Exhibit 13
Union Bankshares, Inc.
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2007 Annual Report
Union Bankshares, Inc. and Subsidiary
Selected Financial Information
At or For The Years Ended December 31
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2007 2006 2005 2004 2003
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(Dollars in thousands, except per share data)
Balance Sheet Data
Total assets $ 393,361 $ 381,149 $ 374,746 $ 359,529 $ 356,557
Investment securities available-for-sale 33,822 23,683 32,408 40,966 44,370
Loans, net of unearned income 318,194 317,452 307,071 280,069 271,561
Allowance for loan losses (3,378) (3,338) (3,071) (3,067) (3,029)
Deposits 323,961 319,822 313,299 306,598 305,381
Borrowed funds 20,328 14,596 16,256 7,934 7,223
Stockholders' equity (1) 42,074 41,923 41,603 42,403 40,987
Income Statement Data
Total interest income $ 26,273 $ 25,197 $ 22,249 $ 20,171 $ 20,368
Total interest expense (8,228) (6,821) (4,499) (3,310) (4,209)
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Net interest and dividend income 18,045 18,376 17,750 16,861 16,159
Provision for loan losses (265) (180) (60) (30) (114)
Noninterest income 4,295 4,058 4,063 3,781 3,607
Noninterest expenses (14,455) (13,814) (13,056) (12,319) (12,060)
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Income before provision for income taxes 7,620 8,440 8,697 8,293 7,592
Provision for income taxes (1,965) (2,185) (2,460) (2,458) (2,205)
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Net income $ 5,655 $ 6,255 $ 6,237 $ 5,835 $ 5,387
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Per Common Share Data
Net income (2)(3) $ 1.25 $ 1.38 $ 1.37 $ 1.28 $ 1.18
Cash dividends paid (3) 1.12 1.06 1.38 0.90 0.82
Book value (1)(3) 9.34 9.25 9.16 9.31 9.01
Weighted average number of shares
outstanding (3) 4,521,380 4,539,641 4,554,055 4,551,469 4,547,366
Number of shares outstanding (3) 4,502,969 4,531,977 4,542,663 4,554,663 4,550,313
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(1) Stockholders' equity includes unrealized gains or losses, net of applicable income taxes, on investment
securities classified as "available-for-sale" and 2007 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 2003 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.
An Active Participant in the Communities We Share
We take great pride in encouraging each and every Union Bank
employee to take an active part in the
communities we serve.
From civic, business and health care Boards to
participating in and -- in many cases -- managing
substantial fund raising events for worthy causes,
our team makes a difference.
A Note from: March of Dimes, Vermont Chapter:
"THANK YOU LAMOILLE VALLEY! With heartfelt thanks we wish to express our
gratitude to the volunteers, sponsors and walkers that make WalkAmerica such a
success in Lamoille County. With the leadership of Union Bank, this event has
continued to be successful, fun and meaningful. Since 1974, Union Bank and Ken
Gibbons have led the charge for the Bank's staff and other community leaders to
support the March of Dimes and WalkAmerica. Union Bank has single-handedly fund
raised and donated more than $500,000 to the cause of saving and celebrating
all babies."
[Photo] (left to right):
Union Bank's Claire Hindes, Ken Gibbons and Ruth Schwartz
with the March of Dimes Corporate Giving Achievement Award
A Note from: Caledonian-Record Educational Services:
"Thank you Union Bank for your sponsorship in our 2006-2007 Newspapers in
Education `Adopt a Classroom' Partnership Program. Union Bank was the sponsor
of Pat LeCour's 3rd through 6th grade classes at Hardwick Elementary, Jay
Gerber's 7th and 8th grade classes at North Country Junior High School and
Sherrie Hoyt's Kindergarten through 8th grade classes at The St. Johnsbury
School. Through your generosity, we were able to cover the expense of
newspapers used in classrooms of area schools. The newspaper is an ideal
educational resource. As a current `textbook' that is re-written every single
day, The Caledonian-Record can be used on all grade levels to educate,
entertain and inform students while helping them grow into informed citizens.
We appreciate your part in this program, and, on behalf of the `adopted'
teachers and students, thank you again for your educational contribution."
1
Letter to Shareholders
Dear Shareholder, March 31, 2008
The past year has been an interesting time for the banking industry and while
we too have experienced some challenges, we are pleased to present the
financial results for your company in this year's annual report.
The top story in the financial sectors for 2007 was the "Sub Prime" mortgage
meltdown. Each day we learn more about the intricacies and breadth of this
problem. Although Union Bank, and for that matter the vast majority of
community banks, did not participate in this debacle, most have been affected
in one way or another. Once again, we have seen the Federal Reserve take
actions, in some cases dramatically, to control the industry's liquidity and
sustain the economy.
We have maintained a strong capital position, adequate reserve for loan losses,
and although earnings decreased from 2006, results were still strong and placed
Union Bank in the top 20% for return on assets of our nationwide peer group of
banks.
Consumers today expect greater access to banking services, whether they be via
electronic means or brick and mortar offices. During the past year we have
implemented Check 21 (digital image presentment of checks), remote branch
capture (digital image of transactions from our branches to the main office)
and installed new desktop computers and network software at all our locations.
Please take a few moments to read the Technology section in this report.
On the "bricks and mortar" side, we have completed the renovations of our
original (1892) headquarters in Morrisville and the Green Mountain Block next
door. All regulatory permits have been received for new branch offices in
Danville and St. Albans. These should be opening in July and September,
respectively, weather permitting. Both locations are expansions of our current
markets and provide opportunity for both retail and commercial growth of your
company.
The year 2008 will again offer challenges and opportunities. We will need to
continue to closely manage interest margin and rates while keeping an eye on
credit quality. Our tenet has been to stick with the business we know which has
served us well over the years. We believe there is opportunity for community
banks in the current financial environment and we will be a part of it. The
general population has begun to realize many of the hybrid products offered by
non-banks may have hidden risks which are not a component of conventional bank
products.
We would like to once again thank our shareholders, customers and 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
Emerging Technologies & Banking Trends
When Union Bank opened it doors for business in 1891, it did so without adding
machines, telephones or computer networks. Today, with the aid and assistance
of cutting-edge technologies, banks are able to offer our customers
unparalleled, 24/7 consumer access to their accounts. At Union Bank, we are no
exception. We have seen a remarkably steady growth in the use of Debit Cards,
Internet and Telephone Banking, PowerPay (Union Bank's complimentary online
Bill Paying service) and Automated Clearing House (ACH) transactions. To
accommodate both technological and communication advances, recent changes have
occurred in federal legislation, referred to as "The Check Clearing for the
21st Century Act" or Check 21.
Let's consider, for a moment, the life of a typical check: Checks are processed
and transported from bank branches to the Depository Bank, and then finally to
the paying bank. It is very inefficient. With Check 21, much of the time and
attention needed to "process" a check is eliminated.
[GRAPHIC]
The Check 21 process starts at the bank the written check is deposited at.
Under Check 21, a deposited check typically will not move beyond the check
recipient's bank. At the bank are high-tech, desk-top
[GRAPHIC]
4
Emerging Technologies & Banking Trends
check readers that optically read both sides of the check simultaneously and
create an immediate electronic record of the check. The bank, instead of
transporting the deposited check (along with thousands of others included in a
day's receipts) may electronically transmit a digital image of the check. With
the increasing energy costs affecting transportation, the government, the
banking industry, and ultimately bank customers stand to reap big savings.
The effective application of Check 21 at Union Bank is already in process. The
installation of hardware and software, and the necessary training was begun in
late 2007. Besides the benefits already described in this article, we
anticipate the full participation by all banks in Check 21 will provide the
following: better customer service, more efficient use of existing staff,
faster check clearing and reduction of the risk of check fraud. We have
informed and continue to inform our customers and the community about the Check
21 process. As we move forward, we expect this exciting, more efficient way of
check processing to save time, improve security and increase efficiency.
[Photo]
Remote check reader
[Photo]
Branch capture in action
5
Success Stories
[Photo]
Marty's 1st Stop - serving greater Danville and beyond.
In 1989, Marty and Catherine Beattie purchased the Danville Garage and a few
months later, opened Marty's 1st Stop. A Danville native, Mr. Beattie had grown
up on a nearby farm (his mother still sleeps in the room she was born in) and,
like many native New Englanders, pursued simultaneous multiple careers. Working
his way up through the ranks at E.T. & H.K. Ide Grain Company of St. Johnsbury,
he ended up as primary dispatcher and sales manager. Simultaneously, he
participated in modest local real estate development, converting structures
into useful spaces for both retail and offices.
"I always felt that Danville needed an anchor store," he states. "I felt very
strongly that there should be an easy place to get a sandwich, milk, etc., and
also a place where folks from the community could visit with each other in the
process."
Marty's 1st Stop has expanded several times since its inception. The current
version was completed in 2004, and features a large interior space, a basement
storage area and state-of-the-art gas pumps with on-pump payment options,
including Mobil Speed Pass.
[Photo]
Marty Beattie, and the interior of Marty's 1st Stop from the deli
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Success Stories
"With my wife, Catherine, we have five of our own children, but through the
store, I actually feel we have several hundred," says Marty -- as he smiles
about one of the most satisfying aspects of the Store's success. "We employ
approximately 15 individuals full-time, and another 16 or so part-time. In the
summer season, we swell to about 40 employees, many of them young people who
benefit from the responsibility, the discipline of regular work and the
camaraderie of our Marty's family."
On the supply side, Marty prefers to keep products that locals want; and that
includes a lot of local products, from coffee to maple syrup.
"We like local, our customers like local. Our deli is very popular, and our
extensive meat department is consistently a huge draw."
When it comes to business banking, Marty emphasizes that he has enjoyed a great
working relationship with Union Bank. "Union Bank has stood with me through
several layers of growing pains," he says emphatically. "And, we're very happy
with our relationship... happy enough to host a new, staffed Union Bank branch
to be completed in July 2008, as well as an expanded Marty's with more room for
our Feed Store business. We think it will be a good thing for the community.
For Marty's 1st Stop, our being able to walk next door to a full-service branch
will be pretty nice."
"Marty's business fulfills what we're trying to achieve as a local business
lender," says Union Bank Regional VP and Commercial Lender Tracey Holbrook.
"Successful, well run businesses have a profound, positive impact in the
community. From assisting the local tax base, to providing local employment,
small businesses like Marty's are essential to keeping the community
economically viable and healthy."
Marty's 1st Stop serves an important social aspect as well; spending just a few
minutes inside reveals the "commons" nature of the space. Customers engage in
lively discussions about local happenings, and of course politics. "It can get
pretty exciting at times," says Marty, "but we wouldn't have it any other way."
[Photo]
Marty's First Stop, in late February 2008
7
Success Stories
Laramy Products - how a small business ships world wide.
If one were to ask Sherry Stahler if she ever dreamed she'd be owning a highly
specialized, thermoplastic welding equipment business with international
distribution, she would have humbly said, "not on your life."
A native of Lyndonville, Vermont, Sherry was shopping in nearby Green Mountain
Mall when, in 1989, she struck up a conversation with Laramy's owner, Pierre
Pottier. (Pottier, a native of France had moved Laramy Products from Cohassett,
Massachusetts to Lyndonville, Vermont in 1971.) As a result of that chance
meeting, a new work experience was begun.
[Photo]
Sherry Stahler
As Pottier's Administrative Assistant, Ms. Stahler learned the operation
thoroughly. Upon approaching retirement, Mr. Pottier initiated a conversation
with Sherry about purchasing the company. It was important to him that the
business remain in Vermont and continue to manufacture the same high-quality
equipment the company was known for.
"I like this company, and I had been running it, practically speaking, for a
number of years. We spent a good amount of time in negotiation and as a result,
I became the owner of the company in 2004. The process was revealing. I had
never dreamed that I could have such a beneficial relationship with a bank, but
my relationship with Union Bank enabled me to buy the company, the building in
which it's located, and several acres of land surrounding it. Union Bank was
positive about the business and its potential. They were extremely helpful and
creative in finding ways to make my purchase possible."
Laramy Products designs and manufactures plastic welding equipment. It is used
to repair plastics in just about every conceivable industry.
"Our products are used in manufacturing, in the repair of HVAC systems,
plumbing systems, agricultural, solid and fluid storage, automotive,
construction industries, and even the military," states Sherry, proudly. "If a
person wants to weld plastic, it is very likely that they use our equipment."
[Photo]
Laramy machine equipment, and a typical Laramy Plastic Welding Kit
8
Success Stories
The company employs three people full-time, but also subcontracts with other
local machine and fabrication companies, creating a manufacturing network that
employs a great many individuals. The innovation at Laramy doesn't stop with
it's sophistication and manufacturing mix; it also extends to the company's
generous employment terms. "We value our team: they make our products and
service our vendors. We have paid vacation, paid personal days, a four day work
week and competitive health benefits."
The company ships its plastic welding equipment primarily to major supply
companies, but due to Laramy's longevity and reputation for quality products,
it enjoys a level of competitive success.
[Photo]
The crucial heating element
"Sure, we have competitors, and we don't ignore them. Right now, we're closely
watching European competitors skirt trade restrictions by setting up assembly
shops in the southeastern U.S., where labor is less expensive, comparatively.
We enjoy a good relationship with our distributors, and we're not sitting on
our hands with it. We're constantly reviewing our manufacturing process as well
as our marketing and outreach positions, to see if we can make improvements -
both to efficiency and the bottom line."
"Sherry has a terrific amount of energy," says Union Bank Commercial Lender
Tracey Holbrook. "She could be a model for what women in business can be. We
are very pleased to have Sherry and Laramy as our customer and are equally
pleased to have been able to play a role in her ongoing success."
"Laramy has a guidebook to plastic welding that is practically the bible for
those who practice plastic welding," says Sherry. "It is very satisfying to
know that your product is a worldwide leader in the field."
[Photo]
Plastic welding torch specialty tips
9
Success Stories
Forget-Me-Not-Shop - Filling a niche and growing.
In 1981, Barbara Burmeister rented a space, spent the last of her money and
opened a thrift shop specializing in recycled clothing - the best from
recycling centers in Boston and NYC. "I filled up a van twice a week, which was
followed by hours of laundering, seamstress work and repairs. My shop always
smelled like fresh linen, which was probably part of the appeal," says Barbara.
"It was a lot of work, like diving for pearls. It wasn't uncommon for me to
hand check 2,000 sweaters at a time to find the ones that were in good enough
condition to clean and resell -- and customers liked the `Robin Hood Factor' --
in that they were getting very well made, formerly expensive clothing for so
little."
[Photo]
Barbara Burmeister
In the 27 years since then, her Forget-Me-Not Shop in Johnson, Vermont, has
grown steadily. Eventually, the Shop moved into "off-price" clothing when
recycled clothing became chic in Europe and Asia. "Prices went off the charts,"
says Barbara. "Used Levi's jeans were fetching $60-$100 overseas while I was
asking $8. In 1993 we moved completely into off-price clothing, taking
advantage of the buying discounts of `just-out-of-vogue' fashion trends."
Forget-Me-Not Shop grew until space limitations of her original East Main
Street location in Johnson became overly constrictive. "We needed more space,
more parking and easier access," Barbara stated. "We knew only a larger
facility would work, with greater parking availability."
