UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JuneSeptember 30, 2005
Commission file number: 001-15985
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate by a check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of JulyOctober 31, 2005:
Common Stock, $2 par value 4,554,6634,557,663 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART l FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 3233
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to Vote of Security Holders33
Item 6. Exhibits 3233
Signatures 33
2
Part l Financial Information
Item 1. Financial Statements
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
JuneSeptember 30, December 31,
2005 2004
---- ----
AssetsAssets:
Cash and due from banks $ 15,99512,534 $ 16,930
Federal funds sold and overnight deposits 3,9488,628 4,187
-------- --------
Cash and cash equivalents 19,94321,162 21,117
Interest bearing deposits in banks 6,21512,079 7,509
Investment securities available-for-sale 31,71234,945 40,966
Loans held for sale 6,4577,287 8,814
Loans 285,882289,885 271,421
Allowance for loan losses (3,022)(3,023) (3,067)
Unearned net loan fees (156)(155) (166)
-------- --------
Net loans 282,704286,707 268,188
-------- --------
Accrued interest receivable 1,6461,733 1,528
Premises and equipment, net 5,3795,408 5,121
Other assets 7,2637,671 6,286
-------- --------
Total assets $361,319$376,992 $359,529
======== ========
Liabilities and Stockholders' Equity
Liabilities
DepositsEquity:
Liabilities:
Deposits:
Non-interest bearing $ 45,94351,190 $ 57,221
Interest bearing 256,739266,716 249,377
-------- --------
Total deposits 302,682317,906 306,598
Borrowed funds 13,80313,539 7,934
Accrued interest and other liabilities 3,7804,075 2,594
-------- --------
Total liabilities 320,265335,520 317,126
-------- --------
Commitments and Contingencies
Stockholders' EquityEquity:
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,915,611 shares issued at 6/9/30/05 and 12/31/04 9,831 9,831
Paid-in capital 107 107
Retained earnings 32,62933,030 33,810
Treasury stock at cost; 360,948 shares at 6/9/30/05 and
12/31/04 (1,722) (1,722)
Accumulated other comprehensive income 209226 377
-------- --------
Total stockholders' equity 41,05441,472 42,403
-------- --------
Total liabilities and stockholders' equity $361,319$376,992 $359,529
======== ========
See accompanying notes to the unaudited consolidated financial statements
3
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
2005 2004 2005 2004
---- ---- ---- ----
Interest incomeincome:
Interest and fees on loans $ 4,9135,241 $ 4,3414,523 $ 9,55214,793 $ 8,65013,172
Interest on debt securities
Taxable 296 432 645 866303 458 948 1,324
Tax exempt 4745 54 100 107145 161
Dividends 21 15 40 3224 17 64 49
Interest on federal funds sold and overnight deposits 98 11 135 24 7 37 12
Interest on interest bearing deposits in banks 5571 53 114 102185 155
--------- --------- --------- ---------
Total interest income 5,356 4,902 10,488 9,7695,782 5,116 16,270 14,885
--------- --------- --------- ---------
Interest expenseexpense:
Interest on deposits 921 726 1,686 1,4821,108 719 2,794 2,201
Interest on borrowed funds 101 91 195 179160 87 355 266
--------- --------- --------- ---------
Total interest expense 1,022 817 1,881 1,6611,268 806 3,149 2,467
--------- --------- --------- ---------
Net interest income 4,334 4,085 8,607 8,1084,514 4,310 13,121 12,418
Provision for loan losses - 30 - - -30
--------- --------- --------- ---------
Net interest income after provision for loan losses 4,334 4,085 8,607 8,1084,514 4,280 13,121 12,388
--------- --------- --------- ---------
Noninterest incomeincome:
Trust income 64 47 129 9167 57 196 148
Service fees 729 694 1,403 1,356756 718 2,159 2,074
Net gains on sales of investment securities 1- - 1 25
Net gains on sales of loans held for sale 23 54 119 23448 62 167 296
Other income 91 75 141 12629 45 170 171
--------- --------- --------- ---------
Total noninterest income 908 870 1,793 1,832900 882 2,693 2,714
--------- --------- --------- ---------
Noninterest expenses:
Salaries and wages 1,408 1,312 2,785 2,7211,444 1,358 4,229 4,079
Pension and employee benefits 520 529 1,035 1,126497 408 1,532 1,534
Occupancy expense, net 198 189 402 381190 174 592 555
Equipment expense 244 221 512 441277 250 789 691
Other expenses 907 898 1,724 1,656944 832 2,668 2,488
--------- --------- --------- ---------
