit and to maintain
a portfolio of investment securities.
The Company's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 83.4% of time deposits will mature within twelve months, that
pattern is consistent with prior periods, with the percentage of time deposits
to mature within twelve months ranging from 72% to 84% over the preceding seven
years. Accordingly, management believes, based on past experience that the
Company will retain a substantial portion of these deposits. Management will
continue to offer a competitive but prudent pricing strategy to facilitate
retention of such deposits. A reduction in total deposits could be offset by
purchases of federal funds, purchase of deposits, short-or long-term FHLB
borrowings, utilization of the repurchase agreement line or liquidation of
investment securities, purchased brokerage certificates of deposit or loans
held for sale. Such steps could result in an increase in the Company's cost of
funds and adversely impact the net interest spread and margin. Management
believes the Company has sufficient liquidity to meet all reasonable borrower,
depositor and creditor needs in the present economic environment. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. Management continually evaluates opportunities to buy/sell
securities and loans available-for-sale, obtain credit facilities from lenders,
or restructure debt for strategic reasons or to further strengthen the
Company's financial position.
Capital Resources. Management of the Company's capital resources is designed to
maintain an optimum level of capital in a cost-effective structure that: meets
target regulatory ratios; supports management's internal assessment of economic
capital; funds the Company's business short and long-term strategies; and
builds long-term stockholder value. Dividends are generally increased in line
with long-term trends in earnings per share growth and conservative earnings
projections, while sufficient profits are retained to support anticipated
business growth, fund strategic investments and provide continued support for
deposits.
The total dollar value of the Company's stockholders' equity increased from
$41.6 million at December 31, 2005 to $41.9 million at December 31, 2006,
reflecting net income of $6.2 million for 2006, less dividends paid of $4.8
million, the purchase of 10,686 shares of Treasury stock during 2006 totaling
$227 thousand, and an increase in accumulated other comprehensive loss of $56
thousand on investment securities available-for-sale and the adjustment to
initially apply SFAS No. 158 for the Company's defined benefit pension plan,
net of tax effect of $849 thousand. The Company has 5,000,000 shares of $2.00
par value common stock authorized. As of December 31, 2006, the Company had
4,918,611 shares issued, of which 4,531,977 were outstanding and 386,634 were
held in Treasury. Also as of December 31, 2006, there were outstanding employee
incentive stock options with respect to 16,075 shares of the Company's common
stock, granted pursuant to the Company's 1998 Incentive Stock Option Plan, of
which 12,825 were exercisable. Of the 75,000 shares authorized for issuance
under the 1998 Plan, 45,450 shares remained available for future option grants
at December 31, 2006.
67
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
On November 18, 2005, the Company announced a stock repurchase program. The
Board of Directors has authorized the repurchase of up to 100,000 shares of
common stock, or approximately 2.2% of the Company's outstanding shares, for an
aggregate repurchase cost not to exceed $2.15 million. Shares can be
repurchased in the open market or in negotiated transactions. Shares may be
reacquired for reissuance in connection with the stock option plan, stock
dividend declaration and for general corporate purposes. The repurchase program
is open for an unspecified period of time. As of December 31, 2006 the Company
had repurchased 25,686 shares under this program, for a total cost of $542
thousand.
For the Company and Union at December 31, 2006, total capital to risk weighted
assets was 17.44% and 17.34% respectively. Tier I capital to risk weighted
assets was 16.16%, and 16.07% respectively and Tier I capital to average assets
was 11.29% and 11.21%, respectively. Union is categorized as well capitalized
under the regulatory framework and the Company is well over the minimum capital
requirements.
Impact of Inflation and Changing Prices. The Company's consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Banks have asset and liability structures that are essentially monetary in
nature, and their general and administrative costs constitute relatively small
percentages of total expenses. Thus, increases in the general price levels for
goods and services have a relatively minor effect on the Company's total
expenses. Interest rates have a more significant impact on the Company's
financial performance than the effect of general inflation. From June of 2003
until July of 2004, because of the uneven nature of the expansion of the U.S.
economy, the Federal Reserve had kept overnight rates at 40 year lows of 1% but
moved the targeted federal funds rates up five 25 basis points steps between
then and December 31, 2004 and another eight 25 basis point steps up during
2005, and another four 25 basis point steps up during the first half of 2006 to
the target rate of 5.25% where it has remained since then. Interest rates do
not necessarily move in the same direction or change in the same magnitude as
the prices of goods and services, although periods of increased inflation may
accompany a rising interest rate environment.