[Photo]
The eastern interior of Forget-Me-Not Shop
10
Success Stories
She purchased land west of Johnson in 1998, and constructed the new, much
larger facility in 1999 and 2000. To make her vision a reality, she applied for
and received a SBA guaranteed loan from Union Bank. With the borrowed funds and
her considerable retailing and purchasing experience, the new 5,000 square foot
building had it's Grand Opening in the late fall of 2000.
Barbara's proven retail mantra: "stack it deep and sell it cheap," led her to
fully stock the new space with heavily discounted clothing, including a hefty
mix of well-known brand names. Within two years she had doubled the sales of
the original shop. By 2003, the new store was well established. "Union Bank and
SBA allowed me to take the great leap forward. In particular, Union Bank worked
very closely with me to get the project off the ground. Union Bank's lenders
were extremely good at listening and helping me find workable solutions to a
very complex financing package."
In addition, Barbara is very enthusiastic about Union Bank's Merchant Services,
which she uses for her credit card processing. "If we have any issues at all,
the Merchant Services Team is immediately there for me. Great service and
support makes all the difference in this business."
"Barb is an astute retailer," says Peter Jones, Union Bank VP and Commercial
Lender. "Her continued success comes from a thorough understanding of her
customers, and the ability to anticipate their ongoing needs. We are pleased to
be able to help support her ongoing success."
Today's Forget-Me-Not Shop is a clear reflection to Barbara Burmeister's hard
work. The Shop is open 7 days a week from 9 a.m. to 9 p.m., and offers new
clothing for men, women and teens at huge discounts -- up to 40% to 75 % off
typical retail prices. "So far, I'm lucky and right more than I'm wrong, which
is why I'm still in business," she emphasizes. And when it comes to banking,
her response is direct: "Can you say that your bank is on your side? With Union
Bank, I can."
[Photo]
The rustic Main entrance to the Shop and Barbara's Sales Team
11
Success Stories
Wheel House Designs - specialty socks for every enthusiast.
In 1989 Gail Wheel had a gift shop in Stowe village, was a rep for gift store
merchandise (including socks) and at the time was also a busy mother. "I had
this idea to create a black and white splotched sock -- sort of a Holstein
design," says Gail. "My sock manufacturer said they were ugly and would never
sell." Gail had the courage of her convictions and ordered 1,200 pairs of the
Holstein hosiery. Soon they were in over 200 Ben & Jerry's shops as well as
many others. They sold through promptly. Seeing an opportunity, she conceived
of many other niche designs, focusing on animal and pet fans... bird motifs,
dog breeds and more, including designs for the American Kennel Club.
[Photo]
Gail Wheel
"We are primarily a wholesale company," says Gail. "We subcontract with sales
representatives in North America and Europe to promote our product to
retailers. Our customers, and our retailers love the originality of our
products and the quality. I use two hosiery mills for manufacturing, one in
California and one in South Carolina. We're proud that Wheel House Designs can
offer a fun, durable and competitive product, made in the U.S.A."
[Photo]
Wheel House Designs trade show banner
12
Success Stories
Enjoying rapid growth is not without its challenges. Inventory management, cash
flow, accounting and more all play a critical role in a company's success. "In
the past three years, I have nearly reinvented the business," Gail says. "As
the owner, I needed to thoroughly expand my understanding of the nuts and bolts
of the financial aspect of the company. I received great assistance from the
Small Business Development Center, and ultimately, from Union Bank. They
listened to my needs, asked the right questions, and have been a quiet partner
in Wheel House's current success."
"Wheel House has great products," says David Silverman, Senior VP and
Commercial Lender. "Gail has worked extremely hard to harness the full
productivity of her company and to create new efficiencies in purchasing and
accounting. We are proud to be a component of her success, but she has done the
hard work, and we really respect it."
[Photo]
The stock wall at the company offices
"We are coming up on our 20th anniversary of being in business," Gail
emphasizes. "We now have about 400 designs in our catalog. Much of our success
is due to our great team. I love coming to work because I so enjoy the people I
work with. We all come up with design ideas, loosely based on the
`doggie-argyle' concept for which we're known. Our reps and even our customers
also request designs. Some make it into the catalog, some don't but everything
is considered."
When asked to reflect on what it takes to own and operate a business, Gail
Wheel doesn't hesitate: "My advice to any new business owner is to thoroughly
learn business accounting practices, and how to best organize business
accounts." And, when it comes to banking, she adds, "Union Bank offers the
personal side of banking -- where a person can simply go to the Bank and speak
with an experienced business lender and get a local decision. The local factor
makes a great difference."
[Photo]
A small portion of the warehouse space
13
Success Stories
Hagan's Homes - forty years of helping people own their own houses.
In 1968, John and Merlene Hagan purchased Ray's Mobile Homes in Littleton, and
started Hagan's Homes. Located just southeast of the Moore Reservoir Dam in
Littleton, New Hampshire, the company has supplied both mobile and modular
homes to a growing clientele. During the mid 1980's the Hagan's also purchased
two mobile home parks, which they own and manage.
"We've seen a lot of changes in the Manufactured Homes market," states Merlene
Hagan. "Modular homes have become much more desirable in the market place, and
the fit, finish and expense have risen accordingly."
[Photo]
Hagan's Homes, Littleton, New Hampshire
The Hagan's noted that many changes have also occurred in land permitting,
zoning and regulations -- all of which affect the housing market. "In 2006, we
were required by the State of New Hampshire to be `licensed installers' of
mobile and modular homes," Merlene described. "We had to pass instructional
courses in Concord (NH), purchase insurance bonding and so on and so forth. We
now have two fully licensed installers, John and our son John Jr., who are
required to be on the site when a home is placed. John and John Jr. were the
first two individuals to be officially licensed in the entire State of New
Hampshire."
Because of the complexity involved in preparing a home site for either a mobile
or modular home, the Hagans prefer to handle and oversee as much of the process
as possible, to ensure that their standards of quality are achieved and their
expertise and experience is put to good use. "Another challenge in this
business," continues Merlene, "is working with site prep contractors that may
not be as experienced as we are at knowing what is required and providing the
necessary set up; which is why we prefer to provide as much of the preparation
as our customer will allow."
[Photo]
Alycia Vosinek, Merlene Hagan, John Hagan, Millie Nelson
14
Success Stories
"We are fortunate that Hagan's Homes is a family business," continues Merlene.
"Our children Elynor, John Jr., and wife Jessica have grown up in the company
and at some point, they may be interested in taking it over. We see a strong
future in this business. Modular and manufactured homes represent a great value
for the dollar and in a competitive real estate market, these homes will
continue to be a viable option."
I've known the Hagan family for many years," states Millie Nelson, VP and
Branch Manager of Union Bank's Littleton Office. "The entire family banks with
us, which includes their personal and business accounts, as well as financing
for both personal and business needs. It is important for me to know they are
with a Bank that understands their needs and will continue to provide the
service they deserve."
"The Hagans are great customers," continues Alycia Vosinek, Union Bank
Commercial Lender. "It has been a privilege to get to know and work with John
and Merlene Hagan over the years. They are honest, hard working, and are the
kind of customer any bank would be fortunate to have. We look forward to
assisting them for many years to come."
[Photo]
The awards earned by the Hagan's forty years of home sales and service,
"When it comes to banking," says Merlene, "relationship is everything. We refer
new home buyers to Union Bank, because we know the Bank will serve their needs
well -- just as they have served us."
[Photos:]
A full-sized model of one of many designs of modular homes
15
Success Stories
Synergy Orthopedics - Bringing efficiency and management to local healthcare.
"You have an existing practice that is successful in its mission, but due to
community needs, you have outgrown your existing space and you have drastically
increased your administration needs. What do you do?" asks Synergy's Jane
Catten, R.N. "In our example, you reinvent how a medical practice operates."
Synergy, aptly named, is the creative outcome of recognizing the ongoing and
upcoming healthcare needs of greater St. Albans, Vermont. The local orthopedic
practice, begun by Doctors Robert Beattie and Bruce Forester had seen
remarkable growth and needed solutions to manage it.
Jane continues: "With this community's proximity to northern Chittenden County,
plus our own Franklin and Grand Isle counties, we'll see an increase in the
need for orthopedic services. Add to this an aging, more active population and
the result is greater stress on joints and bodies. There continues to be a
growing segment of the population whose needs we want to effectively meet."
[Photo]
Synergy's Jane Catten, R.N.
Synergy was begun in 2006. "Dr. Forester announced his intention to relocate to
another part of the U.S. This challenge, along with the practice's obvious need
for more space, organization and more orthopedic providers and surgeons, lead
to the formation of what we now call `Synergy Administrative Services'," Jane
describes. "Our company is a Limited Liability Corporation (LLC) that includes
the management of the Orthopedic, Sports Medicine and Pain Management
practices. The concept was to create a centrally organized facility where
patients and their doctors could efficiently connect -- with a minimum of red
tape. We provide Administrative Support, Physician Scheduling, Billing
Services, Clinical Staff to our Doctors, and overall Practice Management. We
also own our part of the building."
[Photo]
Jane Catten and Dr. Jan Gellis review an X-Ray
16
Success Stories
"We are very pleased to assist Dr. Robert Beattie and Jane Catten, R.N., with
their innovative approach to musculoskeletal health care in Franklin County,"
confirms Mike Curtis, Union Bank VP and Commercial Lender. "The formation of
the Synergy Orthopaedics, Sports Medicine and Pain Management Center brings
together multiple medical specialties in one location -- and provides a
holistic approach to orthopedic medicine. The entire concept would not be
possible without the process-focused management experience that `Synergy
Administrative' provides. At Union Bank, we feel our own approach in providing
commercial services meshes well with Synergy's innovation. The result has
helped create a better health care experience in greater Franklin County."
[Photo]
Dr. Steven Landfish in one of the corridors leading to examination rooms
"Union Bank was instrumental in guiding me toward creative and comprehensive
financing options," Jane states. "The resources the Bank brought to the table
were considerable, and the entire lending process was extremely professional...
I was never left hanging, and I knew the Bank was looking out for my long term
interests. For me to be able to call Union Bank and personally receive the
attention I required is priceless. The unbelievable turnaround time, the local
connections; all of this is local banking at its very best."
[Photo]
The exterior of the Synergy suite
17
Success Stories
Jasper Hill Farm - part of the answer to saving the family farm is cheese.
Think of Jasper Hill Farm in Greensboro, Vermont, as part of a movement toward
high-end, value-added local food production; then add distribution to some of
the finest restaurants and retail shops and you begin to see a glimpse of the
future as seen by Mateo and Andy Kehler.
The Cellars at Jasper Hill is a state of the art, 22,000 square foot cheese
aging facility. It's a project touted as the nation's first structure
exclusively dedicated to the ripening of natural-rind cheeses and a place
designed to make it easier for small-time cheesemakers to produce and sell
their own cheeses. "Cheesemakers will be able to process milk at their own
farms, capture the processor's margin and then ship their green cheese to the
Cellars at Jasper Hill for ripening. And when the cheese is ready, we'll also
handle the sales and marketing," says Andy. "Cheesemakers pay Jasper Hill by
the pound for two to six months of aging. They won't have to hire extra
employees or pay for refrigeration and storage space or distribution on their
own."
[Photo]
Federico Vicconi, Andy Kehler and Mateo Kehler in one of the
smaller cheese cellars at Jasper Hill
"From the beginning," says Mateo, "we knew we couldn't rely on owning and
running a farm that sold fluid milk as a commodity. Our early successes have
shown that the simplest way of making a 40-60 cow dairy farm economically
viable is to directly create value-added products. Producing artisan cheese
products is part of the answer to our larger scale goals: to preserve -- and in
some cases restore -- the landscape and soils of Vermont. As well as our own
cheeses, The Cellars at Jasper Hill can provide the infrastructure to assist
other small farms in their own economic success. Those farms can be part of the
long-term success of family operated agriculture in Vermont."
With seven huge arched vaults, and 12,000 square feet underground, the Cellars
at Jasper Hill are staggering in their size. The facility provides five
different climate-controlled environments suitable for aging a variety of
cheeses, from clothbound cheddars to bloomy rind cheeses, as well as blues,
alpines and washed rind cheeses.
[Photo]
Mateo and Andy Kehler in one of the three large cheese cellars
18
Success Stories
"The Cellars will be able to age nearly any type of cheese a local producer
could dream up," says Mateo, who (along with architects) created the design
after traveling in France and applying the ideas he liked best. "We anticipate
having the facility age between 50 and 60 different types of cheeses from 30 to
40 producers."
The entire Jasper Hill Farm operation, including the Cellars, employs 11 full
time, with plans for 20 more individuals over the next 24 months. Though the
facility isn't fully completed, Cabot's Clothbound Cheddar, a collaboration
between Vermont's Cabot Creamery and Jasper Hill, has been housed there since
December and won "Best of Show" at the 2006 American Cheese Society
competition.
In addition to Jasper Hill's own employees, a small army of contractors has
been employed in the construction of the massive facility.
"We have had architects, concrete engineers, electricians, a plumber,
excavation crews, refrigeration experts, roofing, steel and carpentry
contractors, glazing contractors, waterproof coatings experts, the Army Corps
of Engineers, welders, machinists and very soon, landscapers, and information
tech folks on the project. The construction alone has made a substantial
economic impact," states Mateo.
"Andy and I have a long family history and deep roots in Greensboro," he
continues. "We're enthusiastic about staying true to local land use, which is
agricultural. Our goal at Jasper Hill is to be the antithesis of a large
commodity producer and to find ways to profit - and ways for other small farms
to succeed as well. We approached several banks but it became quickly apparent
that the disconnect between their lenders and their board of directors was an
issue. In comparison, Union Bank has a genuine local focus, and we were able to
meet with their lenders on site and at the bank to accurately describe the
vision we had for the project. The local decision making along with the
expertise to develop and secure a complex and creative financing package was
absolutely critical. I can fairly state that the Jasper Hill project would not
have happened without the relationship between us and Union Bank."
[Photos:]
Happy Ayrshire cows at Jasper Hill Farm,
fluid milk processing equipment,
racks of Jasper Hill "Constant Bliss" cheese,
the main access corridor to the Cellars at Jasper Hill
19
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.
The Disclosure Control Committee assists 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 reviews 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 and reviews all periodic filings and press
releases prior to filing with the SEC.