Total noninterest expense 3,277 3,149 6,458 6,3253,352 3,022 9,810 9,347
--------- --------- --------- ---------
Income before provision for income taxes 1,965 1,806 3,942 3,6152,062 2,140 6,004 5,755
Provision for income taxes 532 501 1,114 1,036568 641 1,682 1,677
--------- --------- --------- ---------
Net income $ 1,4331,494 $ 1,3051,499 $ 2,8284,322 $ 2,5794,078
========= ========= ========= =========
Earnings per common share $ 0.310.33 $ 0.290.33 $ 0.620.95 $ 0.570.90
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,554,663 4,550,7264,551,171 4,554,663 4,550,5204,550,738
========= ========= ========= =========
Dividends per common share $ 0.24 $ 0.22 $ 0.881.12 $ 0.440.66
========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements
4
Union Bankshares, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(Dollars in Thousands)
Common Stock
------------------ Accumulated
Shares, other Total
net of Paid-in Retained Treasury comprehensive stockholders'
Treasury Amount capital earnings stock income (loss) equity
-------- ------ ------- -------- -------- ------------- -------------
Balance,Balances, December 31, 2004 4,554,663 $9,831 $107 $33,810 $(1,722) $377 $42,403
-------
Comprehensive income:
Net income - - - 2,8284,322 - - 2,8284,322
Change in net unrealized gain (loss) on
investment securities available-for-sale,
net of reclassification adjustment and
tax effects - - - - - (168) (168)(151) (151)
-------
Total comprehensive income 2,6604,171
-------
Cash dividends declared
($0.881.12 per share) - - - (4,009)(5,102) - - (4,009)
------------------------------------------------------------------------------------
Balance June(5,102)
--------- ------ ---- ------- ------- ---- -------
Balances, September 30, 2005 4,554,663 $9,831 $107 $32,629$33,030 $(1,722) $209 $41,054
====================================================================================$226 $41,472
========= ====== ==== ======= ======= ==== =======
See accompanying notes to the unaudited consolidated financial statements
5
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
SixNine Months Ended
--------------------------------------------------
(Dollars in Thousands) JuneSeptember 30, JuneSeptember 30,
2005 2004
---- ----
Cash Flows From Operating Activities
Net Income $ 2,8284,322 $ 2,5794,078
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 379 327588 516
Provision (credit)for loan losses -- 30
(Credit) provision for deferred income taxes 14 (12)(212) 193
Net amortization on investment securities 72 115112 165
Equity in losses of limited partnerships 95 62156 107
Write-downs of impaired assets --- 42
(Decrease) increase in unamortized loan fees (10) 8(11) 3
Proceeds from sales of loans held for sale 9,856 13,395
Originals13,810 19,436
Originations of loans held for sale (7,380) (7,158)(12,116) (10,181)
Net gain on sales of investment securities (1) (25)
Net gain on sales of loans held for sale (119) (234)(167) (296)
Net gain on sales of other real estate owned (1) (1)
Net gain on disposals of premises and equipment (1) (5)(2) (7)
(Increase) decrease in accrued interest receivable (118) 118
Decrease(205) 23
(Increase) decrease in other assets 140 253(114) 213
Decrease in income taxes (174) (47)
Decrease(105) (91)
Increase (decrease) in accrued interest payable (1) (136)89 (84)
Increase in other liabilities 613 289749 233
-------- --------
Net cash provided by operating activities 6,193 9,5716,892 14,354
-------- --------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 1,392 1,7851,581 2,088
Purchases (98) (1,779)(6,151) (2,477)
Investment securities available-for-sale
Sales 1,994 529
Maturities, calls and paydowns 7,932 6,39711,297 11,340
Purchases (999) (9,829)(7,611) (10,008)
Increase in loans, net (14,793) (788)(18,807) (22,376)
Recoveries of loans charged off 31 3343 109
Purchases of premises and equipment (637) (815)(875) (1,022)
Investments in limited partnerships (142) - 6
June 30, June 30,
2005 2004
---- ----
Proceeds from sales of premises and equipment 1 122 14
Proceeds from sales of other real estate owned -- 11
Proceeds from sales of repossessed property 811 -
-------- --------
Net cash used in investing activities (5,311) (4,455)(18,658) (21,792)
-------- -------- 6
Nine Months Ended
------------------------------
(Dollars in Thousands) September 30, September 30,
2005 2004
---- ----
Cash Flows From Financing Activities
Increase(Decrease) increase in borrowings outstanding, net 5,869 5,8135,605 (483)