Regulatory Matters. The Company and its subsidiary bank are subject to periodic
examinations by the various regulatory agencies. These examinations include,
but are not limited to, procedures designed to review lending practices, risk
management, credit quality, liquidity, compliance and capital adequacy. During
2006, the Securities and Exchange Commission, Vermont State Department of
Banking, the Federal Deposit Insurance Corporation, and the Federal Reserve
Bank of Boston performed various examinations of the Company and Union pursuant
to their regular, periodic regulatory reviews. No comments were received from
these various bodies that would have a material adverse effect on either
Company's liquidity, capital resources, or operations.
68
Union Bankshares, Inc. and Subsidiary
Union Bankshares' Stock Performance Graph
The following graph compares the cumulative total return (stock price
appreciation plus reinvested dividends) on Union Bankshares, Inc.'s common
stock for the last five calendar years with (i) the cumulative total return on
the stocks included in the NASDAQ Composite Index and (ii) the cumulative
return on the stocks included in the SNL Financial (SNL) $250M-$500M Bank
Asset-Size Index for the same time period. All of these cumulative returns are
computed assuming the investment of $100 on December 31, 2001 and the
reinvestment of dividends at the frequency with which dividends were paid
(quarterly) during the applicable years.
Total Return Performance
[Graphic Omitted]
Period Ending
-------------------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
- --------------------------------------------------------------------------------------------------------
Union Bankshares, Inc. 100.00 111.85 186.43 175.24 177.12 182.55
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
SNL $250M-$500M Bank Index 100.00 128.95 186.31 211.46 224.51 234.58
Source: SNL Financial LC, Charlottesville, VA
69
Union Bankshares, Inc. and Subsidiary
Market for Union Bankshares' Common Shares and Related Stockholder Matters
On March 14, 2007, there were 4,530,414 shares of common stock outstanding held
by 650 stockholders of record. The number of stockholders does not reflect the
number of persons or entities who may hold the stock in nominee or street name.
Union Bankshares' common stock is listed on the American Stock Exchange
("AMEX") and trades under the symbol UNB. LaBranche & Co. of New York City are
the market specialists for Union Bankshares, Inc. stock.
2006 2005
-------------------------------------------------------------------
High Low Dividends High Low Dividends
-------------------------------------------------------------------
First Quarter (1) $24.15 $20.74 $0.26 $24.99 $22.02 $0.64
Second Quarter $22.40 $20.52 $0.26 $23.20 $21.00 $0.24
Third Quarter $23.25 $20.35 $0.26 $22.50 $21.20 $0.24
Fourth Quarter $22.58 $20.25 $0.28 $23.40 $21.01 $0.26
- --------------------
(1) First quarter 2005 included a $0.40 special dividend.
On January 13, 2007, the Company declared a regular dividend of $0.28 per share
to stockholders of record as of January 22, 2007, payable January 25, 2007.
Shareholder Assistance and Investor Information
If you need assistance with a change in registration of certificates, reporting
lost certificates, non-receipt or loss of dividend checks, assistance regarding
direct deposit of dividends, information about the Company, or to receive
copies of financial reports, please contact:
JoAnn A. Tallman, Assistant Secretary
Union Bankshares, Inc.
P.O. Box 667
Morrisville, VT 05661-0667
Phone: 802-888-6600
Facsimile: 802-888-4921
E-mail: ubexec@unionbankvt.com
Form 10-K
A copy of the Form 10-K Report filed with the Securities and Exchange
Commission may be obtained without charge upon written request to:
Marsha A. Mongeon, Treasurer and Chief Financial Officer
Union Bankshares, Inc.
P.O. Box 667
Morrisville, VT 05661-0667
Corporate Name: Union Bankshares, Inc.
Corporate Transfer Agent: Union Bank, P.O. Box 667, Morrisville, VT 05661-0667
70
Administration & Management
Directors
UNION BANKSHARES, INC. & UNION BANK
Richard C. Sargent, Chairman Franklin G. Hovey II
Attorney at Law, Richard Sargent President, Hovey Enterprises, Inc.
Law Office
Cynthia D. Borck Richard C. Marron
Vice President, Union Bankshares, Inc. Owner, Town & Country Motor Lodge
Executive Vice President, Union Bank
Steven J. Bourgeois Robert P. Rollins
CEO & Principal Owner Retired Insurance Agent
Strategic Initiatives for Business LLC
Kenneth D. Gibbons John H. Steel
President & CEO, Union Bankshares, Inc. Owner, President & Treasurer
President & CEO, Union Bank Steel Construction, Inc.
Officers
UNION BANKSHARES, INC.