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
20
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 (the "Company") as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2007. The Company's management is responsible for
these financial statements. 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
/s/ UHY LLP
Albany, New York
March 31, 2008
VT Reg. No. 092-0000-648
21
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2007 and 2006
2007 2006
-----------------------------
ASSETS
Cash and due from banks $ 12,814,693 $ 11,694,471
Federal funds sold and overnight deposits 613,916 9,262,770
-----------------------------
Cash and cash equivalents 13,428,609 20,957,241
Interest bearing deposits in banks 11,867,532 5,416,961
Investment securities available-for-sale 33,821,908 23,682,636
Loans held for sale 7,711,330 3,750,186
Loans 310,594,060 313,821,920
Allowance for loan losses (3,377,857) (3,337,768)
Unearned net loan fees (111,560) (120,139)
-----------------------------
Net loans 307,104,643 310,364,013
Accrued interest receivable 2,077,067 2,000,719
Premises and equipment, net 6,462,191 6,079,715
Other assets 10,887,422 8,897,732
-----------------------------
Total assets $393,360,702 $381,149,203
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 56,155,206 $ 54,875,163
Interest bearing 267,805,778 264,946,884
-----------------------------
Total deposits 323,960,984 319,822,047
Borrowed funds 20,327,671 14,596,130
Liability for pension benefits 1,251,484 1,317,352
Accrued interest and other liabilities 5,746,525 3,490,477
-----------------------------
Total liabilities 351,286,664 339,226,006
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 7,500,000 and 5,000,000 shares authorized;
and 4,921,786 and 4,918,611 shares issued; at December 31, 2007 and
2006, respectively 9,843,572 9,837,222
Paid-in capital 202,401 150,146
Retained earnings 35,791,516 35,202,735
Treasury stock at cost; 418,817 and 386,634 shares; at
December 31, 2007 and 2006, respectively (2,939,429) (2,264,181)
Accumulated other comprehensive loss (824,022) (1,002,725)
-----------------------------
Total stockholders' equity 42,074,038 41,923,197
-----------------------------
Total liabilities and stockholders' equity $393,360,702 $381,149,203
=============================
See accompanying notes to consolidated financial statements.
22
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2007 and 2006
2007 2006
---------------------------
Interest income
Interest and fees on loans $24,009,767 $23,459,344
Interest on debt securities:
Taxable 1,097,900 941,219
Tax exempt 238,052 191,484
Dividends 106,828 122,806
Interest on federal funds sold and overnight deposits 356,938 213,662
Interest on interest bearing deposits in banks 463,459 268,665
---------------------------
Total interest income 26,272,944 25,197,180
---------------------------
Interest expense
Interest on deposits 7,466,236 5,906,623
Interest on borrowed funds 761,421 914,640
---------------------------
Total interest expense 8,227,657 6,821,263
---------------------------
Net interest income 18,045,287 18,375,917
Provision for loan losses 265,000 180,000
---------------------------
Net interest income after provision for loan losses 17,780,287 18,195,917
---------------------------
Noninterest income
Trust income 358,578 304,444
Service fees 3,426,526 3,108,720
Net gains on sales of investment securities available-for-sale 122,503 134,558
Net gains on sales of loans held for sale 138,205 288,138
Net gains on sales of other real estate owned 45,796 -
Other income 203,334 221,953
---------------------------
Total noninterest income 4,294,942 4,057,813
---------------------------
Noninterest expenses
Salaries and wages 6,211,348 6,011,727
Pension and employee benefits 2,315,915 2,344,464
Occupancy expense, net 837,956 802,192
Equipment expense 1,094,068 1,038,246
Vermont franchise tax 358,791 278,539
Equity in losses of limited partnerships 265,056 297,209
Other expenses 3,372,036 3,041,714
---------------------------
Total noninterest expense 14,455,170 13,814,091
---------------------------
Income before provision for income taxes 7,620,059 8,439,639
Provision for income taxes 1,964,912 2,184,364
---------------------------
Net income $ 5,655,147 $ 6,255,275
===========================
Earnings per common share $ 1.25 $ 1.38
Dividends per common share $ 1.12 $ 1.06
See accompanying notes to consolidated financial statements.
23
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2007 and 2006
Common Stock Accumulated
----------------------- other Total
Shares, net Paid-in Retained Treasury comprehensive stockholders'
of treasury Amount capital earnings stock loss equity
-------------------------------------------------------------------------------------------
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 14) -- -- -- -- -- (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
-----------
Comprehensive income:
Net income -- -- -- 5,655,147 -- -- 5,655,147
Other comprehensive income
net of tax:
Change in net unrealized
gain (loss) on investment
securities available-for-sale,
net of reclassification
adjustment and tax effects -- -- -- -- -- 153,361 153,361
Change in net unrealized gain
(loss) on unfunded defined
benefit plan liability, net of
reclassification adjustment
and tax effects -- -- -- -- -- 25,342 25,342
-----------
Total other comprehensive
income 178,703
-----------
Total comprehensive income 5,833,850
-----------
Cash dividends declared -- -- -- (5,066,366) -- -- (5,066,366)
Issuance of stock options -- -- 8,853 -- -- -- 8,853
Exercise of stock options 3,175 6,350 43,402 -- -- -- 49,752
Purchase of treasury stock (32,183) -- -- -- (675,248) -- (675,248)
-----------------------------------------------------------------------------------------
Balances, December 31, 2007 4,502,969 $9,843,572 $202,401 $35,791,516 $(2,939,429) $ (824,022) $42,074,038
=========================================================================================
See accompanying notes to consolidated financial statements.
24
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006
2007 2006
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,655,147 $ 6,255,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 757,315 781,717
Provision for loan losses 265,000 180,000
Credit for deferred income taxes (55,648) (21,433)
Net amortization of investment securities available-for-sale 15,625 59,665
Equity in losses of limited partnerships 265,056 297,209
Issuance of stock options 8,853 10,285
Net gains on sales of investment securities available-for-sale (122,503) (134,558)
Net gains on sales of loans held for sale (138,205) (288,138)
Net losses (gains) on disposals of premises and equipment 5,810 (12,475)
Net gains on sales of other real estate owned (45,796) --
Write-down of other real estate owned 157,500 --
Decrease in unamortized loan fees (8,579) (32,199)
Proceeds from sales of loans held for sale 15,599,487 18,047,445
Origination of loans held for sale (19,422,426) (14,963,474)
Increase in accrued interest receivable (76,348) (28,795)
Increase in other assets (935,701) (427,661)
Increase (decrease) in income taxes 140,559 (79,203)
Increase in accrued interest payable 241,229 417,747
Increase (decrease) in other liabilities 593,023 (57,038)
-----------------------------
Net cash provided by operating activities 2,899,398 10,004,369
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits in banks
Maturities and redemptions 4,045,000 3,971,874
Purchases (10,495,571) (791,000)
Investment securities available-for-sale
Sales 710,818 7,823,788
Maturities, calls and pay downs 4,017,187 3,848,588
Purchases (14,528,032) (2,949,349)
Net redemption (purchase) of Federal Home Loan Bank stock 70,800 (226,400)
Net decrease (increase) in loans 2,599,452 (13,642,749)
Recoveries of loans charged off 42,836 170,454
Purchase of premises and equipment (1,167,996) (965,809)
Investments in limited partnerships (361,363) (347,454)
Proceeds from sales of premises and equipment 22,395 15,276
Proceeds from sales of other real estate owned 397,055 --
Proceeds from sales of repossessed property 40,773 14,815
-----------------------------
Net cash used in investing activities (14,606,646) (3,077,966)
-----------------------------
25
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2007 and 2006 (continued)
2007 2006
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in borrowings outstanding $ 5,731,541 $ (1,660,144)
Proceeds from exercise of stock options 49,752 --
Net increase in noninterest bearing deposits 1,280,043 2,258,251
Net increase in interest bearing deposits 2,858,894 4,264,702
Purchase of treasury stock (675,248) (227,250)
Dividends paid (5,066,366) (4,813,150)
-----------------------------
Net cash provided by (used in) financing activities 4,178,616 (177,591)
-----------------------------
(Decrease) increase in cash and cash equivalents (7,528,632) 6,748,812
Cash and cash equivalents:
Beginning 20,957,241 14,208,429
-----------------------------
Ending $ 13,428,609 $ 20,957,241
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 7,986,428 $ 6,403,516
=============================
Income taxes paid $ 1,880,000 $ 2,285,000
=============================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING & FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 547,455 $ 399,254
=============================
Repossessed property acquired in settlement of loans $ 77,573 $ 14,564
=============================
Loans originated to finance the sale of other real estate owned $ 115,000 $ --
=============================
Investment in limited partnerships acquired by capital
contributions payable $ 1,610,129 $ --
=============================
Change in unrealized losses on investment securities available-for-sale $ 232,365 $ (84,578)
=============================
Change in unrealized loss on unfunded defined pension benefit
plan liability $ 38,397 $ --
=============================
Unrealized loss on defined benefit pension plan, adjustment to
initially apply SFAS No. 158, (See Note 14) $ -- $ 1,286,293
=============================
See accompanying notes to consolidated financial statements.
26
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.
Periods presented
The Company meets the qualification requirements under Securities and Exchange
Commission rules for smaller reporting companies, and pursuant to such rules,
has elected to present audited statements of income, cash flows and changes in
stockholders' equity for each of the preceding two, rather than three, fiscal
years.
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 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, local
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.
Notes 5 and 6 discuss 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 valuation and 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.
27
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 Accumulated 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.
28
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 and northern New Hampshire. In addition,
various regulatory agencies, as an integral part of their examination process,
regularly 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 in Other assets. 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 Class B common stock of the FHLB of Boston. 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 $1,396,100 and $1,466,500 at December 31, 2007 and 2006, respectively.
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 Other
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
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.
29
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
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 Company
recognized the under funded status of its pension plan as a liability in the
consolidated Balance Sheets as of December 31, 2007 and 2006. See Note 14.
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 2007 and 2006.
Advertising costs
The Company expenses advertising costs as incurred.
Earnings per common share
Earnings per common share are computed based on the weighted average number of
shares of common stock outstanding during the period, retroactively adjusted
for stock splits and stock dividends and reduced for shares held in treasury.
The weighted average shares outstanding were 4,521,380 and 4,539,641 for the
years ended December 31, 2007 and 2006, 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 as Other
assets. 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 are recognized as a
reduction of the Provisions for income taxes 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, commitments to invest in low income housing
partnerships, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
fixed and certain.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. 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.
30
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
The following is a summary of changes in other comprehensive income (loss) for
the years ended December 31:
2007 2006
-------------------------
Investment securities available-for-sale:
Change in net unrealized gain on investment securities available-
for-sale, net of tax of $120,655 and $16,993 $ 234,213 $ 32,987
Reclassification adjustment for net gains on investment securities available-
for-sale realized in net income, net of tax of $(41,651) and $(45,750) (80,852) (88,808)
-------------------------
153,361 (55,821)
-------------------------
Defined benefit pension plan:
Change in net unrealized actuarial gain, net of tax of $4,016 7,796 -
Reclassification adjustment for amortization of net actuarial loss, realized
in net income, net of tax of $6,945 13,482 -
Reclassification adjustment for amortization of prior service cost, realized
in net income, net of tax of $2,094 4,064 -
-------------------------
25,342 -
-------------------------
$ 178,703 $ (55,821)
=========================
The components of accumulated other comprehensive loss, net of tax at December
31, are:
2007 2006
-------------------------
Net unrealized loss on investment securities
available-for-sale $ (410) $ (153,772)
Defined benefit pension plan:
Net unrealized actuarial loss (800,770) (822,047)
Net unrealized prior service cost (22,842) (26,906)
-------------------------
Total $(824,022) $(1,002,725)
=========================
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Stock 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 adoption date.
Recent accounting pronouncements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research
Bulletin No.51". The objective of this Statement is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards that require specific financial statement
disclosure, consistent accounting treatment for changes in a parent's ownership
interest and fair value measurement on the deconsolidation of a subsidiary. The
Statement applies to all entities that prepare consolidated financial
statements but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. The Statement is effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company has no noncontrolling interests in a
subsidiary and therefore does not expect there to be any impact on the
consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R, (revised) "Business
Combinations" which replaces Statement No. 141. The objective of this Statement
is to improve the relevance, representational faithfulness, and comparability
of the information that a reporting entity provides in its financial reports
about a business combination and its effects. To accomplish that, this
Statement establishes principles and requirements for how the acquirer; (1)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Statement
shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier application is
prohibited. This Statement will affect the Company for any acquisitions after
December 31, 2008.
31
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (Continued)
In December 2007, the Securities and Exchange Commission (SEC) issued SEC Staff
Accounting Bulletin (SAB) No.110 - "Share-based Payment - Certain Assumptions
Used In Valuation Methods. - Expected Term". SAB No. 110 addresses the
statement in SAB No. 107 - Topic 14. Share-based Payment that the staff would
accept a "simplified" method of determining the expected life of "plain
vanilla" options. SAB No. 107 also indicated that the use of this "simplified"
method would only be accepted through December 31, 2007. SAB 110 extends the
use of the "simplified" method beyond December 31, 2007 under certain
circumstances. The Company does not use the "simplified" method for determining
the expected life of stock options. SAB No. 110 was adopted for the Company's
2007 financial statements and there was no impact on the consolidated financial
statements.
In November 2007, the SEC issued SAB No. 109, "Written Loan Commitments
Recorded at Fair Value Through Earnings". SAB No 109 supersedes SAB 105,
"Application of Accounting Principles to Loan Commitments," and indicates that
the expected net future cash flows related to the associated servicing of the
loan should be included in the measurement of all written loan commitments that
are accounted for at fair value through earnings under SFAS No. 159's
fair-value election or for written mortgage loan commitments for loans that
will be held-for-sale when funded that are marked-to-market as derivatives
under SFAS No. 133 (derivative loan commitments). The guidance in SAB No. 109
is applied on a prospective basis to derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. SAB No. 109 is
not expected to have a material impact on the Company's consolidated financial
statements.
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 has chosen not to exercise the
fair value option for financial assets and liabilities and therefore, there is
no impact of this new standard on the Company's consolidated 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 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. The Company adopted SFAS No. 156 effective January 1,
2007 and will continue with the amortization method of accounting for servicing
rights, which has no impact on the Company's financial position or results of
operations.
Reclassifications
Certain amounts in the 2006 financial statements have been reclassified to
conform to the current year presentation.
32
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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, 2007 and 2006 was $387,000 and $2,301,000, respectively, 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, was as follows:
2007 2006
--------------------------
Noninterest bearing accounts $1,392,986 $1,399,389
Federal Reserve Bank of Boston 8,203,624 7,157,918
Federal funds sold 588,243 9,213,881
Federal Home Loan Bank of Boston 25,673 48,889
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, 2007
and 2006, which are included in the Federal Reserve Bank balances above.
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 2.85% to 6.00% and mature at various dates through
2017, with $6,750,452 scheduled to mature in 2008.
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, 2007:
Debt securities:
U.S. Government-sponsored enterprises $ 3,499,308 $ 26,603 $ -- $ 3,525,911
Mortgage-backed 10,234,282 40,318 (85,817) 10,188,783
State and political subdivisions 8,180,771 35,959 (17,061) 8,199,669
Corporate 11,841,615 101,216 (131,336) 11,811,495
-------------------------------------------------------
Total debt securities 33,755,976 204,096 (234,214) 33,725,858
Marketable equity securities 47,100 29,518 (22) 76,596
Mutual funds 19,454 -- -- 19,454
-------------------------------------------------------
Total $33,822,530 $233,614 $(234,236) $33,821,908
=======================================================
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
Mutual funds 7,375 -- -- 7,375
-------------------------------------------------------
Total $23,915,624 $179,678 $(412,666) $23,682,636
=======================================================
Investment securities with a carrying amount of $6,812,124 and $2,607,245 at
December 31, 2007 and 2006, respectively, were pledged as collateral for public
deposits and for other purposes as required or permitted by law.