Proceeds from exercise of stock options - 913
Net decreaseincrease (decrease) in non-interest bearing deposits (11,278) (514)(6,031) 7,651
Net increase (decrease) in interest bearing deposits 7,362 (17,877)17,339 (4,311)
Dividends paid (4,009) (2,002)(5,102) (3,003)
-------- --------
Net cash used inprovided by (used in) financing activities (2,056) (14,571)11,811 (133)
-------- --------
Change in cash and cash equivalents $ (1,174)45 $ (9,455)(7,571)
Cash and cash equivalents
Beginning $ 21,117 $ 24,540
-------- --------
Ending $ 19,94321,162 $ 15,08516,969
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,8823,061 $ 1,7962,551
======== ========
Income taxes paid $ 5551,001 $ 1,0951,575
======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 244 $ 200
======== ========
Repossessed property acquired in settlement of loans $ 12 $ -9
======== ========
Investment in limited partnerships acquired by
capital contributions payable $ (748) $ -
======== ========
Total change in net unrealized gain on investment
securities available-for-sale $ (255)(230) $ (889)(303)
======== ========
See accompanying notes to the unaudited consolidated financial statements
7
UNION BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Note 1. Basis of Presentation
The accompanying interim unaudited consolidated financial statements of
Union Bankshares, Inc. (the Company) for the interim periods ended
JuneSeptember 30, 2005 and 2004, and for the quarters then ended have been
prepared in conformity with U.S. generally accepted accounting principles
(GAAP), general practices within the banking industry, and the accounting
policies described in the Company's Annual Report to Shareholders and
Annual Report on Form 10-K for the year ended December 31, 2004. In the
opinion of the Company's management, all adjustments, (consistingconsisting only of
normal recurring adjustments)adjustments, and disclosures necessary for a fair
presentation of the information contained herein have been made. This
information should be read in conjunction with the Company's 2004 Annual
Report to Shareholders, 2004 Annual Report on Form 10-K, and current
reports on Form 8-K. The results of operations for the interim periods are
not necessarily indicative of the results of operations to be expected for
the full fiscal year ended December 31, 2005, or any other interim period.
Certain amounts in the 2004 consolidated financial statements have been
reclassified to conform to the 2005 presentation.
Note 2. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management after consulting with the
Company's Legal Counsel,legal counsel, any liability resulting from such proceedings
would not have a material adverse effect on the Company's financial
condition or results of operations.
Note 3. Per Share Information
Earnings per common share amounts are computed based on the weighted
average number of shares of common stock outstanding during the period and
reduced for shares held in treasury. The assumed conversion of available
stock options does not result in material dilution. On January 14, 2005,
the Company declaredIn addition to regular
quarterly cash dividends per share dividend information a special one-time
cash dividend of $0.40 per share declared and paid in addition to the regular quarterly cash dividend of $0.24 per share to
shareholders of record on January 24, 2005. These cash dividends
aggregating approximately $2.9 million were2005 and
funded by available cash resources.
Note 4. New Accounting Pronouncements
On June 1, 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting
Changes and Error Corrections, a replacement of Accounting PrincipalsPrinciples Board
(APB) Opinion No. 20 and FASB Statement No. 3. The Statement applies to all
voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle. SFAS No.
154 requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable to determine either the period-specific effects or the
cumulative effects of the change. APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No. 154 improves
financial reporting because its requirements enhance the consistency of
financial information between periods. SFAS No. 154 is effective for fiscal
years beginning after December 15, 2005, with early adoption permitted. The
Company has adopted SFAS No. 154, which has had no impact on the Company's
financial position or results of operations.