Richard C. Sargent Chairman
Cynthia D. Borck Vice President
Kenneth D. Gibbons President & CEO
Marsha A. Mongeon Vice President/Treasurer
Robert P. Rollins Secretary
JoAnn A. Tallman Assistant Secretary
ST. JOHNSBURY ADVISORY BOARD
Cynthia D. Borck Kirk Dwyer
J.R. Alexis Clouatre Kenneth D. Gibbons
Dwight A. Davis Franklin G. Hovey II
LITTLETON ADVISORY BOARD
Judy F. Aydelott Schuyler W. Sweet
Stanley T. Fillion Norrine A. Williams
Officers UNION BANK
Stacey M. Belanger Assistant Treasurer Fairfax
Rhonda L. Bennett Vice President Morrisville
John T. Booth, Jr. Finance Officer Morrisville
Cynthia D. Borck Executive Vice President Morrisville
Jennie H. Buchanan Assistant Vice President Morrisville
Stacey L.B. Chase Assistant Treasurer Morrisville
Jeffrey G. Coslett Vice President Morrisville
Michael C. Curtis Vice President St. Albans
Peter J. Eley Senior Vice President Morrisville
Fern C. Farmer Assistant Vice President Morrisville
Kenneth D. Gibbons President & CEO Morrisville
Don D. Goodhue Information Systems Officer Morrisville
Lorraine M. Gordon Assistant Vice President Morrisville
Melissa A. Greene Assistant Treasurer Hardwick
Karyn J. Hale Assistant Treasurer Morrisville
Claire A. Hindes Assistant Vice President Morrisville
Patricia N. Hogan Vice President Morrisville
Tracey D. Holbrook Vice President St. Johnsbury
Lynne P. Jewett Assistant Treasurer Morrisville
Peter R. Jones Vice President Morrisville
Stephen H. Kendall Vice President Morrisville
Susan O. Laferriere Vice President St. Johnsbury
Dennis J. Lamothe Vice President St. Johnsbury
Susan F. Lassiter Vice President Jeffersonville
Robert L. Miller Trust Officer St. Johnsbury
Marsha A. Mongeon Senior Vice President-Treasurer Morrisville
Mildred R. Nelson Vice President Littleton
Karen Carlson Noyes Assistant Vice President Morrisville
Barbara A. Olden Vice President St. Johnsbury Ctr.
Deborah J. Partlow Trust Officer Morrisville
Bradley S. Prior Assistant Treasurer Morrisville
Colleen D. Putvain Assistant Treasurer Morrisville
Craig S. Provost Assistant Vice President Stowe
Suzanne L. Roberts Vice President Lyndonville
Robert P. Rollins Secretary Morrisville
Ruth P. Schwartz Vice President Morrisville
Robyn A. Sheltra Assistant Treasurer Stowe
David S. Silverman Senior Vice President Morrisville
JoAnn A. Tallman Assistant Secretary Morrisville
Alycia R. Vosinek Commercial Loan Officer Littleton
Francis E. Welch Assistant Vice President Morrisville
For more Company information, please visit Union Bank's
web pages at www.unionbankvt.com.
St. Albans Fairfax* Jeffersonville* Johnson* Hyde Park
Union Bank Loan Ctr. Jct. Rtes. 104 & 128 44 Main St. 198 Lower Main St. 250 Main Street
120 North Main Street P.O. Box 26 P.O. Box 369 P.O. Box 614 Hyde Park VT 05655
St. Albans VT 05478 Fairfax VT 05454 Jeffersonville VT 05464 Johnson VT 05656 802.888.6880
802.524.9000 802.849.2600 802.644.6600 802.635.6600
Morrisville* Morrisville* Stowe* Hardwick* Lyndonville*
65 Northgate Plaza 20 Lower Main St. 47 Park St. 103 VT Rte. 15 West P.O. Box 1067
Route 100 o P.O. Box 667 P.O. Box 667 P.O. Box 419 P.O. Box 1280 183 Depot St.
Morrisville VT 05661 Morrisville VT 05661 Stowe VT 05672 Hardwick VT 05843 Lyndonville VT 05851
802.888.6860 802.888.6600 802.253.6600 802.472.8100 802.626.3100
St. Johnsbury Center* St. Johnsbury* St. Johnsbury* Littleton*
Green Mtn. Mall P.O. Box 219 P.O. Box 219 263 Dells Road
1998 Memorial Dr., Suite 10 364 Railroad St. 325 Portland St. Littleton NH 03561
St. Johnsbury VT 05819 St. Johnsbury VT 05819 St. Johnsbury VT 05819 603.444.7136
802.748.2454 802.748.3131 802.748.3121
1.802.888.6600
Toll Free 1.866.862.1891
* indicates ATM on premises. Express Telebanking
1.800.583.2869
www.unionbankvt.com
Union Bankshares, Inc.
o 20 Lower Main Street, P.O. Box 667 o Morrisville VT 05661