33
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; aggregated by investment category and length
of time that individual securities have been in a continuous loss position,
follows:
December 31, 2007: Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Debt securities: Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------
Mortgage-backed $ -- $ -- $ 6,701,027 $ (85,817) $ 6,701,027 $ (85,817)
State and political subdivisions 1,600,178 (15,706) 189,563 (1,355) 1,789,741 (17,061)
Corporate 2,926,185 (52,879) 1,874,985 (78,457) 4,801,170 (131,336)
---------------------------------------------------------------------------------
Total debt securities 4,526,363 (68,585) 8,765,575 (165,629) 13,291,938 (234,214)
Marketable equity securities 14,000 (22) -- -- 14,000 (22)
---------------------------------------------------------------------------------
Total $4,540,363 $(68,607) $ 8,765,575 $(165,629) $13,305,938 $(234,236)
=================================================================================
December 31, 2006: Less Than 12 Months Over 12 Months Total
----------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Debt securities: Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------
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)
=================================================================================
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, 2007, forty-two debt securities had unrealized losses totaling
$234,236. This amounts to aggregate depreciation of 0.7% of the Company's
amortized cost of the entire portfolio. Twenty-nine 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 not due to the
deterioration in the creditworthiness of the issuer, but due to the increase in
market interest rates from June 2004 through September 2006 where the Federal
Reserve discount rate and the commercial prime rate rose seventeen times or 425
basis points. During late 2007, the value of the debt securities portfolio has
improved due to a change in the interest rate environment with rates decreasing
100 basis points. In 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, 2007.
Proceeds from the sale of securities available-for-sale were $710,818 and
$7,823,788 in 2007 and 2006, respectively. Gross realized gains from sales of
investments available-for-sale were $133,128 and $284,668 with gross realized
losses of $10,625 and $150,110 for the years 2007 and 2006, respectively.
34
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (Continued)
The contractual scheduled maturities of debt securities available-for-sale as
of December 31, 2007 were as follows:
Amortized Fair
Cost Value
--------------------------
Due in one year or less $ 3,347,721 $ 3,348,295
Due from one to five years 5,931,228 5,915,804
Due from five to ten years 9,409,725 9,431,211
Due after ten years 4,833,020 4,841,765
--------------------------
23,521,694 23,537,075
Mortgage-backed securities 10,234,282 10,188,783
--------------------------
Total debt securities $33,755,976 $33,725,858
==========================
Actual maturities may differ for certain debt securities that may be called by
the issuer prior to the contractual maturity. Actual maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be repaid, usually without any penalties.
Therefore, these mortgage-backed 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, 2007 and 2006, Loans held for sale consisted of conventional
residential mortgages and commercial real estate mortgages originated for
subsequent sale. At December 31, 2007 and 2006, 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, 2007, but there was possible
recourse on the gain on sale of loans totaling $40,529.
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 $93,544,002 and $97,741,211 at
December 31, 2007 and 2006, respectively.
The Company generally retains the servicing rights on loans sold. At December
31, 2007 and 2006, the unamortized balance of servicing rights on loans sold
with servicing retained was not material and is included in Other assets. The
estimated fair value of these servicing rights was in excess of their carrying
value at both December 31, 2007 and 2006, and therefore no impairment reserve
was necessary. Loan servicing rights of $122,680 and $154,855 were capitalized
in 2007 and 2006, respectively. Amortization of servicing rights was $136,228
and $139,580 for 2007 and 2006, respectively.
Note 6. Loans
The composition of Net loans at December 31 was as follows:
2007 2006
---------------------------
Residential real estate $115,302,700 $114,138,833
Construction real estate 20,189,860 22,568,467
Commercial real estate 133,319,830 130,848,192
Commercial 16,537,527 19,252,471
Consumer 7,175,133 7,717,150
Term Federal Funds 3,000,000 -
Municipal loans 15,069,010 19,296,807
---------------------------
Gross loans 310,594,060 313,821,920
Deduct:
Allowance for loan losses (3,377,857) (3,337,768)
Net deferred loan fees, premiums, and discounts (111,560) (120,139)
---------------------------
Net loans $307,104,643 $310,364,013
===========================
Residential real estate loans aggregating $13,310,500 and $14,074,788 at
December 31, 2007 and 2006, respectively, were pledged as collateral on
deposits of municipalities. Qualified first mortgages held by Union may also be
pledged as collateral for borrowings from the FHLB of Boston under a blanket
lien.
Loans in nonaccrual status of $3,299,170 and $2,547,346 and loans past due 90
days or more and still accruing of $2,287,179 and $2,203,291 as of December 31,
2007 and 2006, respectively.
35
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 6. Loans (Continued)
Information regarding impaired loans as of or for the years ended December 31
was as follows:
2007 2006
-----------------------
Impaired loans $1,140,898 $234,837
Total allowance for loan losses related to impaired loans 171,135 35,503
Interest income recognized on impaired loans 17,676 8,506
Average investment in impaired loans 997,364 360,829
At December 31, 2007 and 2006, the Company was not committed to lend any
additional funds to borrowers whose loans were nonperforming, impaired or
restructured. Aggregate interest on nonaccrual loans not recognized was
$457,177 and $370,674 for the years ended December 31, 2007 and 2006,
respectively.
Note 7. Allowance for Loan Losses
Changes in the Allowance for loan losses for the years ended December 31, were
as follows:
2007 2006
---------------------------
Balance, beginning $3,337,768 $3,071,421
Provision for loan losses 265,000 180,000
Recoveries of amounts charged off 42,837 170,453
---------------------------
3,645,605 3,421,874
Amounts charged off (267,748) (84,106)
---------------------------
Balance, ending $3,377,857 $3,337,768
===========================
Note 8. Premises and Equipment
The major classes of Premises and equipment and accumulated depreciation at
December 31 were as follows:
2007 2006
--------------------------
Land and land improvements $ 1,009,029 $ 1,009,473
Building and improvements 6,847,361 6,106,523
Furniture and equipment 6,249,372 6,603,998
Construction in progress and deposits on equipment 310,010 204,579
--------------------------
14,415,772 13,924,573
Less accumulated depreciation (7,953,581) (7,844,858)
--------------------------
$ 6,462,191 $ 6,079,715
==========================
Depreciation included in occupancy and equipment expenses amounted to $757,315
and $781,717 for the years ended December 31, 2007 and 2006, respectively.
The Company is obligated under noncancelable operating leases for premises that
expire in various years through the year 2012. 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, 2007 were as follows:
2008 $101,947
2009 91,791
2010 59,585
2011 45,585
2012 9,900
--------
$308,808
========
Rent expense for 2007 and 2006 amounted to $96,408 and $104,301, respectively.
Occupancy expense is shown in the consolidated statements of income, net of
rental income of $114,450 and $104,688 in 2007 and 2006, respectively.
Note 9. Other Real Estate Owned
There were two properties valued at $225,600 in other real estate owned at
December 31, 2007 and four properties valued at $399,254 at December 31, 2006,
which were included in Other assets. There was no allowance for losses on other
real estate owned at December 31, 2007 or 2006.
36
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 10. Investments Carried at Equity
The carrying values of investments carried at equity were $3,591,136 and
$2,241,063 at December 31, 2007 and 2006, respectively consisting of
investments in limited partnerships for low income housing projects. The
investments are included in Other assets. The capital contributions payable
related to these investments were $1,610,129 and $356,363 at December 31, 2007
and 2006, respectively and are included in Accrued interest and other
liabilities. The provision for undistributed net losses of the partnerships
charged to earnings was $265,056 and $297,209 for 2007 and 2006, respectively.
Note 11. Deposits
The following is a summary of Interest bearing deposits at December 31:
2007 2006
-----------------------------
NOW accounts $ 55,316,254 $ 52,957,973
Saving and money market accounts 86,611,514 95,164,005
Time deposits, $100,000 and over 46,142,736 44,238,353
Other time deposits 79,735,274 72,586,553
-----------------------------
$267,805,778 $264,946,884
=============================
The following is a summary of time deposits by maturity at December 31, 2007:
2008 $110,494,768
2009 10,939,046
2010 3,954,944
2011 208,269
2012 280,983
------------
$125,878,010
============
Note 12. Borrowed Funds
At December 31, 2007 and 2006, Borrowed funds were comprised of option advance
borrowings from the FHLB of Boston of $20,327,671, and $14,596,130,
respectively. The option advance borrowings are a mix of bullets, balloons and
amortizers with maturities through 2027. At December 31, 2007 all of the
borrowings had fixed interest rates ranging from 2.22% to 5.61% and ranging
from 2.22% to 6.06% at December 31, 2006. The weighted average interest rates
on the borrowings were 4.83% and 4.82% at December 31, 2007 and 2006,
respectively.
The contractual payments for borrowed funds as of December 31, 2007 were as
follows:
2008 $ 4,800,951
2009 708,918
2010 743,988
2011 2,431,662
2012 and thereafter 11,642,152
-----------
$20,327,671
===========
Additionally, Union maintains an IDEAL Way Line of Credit with the FHLB of
Boston. As of December 31, 2007, the total amount of this line approximated
$551,000. There were no borrowings outstanding on this line at December 31,
2007. 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, 2007, 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.
Note 13. Income Taxes
The components of the Provision for income taxes for the years ended December
31 were as follows:
2007 2006
-------------------------
Currently paid or payable $1,909,264 $2,162,931
Deferred 55,648 21,433
-------------------------
$1,964,912 $2,184,364
=========================
37
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 13. Income Taxes (Continued)
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:
2007 2006
-------------------------
Computed "expected" tax expense $2,590,820 $2,869,477
Tax exempt interest (328,749) (305,760)
Increase in cash surrender value life insurance (41,218) (39,577)
Tax credits on limited partnership investments (292,412) (319,921)
Other 36,471 (19,855)
-------------------------
$1,964,912 $2,184,364
=========================
Listed below are the significant components of the net deferred tax asset at
December 31:
2007 2006
------------------------
Components of the deferred tax asset
Bad debts $ 950,375 $ 907,386
Mark-to-market loans 46,349 16,604
Nonaccrual loan interest 155,440 126,029
Deferred compensation 404,302 393,203
Unrealized loss on investment securities
available-for-sale 211 79,216
Unfunded defined benefit pension plan liability 424,285 437,340
Other 17,335 22,500
------------------------
Total deferred tax asset 1,998,297 1,982,278
Valuation allowance -- --
------------------------
Total deferred tax asset, net of valuation allowance 1,998,297 1,982,278
------------------------
Components of the deferred tax liability
Depreciation (141,655) (166,136)
Mortgage servicing rights (100,933) (105,540)
Limited partnership investments (332,667) (251,148)
Other (1,538) (1,538)
------------------------
Total deferred tax liability (576,793) (524,362)
------------------------
Net deferred tax asset $1,421,504 $1,457,916
========================
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, 2007 will be realized.
Net deferred income tax assets are included in Other assets on the balance
sheet at December 31, 2007 and 2006.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS No. 109" (FIN 48),
on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a enterprise's financial statements in accordance with SFAS
No. 109, "Accounting for Income Taxes", and prescribes a recognition threshold
and measurement process for 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, disclosure and transition.
Based on management's evaluation, management has concluded that there are no
significant uncertain tax positions requiring recognition in the Company's
financial statements resulting in no effect on the financial statements on the
date of adoption, January 1, 2007 or at December 31, 2007. Although the Company
is not currently the subject of a tax audit by the Internal Revenue Service
(IRS), the Company's tax years ending December 31, 2003 through 2007 are open
to audit by the IRS under the applicable statute of limitations.
The Company may from time-to-time be assessed interest and/or penalties by
federal or state tax jurisdictions, although any such assessments historically
have been minimal and immaterial to the Company's financial results. In the
event that the Company receives an assessment for interest and/or penalties, it
will be classified in the financial statements as other expenses.
Note 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. There was no minimum required
contribution under the ERISA guidelines for 2007 and $256 thousand for 2006.
Union measures defined benefit plan assets and obligations as of December 31,
its fiscal year-end.
38
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Union's policy is to accrue annually an amount equal to the actuarially
calculated expense. Union made additional tax deductible voluntary
contributions of $577,000 and $450,000 to the pension plan in December 2007 and
2006, respectively, which 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 2007 2006
- -------------------------------------- --------------------------
Projected benefit obligation at beginning of year $10,200,079 $ 9,202,470
Service cost 518,515 505,301
Interest cost 602,229 532,409
Actuarial (gain) loss (64,009) 153,739
Benefits paid (197,841) (193,840)
--------------------------
Projected benefit obligation at end of year $11,058,973 $10,200,079
--------------------------
Change in fair value of plan assets
- -----------------------------------
Fair value of plan assets at beginning of year $ 8,882,727 $ 7,196,729
Actual return on plan assets 545,603 1,173,466
Employer contributions 577,000 706,372
Benefits paid (197,841) (193,840)
--------------------------
Fair value of plan assets at end of year $ 9,807,489 $ 8,882,727
--------------------------
Liability for pension benefits $(1,251,484) $(1,317,352)
==========================
2007 2006
--------------------------
Accumulated benefit obligation at December 31 $ 8,231,838 $ 7,900,249
==========================
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 2007 and 2006 consisted of the following
components:
2007 2006
------------------------
Service cost $ 518,515 $ 505,301
Interest cost on projected benefit obligation 602,229 532,409
Expected return on plan assets (597,800) (485,902)
Amortization of prior service cost 6,158 6,158
Amortization of net loss 20,427 84,060
------------------------
Net periodic benefit cost 549,529 $ 642,026
========================
The Company initially applied SFAS No. 158 as of December 31, 2006 which
resulted in recording an unfunded liability for pension benefits of $1,286,293
which was offset by an increase in deferred tax assets of $437,340 and a
decrease in stockholders' equity accumulated other comprehensive income of
$848,953. See Note 1.
It is estimated that the net periodic benefit cost for 2008 will include
approximately $6 thousand of amortization of prior service cost and $10
thousand of amortization of net actuarial loss.
39
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued)
Weighted average assumptions used to determine benefit obligation at December
31:
2007 2006
----------------
Discount rate 6.00% 5.75%
Wage base rate 3.75% 3.50%
Consumer Price Index rate 2.50% 2.25%
Weighted average assumptions used to determine net period benefit cost for
years ended December 31:
2007 2006
----------------
Discount rate 6.00% 5.75%
Rate of increase in compensation levels 4.50% 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 2.50% 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, 2007
and 2006, by asset category based on their fair values are as follows:
Asset Category 2007 2006
- -------------- -----------------
Cash and Equivalents 8.9% 10.3%
Debt Securities 23.8% 21.9%
Equity Securities 59.3% 54.0%
International Mutual Funds 8.0% 13.8%
-----------------
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 and Equivalents 0-5%
The Company made a year-end contribution of $421,000 that had not yet been
invested as of December 31, 2007, 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 2008 is $600,000.
The following table summarizes the estimated future benefit payments expected
to be paid under the Plan:
2008 $ 202,000
2009 191,000
2010 206,000
2011 271,000
2012 468,000
Years 2013 to 2017 3,242,000
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 have been allowed since 2004 for the four participants not yet in
payout status. This deferred compensation plan will be modified or terminated
during 2008 based on the Internal Revenue Service ("IRS") final rules under the
federal "American Jobs Creation Act of 2004". 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
40
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Employee Benefits (Continued
aggregated $1,161,940 and $1,156,481 at December 31, 2007 and 2006,
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 $2,019,367 and $1,898,139 at
December 31, 2007 and 2006, respectively. These amounts are included in Other
assets on the Company's balance sheets.