On March 29, 2005, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin (SAB) No. 107 - Interaction of SFAS No. 123R,
Share-Based Payment and certain SEC rules and regulations. SAB No. 107
provides guidance from the SEC staff related to share-based payment
transactions with nonemployees, the transition from nonpublic to public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable
financial instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial measures, first-timefirst-
time adoption of SFAS 123R in an interim period, capitalization of
compensation cost related to share-based payment arrangements, the
8
accounting for income tax effects of share-based payment arrangements
upon adoption of SFAS 123R, the 8
modification of employee share options prior to adoption of SFAS 123R, and
disclosures in Management's Discussion and Analysis ("MD&A") subsequent to
adoption of SFAS 123R. SFAS 123R, issued in December 2004, is effective
beginning January 1, 2006, and will require the Company to expense share-basedshare-
based payments under the "modified prospective" method. Under this method,
compensation expense is recognized at the time of the grant for all share-basedshare-
based payments granted after January 1, 2006, and also for all awards
granted prior to January 1, 2006 that remain unvested on the effective
date. The Company has no unvested share-
basedshare-based payments as of JuneSeptember 30,
2005. As of such date, the Company had not adopted the transitional
provisions of SFAS No. 123, but had continued to account for its stock
option plan in accordance with the provisions of APB pinionOpinion No. 25. The
Company does not expect that the adoption of SFAS No. 123R will have a
significant impact on its results of operations or inancialfinancial position but
management is still in the process of analyzing the future cost of stock
options under the revised statement and the required disclosure
requirements of SAB 107.
Note 5. Stock Option Plan
The Company has a stock option plan and continues to apply the intrinsic
value based method of accounting in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.Interpretations (see
Note 4). No stock-based employee compensation cost is reflected in net
income, as all stock options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. Had compensation costs been determined on the basis of fair value
pursuant to FASB Statement No. 123, "Accounting for Stock-Based
Compensation", the effects on net income and earnings per common share for
the three and sixnine months ended JuneSeptember 30, 2005 and 2004, would have
approximated:
Three Months Ended SixNine Months Ended
---------------------- ----------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Net income as reported $1,433 $1,305 $2,828 $2,579$1,494 $1,499 $4,322 $4,078
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects 0- (5) 0 (9)- (14)
------ ------ ------ ------
Pro forma net income $1,433 $1,300 $2,828 $2,570$1,494 $1,494 $4,322 $4,064
====== ====== ====== ======
Earnings per common share:
As reported $ 0.310.33 $ 0.290.33 $ 0.620.95 $ 0.570.90
Pro forma $ 0.310.33 $ 0.290.33 $ 0.620.95 $ 0.570.89
Note 6. Defined Benefit Pension Plan
Union Bank (Union), the Company's bank subsidiary sponsors a non-
contributory defined benefit pension plan covering all eligible employees.
The plan provides defined benefits based on years of service and final
average salary.
Net periodic pension benefit cost for the three and sixnine months ended
JuneSeptember 30, 2005 and 2004, consisted of the following components:
Three Months Ended SixNine Months Ended
------------------ ---------------------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars in thousands)
Service cost $116 $ 92 $232 $204$102 $348 $306
Interest cost on projected benefit obligation 121 112 242 218120 109 362 327
Expected return on plan assets (107) (93) (214) (181)(90) (321) (271)
Amortization of prior service cost 1 2 1 4 35 5
Amortization of net loss 15 19 30 4120 45 61
---- ---- ---- ----
Net periodic benefit cost $147 $131 $294 $285$145 $143 $439 $428
==== ==== ==== ====
9
Note 7. Other Comprehensive Income
The components of other comprehensive income (loss) and related tax effects
for the three and sixnine month periods ended JuneSeptember 30, 2005 and 2004 are
as follows:
Three Months Ended SixNine Months Ended
June------------------ -----------------
September 30, JuneSeptember 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars in thousands)
Unrealized holding gains (losses) on investment
securities available-for-sale $152 $(1,265) $(254) $(905)$26 $ 586 $(228) $(319)
Reclassification adjustment for gains realized in income (1)- - (1) (25)
Reclassification adjustment for losses recognized in
income on impaired investment securities - 41- - 41
---- ---------- ----- ----- -----
Net unrealized gains (losses) 151 (1,224) (255) (889)26 586 (229) (303)
Tax effect 51 (416) (87) (302)
---- -------(9) (199) 78 103
--- ----- ----- -----
Net of tax amount $100$17 $ (808) $(168) $(587)
==== =======387 $(151) $(200)
=== ===== ===== =====
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 (the
Company's) financial position as of JuneSeptember 30, 2005, and as of December
31, 2004, and its results of operations for the three and sixnine months ended
JuneSeptember 30, 2005 and 2004. This discussion is being presented to provide
a narrative explanation of the financial statements and should be read in
conjunction with the financial statements and related notes and with other
financial data appearing elsewhere in this filing. In the opinion of
the
Company's management, the interim unaudited data reflects all adjustments,
consisting only of normal recurring adjustments, and disclosures necessary
to fairly present the Company's consolidated financial position and results
of operations for the interim period. Management is not aware of the
occurrence of any events after JuneSeptember 30, 2005, which would materially
affect the information presented.
CAUTIONARY ADVICE ABOUT 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 Quarterly Report, in other written materials,
and in statements made by senior management to analysts, rating agencies,
institutional investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and
are subject to uncertainties, both general and specific, and risk exists
that those predictions, forecasts, projections and other estimates
contained in forward-looking statements will not be achieved. Also, when
any of the words "believes," "expects," "anticipates," "intends," "plans,"
"seeks," "estimates", or similar expressions are used, forward-looking
statements are being made. 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 forward-lookingforward-
10
looking statements. The possible events or factors that might affect
forward-looking statements include, but are not limited to, the following:
* uses of and changes in monetary, fiscal, and tax policy by various
governmentsgovernments;
* political, legislative, or regulatory developments in Vermont, New
Hampshire, or the United States including changes in laws concerning
accounting, taxes, banking, and other aspects of the financial
services industryindustry;
* developments in general economic or business conditions nationally or
in Vermont and 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 effect on the Company or its customerscustomers;
* developments in economic or business conditions in the Canadian
province of Quebec which borders the Company's market area including
fluctuations in the value of the U.S. or Canadian dollar;
* changes in the competitive environment for financial services
organizations, including increased competition from tax-advantaged
credit unionsunions;
* the Company's ability to retain key personnelpersonnel;
* changes in technology including demands for greater automation which
could present operational issues or significant capital outlaysoutlays;
* 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 customerscustomers;
* adverse changes in the securities market which could adversely affect
the value of the Company's stockstock;
* unanticipated lower revenues, loss of customers or business, or higher
operating expensesexpenses;
* the failure of assumptions underlying the establishment of the
allowance for loan losses, and estimations of values of collateral,
and various financial assets and liabilitiesliabilities;
* the amount that we invest in new business opportunities and the
timing of these investmentsinvestments;
* the failure of actuarial, investment, work force, salary and other
assumptions underlying the establishment of the reservereserves for future
pension costscosts;
* future cash requirements might be higher than anticipated due to loan
commitments, or unused lines of credit being drawn upon, or depositors
withdrawing their fundsfunds;
* 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
operationsoperations; and
* the creditworthiness of current loan customers is different from our
understanding or changes dramatically, and therefore the allowance for
loan losses becomes inadequateinadequate.
When evaluating forward-looking statements to make decisions with respect
to the Company, investors and others are cautioned to consider these and
other risks and uncertainties and are reminded not to place undue reliance
on such statements. Forward-looking statements speak only as of the date
they are made and the Company undertakes no obligation to update them to
reflect new or changed information or events, except as may be required by
federal securities laws.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United
States of America in the preparation of the Company's financial statements.
Certain accounting policies involve significant judgments and assumptions
by management which have a material impact on the reported amount of
assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial statements
and accompanying related notes. The 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
11
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 these
judgments and 11 estimates that could have a material impact on the carrying
values of assets and liabilities and the results of operations of the
Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
the preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as
well as other factors including the effect of changes in the local real
estate market on collateral values, the effect on the loan portfolio of
current economic indicators and their probable impact on borrowers and
changes in delinquent, nonperforming or impaired loans. Changes in these
factors may cause management's estimate of the allowance for loan losses to
increase or decrease and result in adjustments to the Company's provision
for loan losses in future periods. The Company also has other key accounting
policies that are significant to understanding the results, which involve
the use of estimates, judgments, and assumptions that are significant to understandingassumptions. These include the results, including
the liability
accrual for the defined benefit pension plan, valuation of deferred
tax assets and analysis of potential impairment of investment securities.
For additional information see FINANCIAL CONDITION - Allowance for Loan
Losses below. Although management believes that its estimates, assumptions,
and judgments are reasonable, they are based upon information presently
available. Actual results may differ significantly from these estimates
under different assumptions, judgments or conditions.