An 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, 2007 and 2006, $27,183 and $7,375, respectively, had 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 $137,461 and $131,681 for 2007 and 2006, 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.
The following table shows financial instruments whose contract amount
represents credit risk at December 31:
Contract or
Notional Amount
----------------------------
2007 2006
----------------------------
Commitments to originate loans $ 7,083,898 $12,175,976
Unused lines of credit 35,783,870 36,573,909
Standby letters of credit 1,248,146 1,045,752
Credit card arrangements 1,633,270 1,457,287
Equity commitments to affordable housing limited partnerships -- 917,170
----------------------------
Total $45,749,184 $52,170,094
============================
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.
41
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 16. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal and
other 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 judgment. Changes in assumptions could
dramatically affect the estimated fair values. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
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.
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.
42
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 17. Fair Values of Financial Instruments (Continued)
The estimated fair values and related carrying amounts of the Company's
significant financial instruments at December 31 were as follows:
2007 2006
---------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 13,428,609 $ 13,428,609 $ 20,957,241 $ 20,957,241
Interest bearing deposits in banks 11,867,532 11,974,019 5,416,961 5,345,689
Investment securities available-for-sale 33,821,908 33,821,908 23,682,636 23,682,636
Loans and loans held for sale, net 314,815,973 313,776,375 314,114,199 312,792,043
Financial liabilities
Deposits $323,960,984 $324,015,832 $319,822,047 $319,760,647
Borrowed funds 20,327,671 21,987,535 14,596,130 14,514,490
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
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:
2007 2006
--------------------------
Balance, beginning $ 884,661 $ 584,151
New loans and advances on lines 1,437,196 1,954,278
Repayments (982,779) (1,428,768)
Other, net -- (225,000)
--------------------------
Balance, ending $1,339,078 $ 884,661
==========================
Balance available on lines of credit
or loan commitments $ 830,239 $ 679,383
==========================
None of these loans are past due, in nonaccrual or have been restructured to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower. There were no loans to
a related party that were considered classified loans at December 31, 2007 or
2006.
Deposit accounts with related parties were $1,078,610 and $1,760,161 at
December 31, 2007 and 2006, 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, 2007, 42,200 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 $8,853 and $10,285 for 2007 and 2006, respectively.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes based option valuation model. Due to the planned retirement of
one of the employees to whom options were granted, the fair value of a portion
of the options granted in 2007 was calculated using different expected life and
risk-free interest rate assumptions. In addition, these options will vest on
the employee's retirement date. The estimated weighted average grant date fair
values, for options granted during 2007 and 2006 and the weighted average
assumptions used are presented in the following table:
2007 2006
-------------------
Fair value per share $ 1.79 $ 2.80
Expected volatility 18.90% 19.25%
Expected dividends 5.48% 4.98%
Risk free interest rate 3.45% 4.56%
Expected term (in years) 4.02 5.00
Vesting periods (in years) 0.88 1.00
43
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Stock Option Plan (Continued)
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.
A summary of the option activity under the Plan as of December 31, 2007, 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, 2007 16,075 $22.60
Granted 3,250 $20.42
Exercised (3,175) $15.67
Forfeited (150) $15.67
------
Outstanding at December 31, 2007 16,000 $23.60 2.61 $ --
===============================================================
Exerciseable at December 31, 2007 12,750 $24.41 2.25 $ --
===============================================================
The aggregate exercise date intrinsic value of options exercised during 2007
was $16 thousand. There were no options exercised during 2006. 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, 2007 is as follows:
Weighted Average
Grant date
Shares Fair Value
--------------------------
Nonvested at January 1, 2007 3,250 $2.80
Granted 3,250 $1.79
Vested (3,250) $2.80
Forfeited - -
---------------------
Nonvested at December 31, 2007 3,250 $1.79
=====================
As of December 31, 2007, there was $5,287 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 2008. The total
fair value of shares vested during the years ended December 31, 2007 and 2006
was $9,107 and $10,351, respectively. The nonvested options at December 31,
2007 are expected to vest during 2008.
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, 2007
and 2006, the Company and Union met all capital adequacy requirements to which
they were subject.
As of December 31, 2007 and 2006, 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.
44
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. Regulatory Capital Requirements (Continued)
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
----------------------------------------------------------------
As of December 31, 2007: Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
Total capital to risk weighted assets
Union $45,802 16.6% $22,127 8.0% $27,658 10.0%
Company 46,289 16.7% 22,174 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $42,411 15.3% $11,059 4.0% $16,588 6.0%
Company 42,898 15.5% 11,092 4.0% N/A N/A
Tier I capital to average assets
Union $42,411 10.8% $15,752 4.0% $19,689 5.0%
Company 42,898 10.9% 15,757 4.0% N/A N/A
Minimum To
be Well
Capitalized Under
Minimum For Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------------------------------------------------
As of December 31, 2006: Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
Total capital to risk weighted assets
Union $45,955 17.3% $21,202 8.0% $26,502 10.0%
Company 46,307 17.4% 21,242 8.0% N/A N/A
Tier I capital to risk weighted assets
Union $42,574 16.1% $10,597 4.0% $15,896 6.0%
Company 42,926 16.2% 10,625 4.0% N/A N/A
Tier I capital to average assets
Union $42,574 11.2% $15,191 4.0% $18,989 5.0%
Company 42,926 11.3% 15,209 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 2007, the Company, under the authorized purchase program, repurchased
32,183 shares of its common stock at prices ranging from $20.00 to $22.08 per
share, for a total of $675,248, compared to the 2006 repurchase of 10,686
shares at prices ranging from $20.73 to $22.00 per share for a total of
$227,250.
Note 22. Subsequent Events
On January 16, 2008, Union Bankshares, Inc. declared a $0.28 per share regular
dividend payable February 7, 2008 to stockholders of record on January 26,
2008.
45
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, 2007 AND 2006
2007 2006
---------------------------
ASSETS
Cash $ 512,613 $ 415,144
Investment securities available-for-sale 15,504 7,375
Investment in subsidiary - Union 41,586,940 41,570,863
Other assets 673,715 607,898
---------------------------
Total assets $42,788,772 $42,601,280
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 714,734 $ 678,083
---------------------------
Total liabilities 714,734 678,083
---------------------------
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 7,500,000 and 5,000,000
shares authorized; and 4,921,786 and 4,918,611 shares
issued at December 31, 2007 and 2006, respectively 9,843,572 9,837,222
Paid-in capital 202,401 150,146
Retained earnings 35,791,516 35,202,735
Treasury stock at cost; 418,817 and 386,634 shares; at
December 31, 2007 and 2006, respectively (2,939,429) (2,264,181)
Accumulated other comprehensive loss (824,022) (1,002,725)
---------------------------
Total stockholders' equity 42,074,038 41,923,197
---------------------------
Total liabilities and stockholders' equity $42,788,772 $42,601,280
===========================
The investment in the subsidiary bank is carried under the equity method of
accounting. The investment and cash, which is on deposit with Union, has been
eliminated in consolidation.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
-------------------------
Revenues
Dividends - bank subsidiary - Union $6,025,000 $5,400,000
Other income 30,969 29,468
-------------------------
Total revenues 6,055,969 5,429,468
-------------------------
Expenses
Interest 1,430 1,369
Administrative and other 354,249 294,995
-------------------------
Total expenses 355,679 296,364
-------------------------
Income before applicable income tax and equity in
undistributed net income of subsidiary 5,700,290 5,133,104
Applicable income tax benefit (117,483) (96,985)
-------------------------
Income before equity in undistributed net income
of subsidiary 5,817,773 5,230,089
Equity in undistributed net (loss) income - Union (162,626) 1,025,186
-------------------------
Net income $5,655,147 $6,255,275
=========================
46
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 STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,655,147 $ 6,255,275
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net loss (income) of Union 162,626 (1,025,186)
Issuance of stock options 8,853 10,286
Increase in other assets (65,817) (26,749)
Increase in other liabilities 36,651 9,009
---------------------------
Net cash provided by operating activities 5,797,460 5,222,635
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available-for-sale (8,129) (7,375)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (5,066,366) (4,813,150)
Proceeds from exercise of stock options 49,752 -
Purchase of treasury stock (675,248) (227,250)
---------------------------
Net cash used in financing activities (5,691,862) (5,040,400)
---------------------------
Increase in cash 97,469 174,860
Beginning cash 415,144 240,284
---------------------------
Ending cash $ 512,613 $ 415,144
===========================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 1,430 $ 1,369
===========================
Income taxes paid $ 250 $ 250
===========================
Note 24. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 2007 and 2006 is presented
below (dollars in thousands):
Quarters in 2007 Ended
-------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
-------------------------------------------------
Interest income $6,388 $6,476 $6,734 $6,675
Interest expense 1,975 2,059 2,123 2,071
Net interest income 4,413 4,417 4,611 4,604
Provision for loan losses 45 -- 190 30
Noninterest income 943 1,127 1,083 1,142
Noninterest expenses 3,668 3,553 3,574 3,660
Net income 1,235 1,486 1,422 1,512
Earnings per common share $ 0.27 $ 0.33 $ 0.32 $ 0.33
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
47
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, 2007 and 2006, and its results of operations for
the years ended December 31, 2007 and 2006. 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. The Company meets the qualification
requirements under Securities and Exchange Commission rules for smaller
reporting companies, and pursuant to such rules, has elected to present audited
statements of income, cash flows and changes in stockholder equity for each of
the preceding two, rather than three, fiscal years. Management is not aware of
the occurrence of any events after December 31, 2007, 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 press releases, 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, mutual
banks 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 generally or in the market for
financial institution securities 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;
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 and loans;
o illegal acts of theft or fraud perpetuated against the Company's subsidiary
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.
48
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 operational 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.
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.
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 in the section below
under the caption "FINANCIAL CONDITION - Allowance for Loan Losses and
Liability for Pension Benefits". 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
The Federal Reserve discount rate and the prime rate remained steady at 5.25%
and 8.25%, respectively from June 2006 to September 2007 when they both dropped
50 basis points. They dropped another 25 basis points the last day of October
and again the middle of December; resulting in a discount rate of 4.25% and a
prime rate of 7.25% as of December 31, 2007.
Historically, the largest and most variable source of income for the Company is
net interest income. The results of operations for the years 2007 and 2006
reflect the impact of changes in rates as well as growth in the volume and
change in composition of both interest earning assets and interest bearing
liabilities during these periods.
The Company's assets continued to grow but net income decreased during 2007 as
the impact of the three decreases totaling 100 basis points in the prime and
other short-term rates over the last four months of the year became evident.
The inverted yield curve throughout most of both 2006 and 2007 and the
competitive pressure on interest rates paid on deposits added to the reduction
of $331 thousand or 1.8% in net interest income from, $18.4 million in 2006 to
$18.0 million in 2007. Additionally, earnings per share decreased to $1.25 in
2007 from $1.38 in 2006 while dividends per share of $1.12 were paid out in
2007 and $1.06 in 2006. Dividend payouts increased $0.06 per share or 5.7% in
2007. The Company remained well capitalized under regulatory guidelines after
payment of dividends
The Company grew 2.4% in average assets from $375 million in 2006 to $384
million in 2007. Average earning assets grew from $351 million in 2006 to $358
million in 2007 or 2.0%. 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, to 8.25% at December 31, 2006 and back down to 7.25% at
December 31, 2007, the yield curve was inverted for much of that time with
long-term rates lower in 2007 by almost 50 basis points than they were in June
2004. The inverted yield curve for over two years and the competitive deposit
rate "specials" have helped to drive a decrease in the net interest margin to
5.16% for 2007 as compared to 5.35% for 2006.
49
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Loan demand was slower in 2007 with total loan growth of only $733 thousand or
0.2% over 2006, net of selling $15.5 million of loans in 2007 compared to loan
sales of $17.8 million for 2006. Loans at December 31, 2007 included $3 million
in Term Federal Funds which means that loans to customers decreased $2.3
million or 0.7% from the December 31, 2006 level. Loans in nonaccrual status
were up between years at $3.3 million at December 31, 2007 versus $2.5 million
at December 31, 2006, of which $206 thousand was guaranteed by the U.S. Small
Business Administration at December 31, 2007. Other nonperforming loans
increased to $2.3 million at December 31, 2007 from $2.2 million at December
31, 2006 but $1.3 million of those loans were guaranteed by the U.S. Department
of Agriculture. The ratio of net charge-offs to average loans not held for sale
was 0.07% for 2007 compared to (0.03%) for 2006, as recoveries exceeded
charge-offs slightly during 2006. The Company's ratio of allowance for loan
losses to loans not held for sale was 1.09% and 1.06% at December 31, 2007 and
2006, respectively. The ratio of allowance for loan losses to nonperforming
loans has decreased to 60.47% at December 31, 2007 from 70.30% at December 31,
2006. The increase in the 2007 provision to $265 thousand from $180 thousand in
2006 reflects the slowdown in the real estate market, the general economy, and
management's assessment of credit quality.
There has been significant competition in the financial services market place
during the last few years for both loans and deposits. The uncertainty in the
stock market and the continuance of deposit "special" products and teaser rates
have made the competition intense. The growth in deposits was $6.5 million or
2.1% in 2006 and $4.1 million or 1.3% in 2007. These factors combined to reduce
the net interest spread from 4.86% in 2006 to 4.59% in 2007 as the average rate
paid on interest bearing liabilities rose from 2.43% to 2.87% from 2006 to
2007. The Company increased the investment security portfolio and the interest
bearing deposits in banks utilizing the growth in deposits and the low
long-term interest rates available for Federal Home Loan Bank (FHLB) of Boston
advances. The Company will continue to focus on customer service and its core
business of community banking to provide products and services to the
communities it serves and the market for its future branches in Danville and
St. Albans, Vermont and adopting new technologies as appropriate.
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 are few significant differences in the requirements
because of size, complexity of operations and products, nor is any relief
provided in light of the other regulatory oversight to which the banking
industry already is subject to 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 2007, the
Company purchased 32,183 shares of its common stock pursuant to that authority
totaling $675 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 2007 and 2006 contributions totaling $577 and $706
thousand, respectively were made to the pension plan. Minimum required
contributions under the ERISA guidelines was $0 and $256 thousand, respectively
and the Company made additional tax deductible voluntary contributions of $577
and $450 thousand in 2007 and 2006, respectively. 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,
2007 and 2006, respectively:
2007 2006
-------------------
Return on average assets (ROA) 1.47% 1.67%
Return on average equity (ROE) 13.60% 14.96%
Net interest margin (1) 5.16% 5.35%
Efficiency ratio (2) 63.88% 60.89%
Net interest spread (3) 4.59% 4.86%
Loan to deposit ratio 96.81% 99.30%
Net loan charge-offs (recoveries) to average loans
not held for sale 0.07% (0.03)%
Allowance for loan losses to loans not held for sale 1.09% 1.06%
Nonperforming assets to total assets 1.48% 1.35%
Equity to assets 10.70% 11.00%
Total capital to risk weighted assets 16.70% 17.44%
Book value per share $9.34 $9.25
Earnings per share $1.25 $1.38
Dividends paid per share $1.12 $1.06
Dividend payout ratio(4) 89.60% 76.81%
- --------------------
(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 dividends declared and paid per share divided by consolidated net
income per share.
50
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, 2007, was $5.66
million compared with net income of $6.26 million for the year 2006.
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 decreased $331
thousand, or 1.8%, to $18.0 million for the year ended December 31, 2007 from
$18.4 million for the year ended December 31, 2006. This decrease was due
primarily to the increase in interest expense, as rates paid on deposit
accounts were higher during the first nine months of 2007 than they had been in
2006 due to the continuing competitive pressures to "pay up" for deposits and
the movement of funds from lower rate core deposits to higher rate time
deposits. In addition, the reductions in the prime rate during the last four
months of 2007, the slowdown in loan demand, and the resulting placement of
more funds in interest bearing deposits in banks and investment securities,
which earn at a lower rate than loans, also worked to more than offset the
increase in interest income.
On average for the year, 93.1% of assets earned interest in 2007 versus 93.5%
in 2006. The net interest spread decreased to 4.59% for the year ended December
31, 2007, from 4.86% for the year ended December 31, 2006, reflecting the
continued challenging interest rate environment. The net interest margin for
the 2007 period decreased 19 basis points to 5.16% from 5.35% for the 2006
period as the cost of interest bearing liabilities rose much faster than the
rates earned on interest earning assets.
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.
51
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Years Ended December 31,
----------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
----------------------------------------------------------------------
(Dollars in thousands)
Average Assets
Federal funds sold and overnight deposits $ 7,037 $ 357 5.00% $ 4,173 $ 214 5.05%
Interest bearing deposits in banks 9,732 463 4.76% 6,855 269 3.92%
Investment securities (1), (2) 28,955 1,348 5.01% 26,179 1,157 4.75%
Loans, net (1), (3) 310,761 24,010 7.83% 312,149 23,459 7.61%
FHLB of Boston stock 1,391 95 6.73% 1,520 98 6.36%
-------------------------------------------------------------------
Total interest earning assets (1) 357,876 26,273 7.45% 350,876 25,197 7.29%
Cash and due from banks 10,424 10,338
Premises and equipment 6,187 6,068
Other assets 9,813 8,062
-------------------------------------------------------------------
Total assets $384,300 $375,344
===================================================================
Average Liabilities and Stockholders' Equity
NOW accounts $ 55,047 466 0.85% $ 52,937 391 0.74%
Savings/money market accounts 92,847 1,614 1.74% 102,347 1,673 1.63%
Time deposits 123,375 5,387 4.37% 105,688 3,843 3.64%
Borrowed funds 15,268 761 4.92% 18,907 914 4.77%
-------------------------------------------------------------------
Total interest bearing liabilities 286,537 8,228 2.87% 279,879 6,821 2.43%
Noninterest bearing deposits 49,727 49,328
Other liabilities 6,457 4,315
-------------------------------------------------------------------
Total liabilities 342,721 333,522
Stockholders' equity 41,579 41,822
-------------------------------------------------------------------
Total liabilities and stockholders equity $384,300 $375,344
===================================================================
Net interest income $18,045 $18,376
=======================================================
Net interest spread (1) 4.59% 4.86%
Net interest margin (1) 5.16% 5.35%
- --------------------
(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.
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.
52
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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, 2007
Compared to Year ended
December 31, 2006
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------------------------------------
Interest earning assets (Dollars in thousands)
Federal funds sold and overnight deposits $ 145 $ (2) $ 143
Interest bearing deposits in banks 128 66 194
Investment securities 126 65 191
Loans, net (106) 657 551
FHLB of Boston stock (9) 6 (3)
------------------------------
Total interest earning assets $ 284 $ 792 $1,076
------------------------------
Interest bearing liabilities
NOW accounts $ 16 $ 59 $ 75
Savings/money market accounts (164) 105 (59)
Time deposits 704 840 1,544
Borrowed funds (180) 27 (153)
------------------------------
Total interest bearing liabilities $ 376 $1,031 $1,407
------------------------------
Net change in net interest income $ (92) $ (239) $ (331)
==============================
Interest and Dividend Income 2007 versus 2006. The Company's interest and
dividend income increased $1.1 million or 4.3% to $26.3 million for the year
ended December 31, 2007 from $25.2 million for the year ended December 31,
2006. Average earning assets increased $7.0 million or 2.0% from $350.9 million
at December 31, 2006 to $357.9 million at December 31, 2007. Average loans were
$310.8 million for the year ended December 31, 2007 compared to $312.1 million
for the year ended December 31, 2006, which is a decrease of $1.3 million or
0.4%. The slowdown in the origination of residential construction and first
mortgage loans as well as commercial and consumer loans was partially offset by
the increase in commercial real estate and home equity loans. Municipal loans
can vary dramatically between years due to the bidding process for those loans
and the Company's average municipal loans dropped from $19.1 million in 2006 to
$17.5 million for 2007. The purchase of Term Federal funds in mid 2007
increased average loans for the year by $1.2 million. The yield on the loan
portfolio increased from 7.61% for the year ended December 31, 2006, to 7.83%
for the year ended December 31, 2007, or an increase of 22 basis points, as
short-term interest rates and the prime rate which had continued to rise during
the first half of 2006 didn't start to drop until mid-September 2007.
The average balance of investment securities (including mortgage-backed
securities) increased $2.8 million or 10.6% from $26.2 million for the year
ended December 31, 2006 to $29.0 million for the year ended December 31, 2007.
This increase was due primarily to a slowing of loan demand combined with the
growth in deposits. The yield on the investment portfolio increased from 4.75%
for 2006 to 5.01% for 2007 or 26 basis points as the duration of the portfolio
had 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 $2.8 million or 68.6% from $4.2 million for the year ended
December 31, 2006 to $7.0 million for the year ended December 31, 2007. The
yield on federal funds sold and overnight deposits decreased from 5.05% for
2006 to 5.00% for 2007, or 5 basis points. The average balance of interest
bearing deposits in banks increased $2.9 million or 42.0% to $9.7 million for
the year ended December 31, 2007 from $6.9 million for the year ended December
31, 2006. These deposit instruments are FDIC insured. The yield on interest
bearing deposits in banks increased from 3.92% for 2006 to 4.76% for 2007 or 84
basis points, reflecting the rising rate environment during the first eight
months of 2007 and competitive pricing pressures.
Interest Expense 2007 versus 2006. The Company's interest expense increased
$1.4 million or 20.6% from $6.8 million for the year ended December 31, 2006 to
$8.2 million for the year ended December 31, 2007. Interest rates paid in 2007
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 $6.6 million or 2.4% from $279.9 million for the year
ended December 31, 2006 to $286.5 million for the year ended December 31, 2007.
Average NOW accounts increased $2.1 million or 4.0% from $52.9 million for the
year ended December 31, 2006 to $55.0 million for the year ended December 31,
2007. The average balances of savings and money market accounts decreased $9.5
million or 9.3% from $102.3 million for the year ended December 31, 2006 to
$92.8 million for the year ended December 31, 2007 as customers moved funds
into time deposits to take advantage of the higher interest rates offered. Time
deposits increased $17.7 million or 16.7% to $123.4 million for 2007 from
$105.7 million for 2006. The market for these deposits was very competitive
throughout 2007 with brokerage firms, mutual banks, credit unions, nationwide
banks and insurance companies keeping the interest rates offered up. The
average rate paid on interest bearing deposits increased 49 basis points from
2.26% in 2006 to 2.75% in 2007. This contributed significantly to the reduction
in the net interest spread from 4.86% in 2006 to 4.59% in 2007. The average
balance of borrowed funds decreased $3.6 million or 19.2%, from $18.9 million
for the year ended December 31, 2006, to $15.3 million for the year ended
December 31, 2007 as deposit growth sustained asset growth. The average rate
paid for borrowed funds increased from 4.77% for the year ended December 31,
2006 to 4.92% for the year ended December 31, 2007 as some longer term, higher
rate advances were taken down during the second half of 2007 to match fund
specific commercial real estate loans.
53
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Provision for Loan Losses. Due to management's assessment of the credit quality
of the Company's loan customers, the composition and size of the loan
portfolio, and economic conditions and risks, including the impact of the
slowdown in loan demand, the real estate market in our region, and general
economic conditions, the provision for loan losses was increased from $180
thousand in 2006 to $265 thousand in 2007. Refer to Asset Quality and Allowance
for Loan Losses sections below for more in depth discussion.
Noninterest income. The following table sets forth changes from 2006 to 2007
for the components of noninterest income:
For The Year Ended December 31,
-------------------------------------------------
2007 2006 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Trust income $359 $ 304 $ 55 18.1
Service fees 3,427 3,109 318 10.2
Net gains on sales of investment securities 122 135 (13) (9.6)
Net gains on sales of loans held for sale 138 288 (150) (52.1)
Net gains on sales of other real estate owned 46 -- 46 100.0
Other 203 222 (19) 8.6
-----------------------------------------------
Total noninterest income $4,295 $4,058 $237 5.8
===============================================
Trust income. For 2007 compared to 2006, the increase resulted from increases
in regular fees due to growth in assets under management and trust
relationships and the improved market value of assets under management.
Service fees. The increase in service fees for 2007 compared to 2006 is
primarily due to the increase in overdraft fees from $1.14 million in 2006 to
$1.26 million in 2007 mainly due to the fee increase from $22 to $25 per item
in April 2006, the increase in merchant program income from $386 thousand in
2006 to $455 thousand in 2007 and the increase in ATM and interchange fees from
$676 thousand in 2006 to $741 thousand in 2007.
Net gains on sales of loans held for sale. Net gains decreased from 2006 to
2007 by $150 thousand or 52.1% even though total loans sold only decreased
12.9% to $15.5 million in 2007 from $17.8 million in 2006.
Net gains on sales of other real estate owned. The increase in 2007 compared to
2006 was due primarily to the sale in 2007 of the underlying properties from
two commercial properties, two residential properties and two pieces of land.
Noninterest expense. The following table sets forth changes from 2006 to 2007
for the components of noninterest expense:
For The Year Ended December 31,
-------------------------------------------------
2007 2006 $ Variance % Variance
-------------------------------------------------
(Dollars in thousands)
Salaries and wages $ 6,211 $ 6,012 $199 3.3
Pension and employee benefits 2,316 2,344 (28) (1.2)
Occupancy expense, net 838 802 36 4.5
Equipment expense 1,094 1,038 56 5.4
Supplies and printing 327 313 14 4.5
Communications 220 220 -- --
Postage and shipping 218 211 7 3.3
Professional fees 250 272 (22) (8.1)
Advertising 236 244 (8) (3.3)
Vermont franchise tax 359 279 80 28.7
Expenses of other real estate owned 262 57 205 359.6
Equity in losses of limited partnerships 265 297 (32) (10.8)
Other 1,859 1,725 134 7.8
-----------------------------------------------
Total noninterest expense $14,455 $13,814 $641 4.6
===============================================
Salaries, wages and benefits. The salaries and wages increase in 2007 over 2006
was due primarily to regular salary activity and the expansion of the Littleton
loan production office to a full service branch in March 2006. The decrease in
expenses for the pension and employee benefits was mainly due to the decrease
in the defined benefit pension plan expense of $92 thousand offset by the
increased cost of partially self insured medical plan of $72 thousand.
Occupancy and equipment expense. Occupancy expense increased in 2007 mainly due
to increased building depreciation and real estate taxes for new facilities and
the increased cost of fuel and janitorial costs throughout the system. The
increase in equipment expense for 2007 versus 2006 was due mainly to increased
maintenance contract expense as licenses and services were upgraded to remain
current and competitive.
Professional fees. Professional fees decreased in 2007 versus 2006 due
primarily to the non recurrence of $60 thousand in expenses related to
information systems strategic planning, testing and management services
partially offset by the additional $44 thousand in expenses related to the
Company's ongoing implementation of provisions of the Sarbanes-Oxley Act of
2002.
54
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Vermont franchise tax. Vermont franchise tax, which is based on average
deposits, increased for 2007 compared to 2006 as $81 thousand of remaining net
tax credits awarded to the Company as a result of a limited partnership
investment was applied to 2006's expense. These credits were fully utilized in
2006 and were no longer available for 2007.
Expenses of other real estate owned. Expenses of other real estate owned
increased $205 thousand to $262 thousand in 2007 from $57 thousand in 2006 due
to the $158 thousand write down of the value of other real estate acquired.
There were only two residential properties valued at $226 thousand as of
December 31, 2007 remaining and one has subsequently been sold.
Equity in losses of limited partnerships. These expenses decreased in 2007 from
2006 due primarily to the non-recurrance of an adjustment in 2006 of equity in
losses of two 2005 investments in affordable housing projects. 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 $2.0 million for 2007 from $2.2 million
for 2006. This is mainly the result of the decrease in federal income taxes
from decreased taxable income. The Company's effective tax rate for 2007 was
25.8% compared to 25.9% for 2006.
FINANCIAL CONDITION
At December 31, 2007, the Company had total consolidated assets of $393.4
million, including gross loans and loans held for sale ("total loans") of
$318.3 million, deposits of $324.0 million and stockholders' equity of $42.1
million. Based on the most recent information published by the Vermont Banking
Commissioner, in terms of total assets at December 31, 2006, 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 $12.2 million, or 3.2% to $393.4
million at December 31, 2007 from $381.1 million at December 31, 2006. Total
net loans and loans held for sale increased by $0.7 million or 0.2% to $314.8
million, representing 80.0% of total assets at December 31, 2007 as compared to
$314.1 million or 82.4% of total assets at December 31, 2006. The slight
increase in 2007 resulted from growth of $2.5 million in commercial real estate
loans, growth of $1.2 million in residential real estate loans, a $4.0 million
increase in the residential real estate loans held for sale between years and
the investment in $3.0 million in term federal funds with one of our
correspondent banks. These increases were mostly offset by decreases of $2.4
million in real estate construction loans, $4.2 million in municipal loans,
$2.7 million in commercial loans and $0.5 million in consumer loans. Loan
growth was slow during the year and was moderated by management's decision to
continue to sell some lower rate loans into the secondary market during 2007 to
mitigate future interest rate risk and to participate out some commercial real
estate loans to mitigate the level of credit risk.
Cash and due from banks increased from $11.7 million at December 31, 2006 to
$12.8 million at December 31, 2007. Federal funds sold and overnight deposits
decreased $8.7 million to $0.6 million at December 31, 2007 from $9.3 million
at December 31, 2006. Investment securities available-for-sale increased $10.1
million or 42.6% from $23.7 million at December 31, 2006 to $33.8 million at
December 31, 2007. The increase was due to the purchase of $14.5 million of
debt and equity securities, as loan demand was slower than recent years while
deposit growth and low rate FHLB advances were available. There was also a
decrease of $232 thousand in the unrealized holding losses resulting in
unrealized net losses of only $1 thousand at December 31, 2007.