OVERVIEW
The Company's net income was $1.494 million for the quarter ended JuneSeptember
30, 2005, was $1.433
million, compared with net income of $1.305$1.499 million for the secondthird quarter
of 2004, or a 9.8% increase0.3% decrease between years. The company'sincrease in net interest
income of $204 thousand between quarters was offset by the increase in
noninterest expenses. For additional information see quarterly results
analysis beginning on page 16. The Company's net income was $4.322
million for the sixnine months ended JuneSeptember 30, 2005, was $2.828 million, compared with net
income of $2.579$4.078 million for the same period in 2004, or a 9.7%6.0% increase
between years. A quarterly cash dividend of $0.24 per share was declared
and paid in April,July 2005, in addition to a quarterly cash dividenddividends of $0.24
per share declared and paid in January and April 2005. Also a special
cash dividend of $0.40 per share was declared and paid in January 2005. A special dividend was declared2005
as the Company's primary capital ratio approached 12%, on December 31,
2004, approached 12%, 2004 earnings were better than anticipated, and the current tax
treatment of dividends iswas beneficial to shareholders. The Company remainsremained
well capitalized after payment of the regular and special dividends.
The Company's total assets increased from $359 million at December 31,
2004, to $361$377 million at JuneSeptember 30, 2005.2005, an increase of 4.9%. Loans and
loans held for sale increased a net $12.1 million, while investments decreased $9.3$16.9 million reflecting the continuing high
demand for loans.loans despite the rising interest rates. Investment securities
available-for-sale decreased $6.0 million of which $4.6 million was
reinvested in FDIC insured interest bearing deposits in banks where
there is no credit risk and the yields obtained have been favorable. The
remainder of the funds were utilized to fund loan demand. The increase in
loans was also funded by an increase in borrowings of $5.9$5.6 million and an
increase in deposits of $11.3 million.
12
The following per share information and key ratios depict several
measurements of performance or financial condition for or at the quartersthree
and sixnine months ending JuneSeptember 30, 2005 and 2004, respectively:
Quarter Ended Year to Date
------------------------------ ------------------------------
JuneYear-to-Date
---------------------------------------- ----------------------------------------
September 30, 2005 JuneSeptember 30, 2004 JuneSeptember 30, 2005 JuneSeptember 30, 2004
------------- ------------- ------------- ------------------------------- ------------------ ------------------ ------------------
Return on average assets (ROA) (1) 1.61% 1.49% 1.60% 1.47%1.69% 1.60% 1.55%
Return on average equity (ROE) (1) 14.13% 12.78% 13.89% 12.62%14.57% 14.47% 14.12% 13.26%
Net interest margin (1)(2) 5.36% 5.15% 5.36% 5.16%5.26% 5.30% 5.30% 5.19%
Efficiency ratio (3) 62.53% 62.62% 62.10% 62.86%61.91% 57.48% 62.03% 61.15%
Net interest spread (4) 5.05% 4.90% 5.06% 4.92%4.91% 5.03% 4.98% 4.94%
Loan to deposit ratio 96.58% 92.79% 96.58% 92.79%93.48% 92.28% 93.48% 92.28%
Net loan charge-offs to average loans 0.06% 0.00% 0.03%0.00% 0.02% 0.00%
Allowance for loan losses to loans 1.10% 1.19% 1.10% 1.19%1.04% 1.12% 1.04% 1.12%
Non-performing assets to total assets 1.52% 1.22% 1.52% 1.22%1.00% 0.07% 1.00% 0.07%
Equity to assets 11.36% 11.91% 11.36% 11.91%11.00% 11.62% 11.00% 11.62%
Total capital to risk assets 17.71% 18.39% 17.71% 18.39%17.32% 18.12% 17.32% 18.12%
Book value per share $ 9.01 $ 9.00 $ 9.01 $ 9.00$9.11 $9.20 $9.11 $9.20
Earnings per share $ 0.31 $ 0.29 $ 0.62 $ 0.57$0.33 $0.33 $0.95 $0.90
Dividends paid per share $ 0.24 $ 0.22 $ 0.88 $ 0.44$0.24 $0.22 $1.12 $0.66
Dividend payout ratio (5) 77.42% 76.70% 141.94% 77.63%72.73% 66.78% 117.89% 73.64%
- --------------------
Annualized
The ratio of tax equivalent net interest income to average earning
assets.
The ratio of noninterest expense to net interest income and
noninterest income excluding securities gains and losses.
The difference between the average rate earned on assets minus the
average rate paid on liabilities.
Cash dividenddividends declared and paid per share divided by consolidated net
income per share.
The prime interest rate has risen fourrose six times during the first nine months of 2005
and twice during the fourth quarter of 2004 by 25 basis points each time, to
stand at 6.25%6.75% as of JuneSeptember 30, 2005.2005 from its 4.75% level as of September
30, 2004. This is the highest the prime rate hashad been since September 17,August, 2001.