Total deposits increased $4.2 million or 1.3% to $324.0 million at December 31,
2007 from $319.8 million at December 31, 2006. Noninterest bearing deposits
increased 2.3% or $1.3 million from $54.9 million at December 31, 2006 to $56.2
million at December 31, 2007. Interest bearing deposits increased 1.1% or $2.9
million from $264.9 million to $267.8 million.
Borrowed funds from the Federal Home Loan Bank of Boston increased $5.7 million
or 39.0% to $20.3 million at December 31, 2007 from $14.6 million at December
31, 2006 as Union Bank has taken advantage of the low advance rates in late
2007 to lock in both short-term liquidity funding as well as long-term
strategic funding.
Total stockholders' equity increased by $0.2 million or 0.5% to $42.1 million
at December 31, 2007 from $41.9 million at December 31, 2006. This increase
reflected net income of $5.7 million, a $9 thousand increase due to the
issuance of stock options, a $50 thousand increase due to the exercise of stock
options, a decrease of $153 thousand in the net unrealized holding loss on
investment securities available-for-sale, and a decrease of $25 thousand in the
net unfunded defined benefit pension liability offset by dividend payments of
$5.1 million and the purchase of treasury stock for $675 thousand.
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 or commercial real estate. As of December 31,
2007, the gross loan portfolio totaled $318.3 million or 80.9% of assets
compared to $317.6 million or 83.3% of assets as of December 31, 2006. Total
loans have increased $0.7 million or 0.2% since December 31, 2006, despite
selling $15.5 million of loans held for sale during 2007 resulting in a gain on
sale of loans of $138 thousand. Sales of loans in 2006 totaled $17.8 million
for a gain of $288 thousand. Management expects to continue to use this
strategy to manage interest rate exposure or liquidity needs in the future.
55
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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,
------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate 115,303 36.2 114,139 35.9 106,470 34.7 100,130 35.7 89,974 33.1
Construction real estate 20,190 6.4 22,568 7.1 18,066 5.9 20,050 7.2 18,257 6.7
Commercial real estate 133,320 41.9 130,848 41.2 130,483 42.5 108,474 38.7 102,366 37.7
Commercial 16,537 5.2 19,253 6.1 20,650 6.7 20,584 7.4 17,877 6.6
Consumer and other 7,175 2.3 7,717 2.4 7,999 2.6 8,729 3.1 9,402 3.5
Municipal 15,069 4.7 19,297 6.1 17,009 5.5 13,454 4.8 15,346 5.6
Term Fed funds 3,000 0.9 -- -- -- -- -- -- -- --
Loans held for sale 7,711 2.4 3,750 1.2 6,546 2.1 8,814 3.1 18,524 6.8
------------------------------------------------------------------------------------------------
Total loans 318,305 100.0 317,572 100.0 307,223 100.0 280,235 100.0 271,746 100.0
================================================================================================
For residential loans, the Company generally does not lend more than 80% of the
appraised value of the home without a government guaranty or the borrower
purchasing private mortgage insurance and does not lend more than 100% of the
value. The Company lends up to 80% of the collateral value on commercial real
estate loans to strong borrowers. The majority of commercial real estate loans
do not exceed 75% of the appraised collateral value. 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, teaser
rates 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 or when a decision is
made to increase the loans held for sale. They are 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
$204.1 million and $198.4 million at December 31, 2007 and 2006, respectively.
Of that portfolio, $87.4 million at December 31, 2007 and $84.3 million at
December 31, 2006 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 $6.2 million of commercial and commercial real estate
loans for unaffiliated third parties as of December 31, 2007 and $7.9 million
at December 31, 2006. 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 $297 thousand as of December 31, 2007 and $310
thousand as of December 31, 2006, 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 or real estate loans to other financial institutions for
liquidity or credit concentration management purposes. The total of loans
participated out as of December 31, 2007 was $11.6 million and $9.5 million at
December 31, 2006.
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.
56
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, 2007:
Within 1 2-5 Over 5
Year Years Years
-------------------------------
(Dollars in thousands)
Residential real estate
Fixed-rate $ 4,465 $ 4,674 $ 41,598
Variable-rate 3,354 945 67,140
Construction real estate
Fixed-rate 13,716 590 153
Variable-rate 1,104 502 4,125
Commercial real estate
Fixed-rate 1,605 3,930 9,759
Variable-rate 18,965 3,581 96,318
Commercial
Fixed-rate 900 5,248 744
Variable-rate 5,117 2,536 1,992
Municipal
Fixed-rate 10,387 2,798 546
Variable-rate -- -- 1,338
Consumer & Other
Fixed-rate 5,485 4,132 449
Variable-rate 71 37 1
------------------------------
Total $65,169 $28,973 $224,163
==============================
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 conservative
individual lending limits for officers, aggregate and advisory board approval
levels, 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 as well as other
experienced personnel and encompasses a quality control process for loan
documentation and underwriting that may include a post-closing review. 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 $184 thousand at
December 31, 2007 and $1.3 million at December 31, 2006. At December 31, 2007,
the Company was not committed to lend any additional funds to borrowers whose
terms had been restructured.
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 $3.3 million at December
31, 2007 and $2.5 million at December 31, 2006. Of the $3.3 million in
nonaccrual status at December 31, 2007, there is a U.S. Small Business
Administration guarantee on $206 thousand. The aggregate interest on nonaccrual
loans not recognized for the years ended December 31, 2007 and 2006 was $457
thousand and $371 thousand, respectively.
57
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company had $2.3 million and $2.2 million in loans past due 90 days or more
and still accruing at December 31, 2007 and 2006, respectively. Of the $2.3
million in loans at December 31, 2007 past due 90 days or more and still
accruing interest, certain loans, totaling $1.3 million are covered by
guarantees of U.S. government at December 31, 2007.
At December 31, 2007, the Company had internally classified certain loans
totaling $21 thousand, compared to $319 thousand at December 31, 2006. 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.
The Company has been actively working with customers who may be delinquent or
headed for problems due to the downturn in the economy and the slowdown in the
residential real estate market, although northern New England has not yet
experienced these issues to the extent of other parts of the country. One of
the benefits of being a community financial institution is our employees' and
Boards' knowledge of the community and borrowers which allows us to be
proactive in working closely with our loan customers. The Company's delinquency
rates have historically run higher than similar institutions while losses have
been lower. The Company has not targeted sub-prime borrowers and has not
experienced an elevated delinquency in this area.
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, 2007 valued at $226
thousand and property valued at $399 thousand so classified on December 31,
2006.
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 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 regularly 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 and has historically been well received by the various regulatory
authorities. 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
58
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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, 2007, 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,
2006, 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:
2007 2006 2005 2004 2003
--------------------------------------------------
(Dollars in thousands)
Balance at the beginning of period $3,338 $3,071 $3,067 $3,029 $2,908
Charge-offs
Real estate 99 8 28 37 17
Commercial 79 3 19 26 10
Consumer and other 90 73 63 53 65
--------------------------------------------------
Total charge-offs 268 84 110 116 92
--------------------------------------------------
Recoveries
Real estate 10 26 14 6 2
Commercial 3 18 4 72 28
Consumer and other 30 127 36 46 69
--------------------------------------------------
Total recoveries 43 171 54 124 99
--------------------------------------------------
Net (charge-offs) recoveries (225) 87 (56) 8 7
Provision for loan losses 265 180 60 30 114
--------------------------------------------------
Balance at end of period $3,378 $3,338 $3,071 $3,067 $3,029
==================================================
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:
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate
Residential $ 710 35.7 $ 640 34.8 $ 571 35.4 $ 585 34.4 $ 550 33.2
Commercial 2,011 42.9 1,901 41.7 1,826 43.4 1,733 42.5 1,578 42.7
Construction 202 6.5 296 7.2 181 6.0 199 7.3 183 7.2
Other Loans
Commercial 277 5.3 312 6.1 343 6.9 349 7.5 336 7.1
Consumer installment 112 2.3 125 2.5 123 2.6 138 3.3 145 3.7
Municipal, other and
unallocated 66 7.3 64 7.7 27 5.7 63 5.0 237 6.1
----------------------------------------------------------------------------------------------------
Total $3,378 100.0 $3,338 100.0 $3,071 100.0 $3,067 100.0 $3,029 100.0
====================================================================================================
Ratio of net charge-offs
(recoveries) to average
loans not held for sale 0.07% (0.03%) 0.02% 0.00% 0.00%
Ratio of allowance for
loan losses to loans not
held for sale 1.09% 1.06% 1.02% 1.13% 1.20%
Ratio of allowance for
loan losses to
nonperforming loans(1) 60.47% 70.26% 66.66% 57.91% 91.65%
- --------------------
(1) Nonperforming loans includes loans in nonaccrual status plus loans past due 90 days or more and still accruing.
59
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Management of the Company believes, in their best estimate, that the allowance
for loan losses at December 31, 2007 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, 2007.
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
collectability of 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, 2007, the reported value of investment securities available-for-sale was
$33.8 million or 8.6% of assets compared to $23.7 million or 6.2% of assets at
December 31, 2006. 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 on the
balance sheet for available-for-sale securities 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, 2007 reflects net unrealized loss
of $1 thousand.
At December 31, 2007, forty-two debt securities had unrealized losses with
aggregate depreciation of 0.7% from the Company's amortized cost basis.
Securities are evaluated at least quarterly for other-than-temporary impairment
and during 2007, in management's estimation no security was
other-than-temporarily impaired.
The following tables show as of December 31, 2007 and 2006 the amortized cost,
fair value and weighted average yield of the Company's investment debt
portfolio maturing within the stated periods:
December 31, 2007
----------------------------------------------------------------------------
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 $ -- $ -- $ 2,498 $1,001 $ 3,499 5.45%
Mortgage-backed 245 3,274 1,817 4,898 10,234 4.56%
State and political subdivisions 388 2,203 1,957 3,633 8,181 5.90%
Corporate debt 2,960 3,728 4,955 199 11,842 5.27%
----------------------------------------------------------------------
Total investment debt securities $3,593 $ 9,205 $11,227 $9,731 $33,756 5.22%
======================================================================
Fair value $3,591 $ 9,168 $11,236 $9,731 $33,726
==========================================================
Weighted average yield 5.00% 5.02% 5.32% 5.39% 5.22%
==========================================================
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%
==========================================================
The tables above exclude marketable equity securities, with a book value of $47
thousand and a market value of $77 thousand at December 31, 2007, and a book
value of $196 thousand and a market value of $349 thousand at December 31, 2006
which have no maturity but may be sold by the Company at any time. The table
also excludes mutual funds with a book and market value of $19 thousand at
December 31, 2007 and of $7 thousand at December 31, 2006.
60
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:
2007 2006
-----------------------------------------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
-----------------------------------------------------------------------
(Dollars in thousands)
Nontime deposits
Noninterest bearing deposits $ 49,727 15.5 -- $ 49,328 15.9 -
NOW accounts 55,046 17.2 0.85% 52,937 17.1 0.74%
Money market accounts 51,470 16.0 2.65% 56,286 18.1 2.48%
Savings accounts 41,377 12.9 0.60% 46,061 14.8 0.60%
---------------------------------------------------------------------
Total nontime deposits 197,620 61.6 1.05% 204,612 65.9 1.01%
---------------------------------------------------------------------
Time deposits
Less than $100,000 78,237 24.4 4.07% 66,982 21.6 3.34%
$100,000 and over 45,138 14.0 4.87% 38,706 12.5 4.14%
---------------------------------------------------------------------
Total time deposits 123,375 38.4 4.37% 105,688 34.1 3.64%
---------------------------------------------------------------------
Total deposits $320,995 100.0% 2.33% $310,300 100.0% 1.90%
=====================================================================
A maturity distribution of time deposits in denominations of $100,000 or more
at December 31 is as follows:
2007 2006
----------------------
(Dollars in thousands)
Three months or less $15,443 $13,466
Over three months through six months 16,706 17,254
Over six months through twelve months 11,859 11,299
Over twelve months 2,135 2,219
----------------------
$46,143 $44,238
======================
Liability for Pension Benefits. The Company has a Liability for Pension
Benefits for its defined benefit pension plan of $1.3 million at both December
31, 2007 and 2006. The adjustment to initially apply SFAS No. 158 for the
unfunded liability at December 31, 2006 was $1.3 million with the offsetting
debits to deferred taxes of $437 thousand and to stockholders equity of $849
thousand. 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 shape of the current yield curve and the anticipated change in the 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 Indices. The determination was made to
raise the discount rate from 5.75% at December 31, 2006 to 6.00% at December
31, 2007.
The Company bases its 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 2007, our actual net investment returns over
the last 16 years had a high of 20.35% and a low of negative 6.60%. The latest
one year return, as of December 31, 2007, was 7.17%. Therefore, the
conservative expectation of a 6.75% return, which is consistent with the 2.50%
inflation assumption, is balanced by our discount rate of 6.00% since the plan
has a very long-term (40+ years) horizon.
61
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. 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, competitive pressures and various business
strategies. The ALCO's methods for evaluating interest rate risk include an
analysis of the Company's interest rate sensitivity "gap", which provides a
static analysis of the maturity and repricing characteristics of the Company's
entire balance sheet, and a simulation analysis, which calculates projected net
interest income based on alternative balance sheet and interest rate scenarios,
including "rate shock" scenarios involving immediate substantial increases or
decreases in market rates of interest.
Members of ALCO meet at least weekly to set loan and deposit rates, make
investment decisions, monitor liquidity and evaluate the loan demand pipeline.
Deposit runoff is monitored daily and loan prepayments evaluated monthly. The
Company historically has maintained a substantial portion of its loan portfolio
on a variable-rate basis and plans to continue this Asset/Liability/Management
(ALM) strategy in the future. Portions of the variable-rate loan portfolio have
interest rate floors and caps which are taken into account by the Company's ALM
modeling software to predict interest rate sensitivity including prepayment
risk. The investment portfolio is all classified as available-for-sale and the
modified duration is relatively short. The Company does not utilize any
derivative products or invest in any "high risk" instruments.
The Company's interest rate sensitivity analysis (simulation) as of December
2006 for a simulated, immediate, and proportional 100 basis point downward
shock of the prime rate from 8.25% to the anticipated prime rate of 7.25%,
maintained throughout 2007, projected the following 2007 results compared to
the actual:
2007 2007 %
Projected Actual Variance
-----------------------------------
(Dollars in thousands)
Average earning assets $349,888 $357,876 2.3
Average loans $316,930 $310,761 (1.9)
% loans to interest earning assets 90.6% 86.8% (4.2)
Average interest bearing liabilities $279,040 $286,537 2.7
Noninterest bearing deposits $ 49,864 $ 49,727 (0.3)
Interest and fees on loans $ 23,053 $ 24,010 4.2
Other interest income 1,549 2,263 46.1
Interest expense 7,519 8,228 (9.4)
---------------------------------
Net interest income 17,083 18,045 5.6
Provision for loan losses 180 265 (47.2)
Noninterest income 3,928 4,295 9.3
Noninterest expense 14,217 14,455 (1.7)
Provision for income taxes 1,634 1,965 (20.3)
---------------------------------
Net income $ 4,980 $ 5,655 13.6
Net interest margin 4.71% 5.16% 9.6
Yield on interest earning assets 7.03% 7.45% 6.0
Rates paid on interest bearing liabilities 2.69% 2.87% (6.7)
Net interest spread 4.34% 4.59% 5.8
Return on assets 1.32% 1.47% 11.4
Return on equity 11.89% 13.60% 14.4
62
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
In actuality, the prime rate moved down in 25 basis point increments leading to
decreases in interest rates on short-term assets and variable-rate loans and
deposits in conjunction with the three prime rate decreases on September 18th,
October 31st and December 11th. Long-term rates dropped some during the fourth
quarter of 2007 but not as rapidly as the short-term rates. The yield curve
remained inverted throughout the majority of 2007 finally moving back to a
positive curve during the fourth quarter. Rates paid on other nonvariable rate
time deposits stayed up longer than projected in response to competitive
pressures. Lower loan demand in 2007 combined with deposit growth contributed
to the positive variance in other interest income as interest bearing deposits
in banks and investments available-for-sale increased more than anticipated.