The prime rate duringwas static at 4% for the first six months of 2004, was static at 4.00%.and rose
three times, by 25 basis points each time during the third quarter of 2004,
to 4.75% as of September 30, 2004. The rise in the prime rate is partially
responsible for the 2011 basis point increase in the Company's Net Interest
Margin year over year, as variable rate loans have reacted more fully and
quickly than core deposit rates to thesethe increases in the prime rate.
RESULTS OF OPERATIONS
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 its interest-bearing liabilities. The Company's net interest
income increased by $249$204 thousand, or 6.1%4.73%, to $4.33$4.51 million for the three
months ended JuneSeptember 30, 2005, from $4.09$4.31 million for the three months
ended JuneSeptember 30, 2004. The net interest spread increased 15decreased 12 basis points
to 5.05%4.91% for the three months ended JuneSeptember 30, 2005, from 4.90%5.03% for the
three months ended JuneSeptember 30, 2004, as interest rates paid on
liabilities and earned on assets both moved upward in response to the
increases in the prime rate.rate, but as the yield curve continued to flatten,
the interest rates on short term and nonmaturity deposits moved up more
quickly. The net interest margin for the secondthird quarter of 2005 increased 21decreased
4 basis points to 5.36%5.26% from the 2004 period at 5.15%5.30% reflecting a rising
rate environment.environment in which interest rates paid on liabilities rose at a
faster pace than interest rates earned on assets. For the first sixnine
months of 2005, net interest income increased $499$703 thousand, or 6.15%5.66%, to
$8.61$13.12 million, from $8.11$12.42 million for the year earlier period. The net
interest spread increased 144 basis points or 2.8%, to 5.06%4.98% for the first sixnine months
of 2005 compared to 4.92%4.94% for the first sixnine months of 2004. The net
interest margin increased 2011 basis points or 3.9%, to 5.36%5.30% for the first sixnine
months of 2005 compared to 5.16%5.19% for the same period in 2004. A decrease
in prime rate would not necessarily be beneficial to Unionthe Company in the
near term, see "OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and
Liability Management."
13
Yields Earned and Rates Paid. The following table shows, for the periods
indicated, the total amount of income recorded from interest-earning
assets, and the related average yields, the interest expense associated
with interest-bearing liabilities, expressed in dollars and average rates,
and the relative net interest spread and net interest margin. All yield and
rate information is calculated on an annualized tax equivalent basis. Yield
and rate information for a period is average information for the period,
and is calculated by dividing the annualized income or expense item for the
period by the average balance of the appropriate balance sheet item during
the period. Net interest margin is annualized tax equivalent net interest
income divided by average interest-earning assets. 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. The yields,
net interest spreadspreads, and net interest margins appearing in the following
table have been calculated on a pre-tax basis:
Three months ended JuneSeptember 30,
2005 2004
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
Average Assets
Federal funds sold and
overnight deposits $ 3,32911,301 $ 24 2.79%98 3.40% $ 3,8633,418 $ 7 0.73%11 1.27%
Interest bearing deposits in banks 6,545 55 3.33% 6,6468,095 71 3.51% 6,703 53 3.17%3.15%
Investment securities (1), (2) 34,525 352 4.35% 43,580 494 4.75%32,602 359 4.66% 43,336 521 5.02%
Loans, net (1), (3) 284,639 4,913 7.00% 268,685 4,341 6.56%293,794 5,241 7.17% 273,059 4,523 6.63%
FHLB of Boston stock 1,241 12 3.90%13 4.15% 1,241 7 2.14%8 2.49%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 330,279 5,356 6.60% 324,015 4,902 6.16%347,033 5,782 6.71% 327,757 5,116 6.27%
Cash and due from banks 12,760 13,57112,096 12,696
Premises and equipment 5,378 4,8415,400 4,965
Other assets 7,605 8,7478,247 7,389
-------- --------
Total assets $356,022 $351,174$372,776 $352,807
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 50,60453,831 $ 6367 0.50% $ 44,83344,883 $ 4445 0.40%
Savings/money market accounts 109,342 294 1.08% 111,494 203110,678 382 1.37% 112,153 206 0.73%
Time deposits 96,431 564 2.35% 93,871 479 2.05%100,992 659 2.59% 90,866 468 2.04%
Borrowed funds 8,842 101 4.52% 10,334 91 3.48%13,686 160 4.58% 9,391 87 3.63%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 265,219 1,022 1.55% 260,532 817 1.26%279,187 1,268 1.80% 257,293 806 1.24%
Non-interest bearing deposits 46,296 46,40548,436 50,961
Other liabilities 3,955 3,376
-------- --------4,136 3,353
Total liabilities 315,470 310,313331,759 311,607
Stockholders' equity 40,552 40,86141,017 41,200
-------- --------
Total liabilities and
stockholders' equity $356,022 $351,174$372,776 $352,807
======== ========
Net interest income $4,334 $4,085$4,514 $4,310
====== ======
Net interest spread (1) 5.05% 4.90%4.91% 5.03%
==== ====
Net interest margin (1) 5.36% 5.15%5.26% 5.30%
==== ====
- --------------------
Average yield reported on a tax-equivalent basis.