Noninterest income was $367 thousand or 9.3% higher than projected in almost
every category with the two largest differences being the $123 thousand in gain
on the sale of securities and the $48 thousand gain on the sale of other real
estate owned. The increase of $238 thousand in noninterest expense was mainly
due to the write down of value and the expenses incurred to carry other real
estate owned. The increase in taxes from projection to actual is due to two
causes, the increase in income before taxes, and the decrease in non-tax exempt
municipal income.
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, 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 at December 31, 2007:
Contract or Notional Amount
-----------------------------------------------------------------------
2008 2009 2010 2011 2012 Thereafter Total
-----------------------------------------------------------------------
(Dollars in thousands)
Commitments to originate loans $ 7,084 $ -- $ -- $ -- $ -- $ -- $ 7,084
Unused lines of credit 26,771 1,971 365 272 692 5,713 35,784
Standby letters of credit 1,004 57 5 182 -- -- 1,248
Credit card arrangements 1,633 -- -- -- -- -- 1,633
-----------------------------------------------------------------------
Total $36,492 $2,028 $370 454 692 5,713 $45,749
=======================================================================
Approximately $20.3 million of the unused lines of credit outstanding at
December 31, 2007 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. Unused lines
of credit decreased slightly from $36.6 million at December 31, 2006 to $35.8
million at December 31, 2007.
Commitments to originate loans decreased from $12.2 million at December 31,
2006 to $7.1 million at December 31, 2007 due primarily to the slowdown in loan
demand in the real estate market in particular.
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, 2007.
63
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Contractual Obligations: The Company has various financial obligations,
including contractual obligations that may require future cash payments. The
following table presents, as of December 31, 2007, 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 $ 102 $ 151 $ 56 $ -- $ 309
Maturities on borrowed funds 4,801 1,453 3,609 10,465 20,328
Deposits without stated maturity (1) 198,083 -- -- -- 198,083
Certificates of deposit (1) 110,495 14,894 489 -- 125,878
Pension plan contributions (2) 600 -- -- -- 600
Purchase of future branch location (3) 288 -- -- -- 288
Deferred compensation payouts 80 160 155 75 470
Equity housing limited partnership 1,359 251 -- -- 1,610
-----------------------------------------------------------
Total $315,808 $16,909 $4,309 $10,540 $347,566
===========================================================
- --------------------
(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 2008 are excluded due to the significant
variability in the assumptions required to project the amount and timing of future cash
contributions.
(3) St. Albans, Vermont
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, 2007 was $387 thousand, which was satisfied by vault cash.
The Company has also committed to maintain a noninterest bearing contracted
clearing balance of $1.0 million at December 31, 2007 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, 2007:
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 $ 614 $ -- $ -- $ -- $ -- $ 614
Interest bearing deposits in banks 3,489 3,262 3,156 1,863 98 11,868
Investment securities available-
for-sale (1) (3) 1,236 4,991 8,714 4,497 14,288 33,726
Loans (2) (3) 92,953 49,592 70,032 61,385 44,232 318,194
FHLB Stock -- -- -- -- 1,396 1,396
-------------------------------------------------------------------------
Total interest sensitive assets $98,292 $57,845 $81,902 $ 67,745 $ 60,014 $365,798
=========================================================================
Interest sensitive liabilities
Time deposits $51,325 $59,943 $14,122 $ 489 $ -- $125,879
Money markets 4,680 -- -- -- 43,599 48,279
Regular savings 5,665 -- -- -- 32,668 38,333
NOW accounts 17,993 -- -- -- 37,323 55,316
Borrowed funds 4,217 507 1,453 3,611 10,540 20,328
-------------------------------------------------------------------------
Total interest sensitive liabilities $83,880 $60,450 $15,575 $ 4,100 $124,130 $288,135
=========================================================================
Net interest rate sensitivity gap $14,412 $(2,605) $66,327 $ 63,645 $(64,116) $ 77,663
Cumulative net interest rate sensitivity gap $14,412 $11,807 $78,134 $141,779 $ 77,663
Cumulative net interest rate sensitivity gap
as a percentage of total assets 3.7% 3.0% 19.9% 36.0% 19.7%
Cumulative interest sensitivity gap as a
percentage of total interest earning assets 3.9% 3.2% 21.4% 38.8% 21.2%
Cumulative net interest sensitivity gap as
percentage of total interest bearing 5.0% 4.1% 27.1% 49.2% 27.0%
liabilities
- ------------------
(1) Investment securities available-for-sale exclude marketable equity securities and mutual funds with fair values of
$77 thousand and $19 thousand, respectively, that may be sold by the Company at any time.
(2) Balances shown net of unearned income of $112 thousand.
(3) Estimated repayment assumptions considered in Asset/Liability model.
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. Shocks 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 7.25%; this is the
highest and lowest internal slopes monitored. This slope range was determined
to be the most relevant during this economic cycle.
65
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
INTEREST RATE SENSITIVITY SIMULATION ANALYSIS
DECEMBER 31, 2007
(Dollars in thousands)
Year Prime Net Interest Change Net Return on Return on Net Fair
Ending Rate Income % Income Assets % Equity % Value Ratio
- -------------------------------------------------------------------------------------------------------
December-08 10.25% $18,523 7.31 $5,680 1.45% 13.41% 7.16
7.25% 17,261 0.00 4,849 1.24% 11.57% 9.28
4.25% 16,057 (6.98) 4,062 1.04% 9.76% 11.31
The resulting projected effect of these estimates on net interest income and
the net fair value ratio for the year ending December 31, 2008 are within the
approved ALCO guidelines but the return on assets and equity in the down 300
basis point shock are lower than Board 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.
Management budgeted the Prime Rate to drop to 5.50% by March of 2008 and on
March 18, 2008 the Prime Rate had dropped 200 basis points to 5.25%. Management
has been taking actions to moderate the negative consequences of these interest
rate decreases.
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, 2007, the Company's ratio of average loans to
average deposits was 96.8% compared to the average for the year ended December
31, 2006 of 100.6% reflecting 2007's lower loan demand and stiff competition
for deposit dollars. The 2007 average loans to average deposits ratio is more
in line with historical ratios with 2006's ratio being higher than normal. The
lower loan demand in 2007 and actions taken by management to increase deposit
funding explains the change.
As a member of the FHLB of Boston, Union has access to preapproved lines of
credit up to $622 thousand at December 31, 2007 over and above the term
advances already drawn on the line. This line of credit could be used for
either short-term or long-term liquidity or other needs. The December 31, 2007
analysis by FHLB of Boston shows additional borrowing capacity for Union Bank
of approximately $17.4 million which would require additional purchases of FHLB
of Boston Class B common stock as well as the evaluation by FHLB of the
underlying collateral available. 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, 2007. 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, 2007 and 2006. 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 87.8% of time deposits will mature within twelve months, which is
higher than the preceding six years that ranged from 72.3% to 84.4%, the
deposit gathering activities of financial institutions generally have been
affected by the inverse yield curve which has been dominant for most of the
last two years. "Deposit Specials" in the marketplace have emphasized the
shorter end of the curve as that is where the greater yield was and customers
have responded strongly to that higher yield availability. Since rates have
fallen during the last four months of 2007, the yield curve has become
positive, and customer's time deposits matured; the rollover interest rate
available to those customers is most often much lower than their previous
deposit rate and therefore the cost of funding should start to drop and the
maturity dates begin to lengthen out. This phenomenon is happening throughout
the banking industry and the Company is optimistic
66
Union Bankshares, Inc. and Subsidiary
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
that it can maintain and grow its customer deposit base through good customer
service, competitive but prudent pricing strategy and the expansion of the
branch network.
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 slightly
from $41.9 million at December 31, 2006 to $42.1 million at December 31, 2007,
reflecting net income of $5.7 million for 2007, a $9 thousand increase due to
the issuance of stock options, a $50 thousand increase due to the exercise of
stock options, and a decrease in the net unrealized other comprehensive loss of
$153 thousand on investment securities available-for-sale and a decrease of $25
thousand in the net other comprehensive loss attributable to the unfunded
defined benefit pension liability, partially offset by dividends paid of $5.1
million and the purchase of 32,183 shares of Treasury stock during 2007
totaling $675 thousand. The Company has 7,500,000 shares of $2.00 par value
common stock authorized. As of December 31, 2007, the Company had 4,921,786
shares issued, of which 4,502,969 were outstanding and 418,817 were held in
Treasury. Also as of December 31, 2007, there were outstanding employee
incentive stock options with respect to 16,000 shares of the Company's common
stock, granted pursuant to the Company's 1998 Incentive Stock Option Plan, of
which 12,750 were exercisable. Of the 75,000 shares authorized for issuance
under the 1998 Plan, 42,200 shares remained available for future option grants
at December 31, 2007.
On November 18, 2005, the Company announced a stock repurchase program, which
was most recently reauthorized on March 19, 2008. 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, 2007 the Company had repurchased
57,869 shares under this program, for a total cost of $1.2 million.
For the Company and Union at December 31, 2007 and December 31, 2006 total
capital to risk weighted assets was 16.7% and 16.6% respectively. Tier I
capital to risk weighted assets was 15.5%, and 15.3% respectively and Tier I
capital to average assets was 10.9% and 10.8%, 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 allow for the measurement of financial position
and results of operations in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Banks have asset and liability structures that are essentially monetary in
nature, and their general and administrative costs constitute relatively small
percentages of total expenses. Thus, increases in the general price levels for
goods and services have a relatively minor effect on the Company's total
expenses. Interest rates have a more significant impact on the Company's
financial performance than the effect of general inflation. During the first
half of 2006, the Federal Reserve moved the targeted federal funds rate up four
25 basis point steps to the target rate of 5.25%. That targeted rate was
maintained until September 18, 2007 when the Federal Reserve took a step to
lower the rate 50 basis points to 4.75% in response to the weakening U.S. and
global economies. The Federal Reserve dropped the rate twice more on October
31st and December 11th by 25 basis points each time to 4.25%. On January 22,
2008, they took the dramatic step of lowering an additional 75 basis points
outside of their regularly scheduled meeting which brought the target rate down
to 3.50%, on January 30, 2008 the Federal Open Market Committee of the Federal
Reserve dropped an additional 50 basis points which brought the rate down to
3.00% and on March 18, 2008 they dropped the target another 75 basis points
which brings it down to 2.25%. The U.S. prime rate, which is the base rate that
banks use in pricing short-term maturity commercial loans to their best, or
most creditworthy, customers; has moved up and down in lock step with the
targeted Federal Funds rate during the past two years and was 7.25% at December
31, 2007, dropped to 6.50% on January 22, 2008, 6% on January 30, 2008 and to
5.25% on March 18, 2008 in response to the Federal Reserve's latest rate cuts.
Interest rates do not necessarily move in the same direction or change in the
same magnitude as the prices of goods and services, although periods of
increased inflation may accompany a rising interest rate environment. Inflation
in the price of goods and services, while not having a substantial impact on
the operating results of the bank, do affect all customers and therefore may
impact their ability to keep funds on deposit or make loan payments in a timely
fashion. The Company is aware of this risk and evaluates that risk along with
others in making business decisions.
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
2007, 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.
67
Market for Union Bankshares' Common Shares and Related Stockholder Matters
On March 21, 2008, there were 4,492,433 shares of common stock outstanding held
by 664 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.
2007 2006
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High Low Dividends High Low Dividends
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First Quarter $22.55 $21.00 $0.28 $24.15 $20.74 $0.26
Second Quarter $24.11 $20.55 $0.28 $22.40 $20.52 $0.26
Third Quarter $22.00 $18.97 $0.28 $23.25 $20.35 $0.26
Fourth Quarter $21.40 $19.80 $0.28 $22.58 $20.25 $0.28
On January 16, 2008, the Company declared a regular dividend of $0.28 per share
to stockholders of record as of January 26, 2008 payable February 7, 2008.
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 either:
JoAnn A. Tallman, Assistant Secretary Registrar & Transfer Company
Union Bankshares, Inc. Attn: Stock Transfer Department
P.O. Box 667 10 Commerce Drive
Morrisville, VT 05661-0667 or Cranford , NJ 07016,
Phone: 802-888-6600 Phone: 800-368-5948
Facsimile: 802-888-4921 Facsimile: 908-497-2318
E-mail: ubexec@unionbankvt.com E-mail: info@rtco.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: Registrar & Transfer Company, 10 Commerce Drive,
Cranford, NJ 07016
68
Administration & Management
Directors -- Union Bankshares, inc
Richard C. Sargent, Chairman Franklin G. Hovey II
Cynthia D. Borck Richard C. Marron
Steven J. Bourgeois Robert P. Rollins
Kenneth D. Gibbons John H. Steel
Directors -- Union bank
Richard C. Sargent, Chairman Richard C. Marron
Cynthia D. Borck Robert P. Rollins
Steven J. Bourgeois John H. Steel
Kenneth D. Gibbons Schuyler W. Sweet
Franklin G. Hovey II
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
Regional Advisory Board Members
Judy F. Aydelott - Littleton
Cynthia D. Borck - St. Johnsbury
Steven J. Bourgeois - St. Albans
J.R. Alexis Clouatre - St. Johnsbury
Coleen K. Condon - St. Albans
Dwight A. Davis - St. Johnsbury
Kirk Dwyer - St. Johnsbury
Stanley T. Fillion - Littleton
Kenneth D. Gibbons - All
Franklin G. Hovey II - St. Johnsbury
Samuel H. Ruggiano - St. Albans
Schuyler W. Sweet - Littleton
Norrine A. Williams - Littleton
Officers -- Union bank
Rhonda L. Bennett Vice President Morrisville
Cynthia D. Borck Executive 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 Regional Vice President St. Johnsbury
Lura L. Jacques Asst. V.P., Trust Officer St. Albans
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
Robyn A. Masi Assistant Vice President Stowe
Robert L. Miller Trust Officer St. Johnsbury
Marsha A. Mongeon Senior Vice President & CFO Morrisville
Mildred R. Nelson Vice President Littleton
Karen Carlson Noyes Assistant Vice President Morrisville
Barbara A. Olden Vice President St. Johnsbury
Deborah J. Partlow Asst. V.P., Senior Trust Officer Morrisville
Lois J. Pigeon Branch Manager St. Albans
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
David S. Silverman Senior Vice President Morrisville
Curt Swan Assistant Vice President Fairfax
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