Average balances of investment securities are calculated on the
amortized cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
14
SixNine months ended JuneSeptember 30,
2005 2004
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
Average Assets:
Federal funds sold and
overnight deposits $ 2,7465,629 $ 37 2.67%135 3.16% $ 3,3723,387 $ 12 0.74%24 0.92%
Interest bearing deposits in banks 6,969 114 3.29% 6,581 102 3.10%7,349 185 3.37% 6,622 155 3.11%
Investment securities (1), (2) 37,020 762 4.37% 42,267 990 4.90%35,531 1,121 4.46% 43,450 1,511 4.85%
Loans, net (1), (3) 280,549 9,552 6.93% 267,020 8,650 6.57%285,012 14,793 6.98% 269,048 13,172 6.58%
FHLB of Boston Stock 1,241 36 3.86% 1,241 23 3.71% 1,241 15 2.46%2.47%
-------- ------- ---- -------- ------------- ----
Total interest-earning assets (1) 328,525 10,488 6.51% 320,481 9,769334,762 16,270 6.56% 323,748 14,885 6.20%
Cash and due from banks 13,186 16,52512,819 15,240
Premises and equipment 5,297 4,7015,332 4,790
Other assets 7,461 8,7377,726 7,523
-------- --------
Total assets $354,469 $350,444$360,639 $351,301
======== ========
Average Liabilities and
Stockholder's Equity:
Now accounts $ 47,90649,903 $ 114 0.48%181 0.49% $ 44,18844,422 $ 87133 0.40%
Savings/money market accounts 109,856 535 0.98% 111,359 413 0.75%110,133 917 1.11% 111,625 619 0.74%
Time deposits 93,395 1,037 2.24% 94,606 982 2.09%95,955 1,696 2.36% 93,350 1,449 2.07%
Borrowed funds 8,991 195 4.32% 9,896 179 3.57%10,573 355 4.43% 9,742 266 3.59%
-------- ------- ---- -------- ------------- ----
Total interest-bearing liabilities 260,148 1,881 1.45% 260,049 1,661 1.28%266,564 3,149 1.58% 259,139 2,467 1.27%
Non-interest bearing deposits 50,050 46,28649,526 47,855
Other liabilities 3,558 3,2363,750 3,221
-------- --------
Total liabilities 313,756 309,571319,840 310,215
Stockholder's equity 40,713 40,87340,799 41,086
-------- --------
Total liabilities and
stockholders' equity $354,469 $350,444$360,639 $351,301
======== ========
Net interest income $ 8,607 $8,108$13,121 $12,418
======= =============
Net interest spread (1) 5.06% 4.92%4.98% 4.94%
==== ====
Net interest margin (1) 5.36% 5.16%5.30% 5.19%
==== ====
- --------------------
Average yield reported on a tax-equivalent basis.
The average balance of investment securities is calculated on the
amortized cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
Rate/Volume Analysis. The following tables describe the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest
income and interest expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume); and
* total change in rate and volume.
Changes attributable to both rate and volume, including the extra day in
2004 due to leap year, have been allocated proportionately to the change due
to volume and the change due to rate.
15
Three Months Ended JuneSeptember 30, 2005
Compared to
Three Months Ended JuneSeptember 30, 2004
Increase/(Decrease) Due to Change In
------------------------------------------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (2)50 $ 1937 $ 1787
Interest bearing deposits in banks (1) 3 212 6 18
Investment securities (102) (40) (142)(125) (37) (162)
Loans, net 269 303 572349 369 718
FHLB of Boston stock -0 5 5
----- ---- ---- ---------
Total interest-earning assets 164 290 454286 380 666
Interest-bearing liabilities:
NOW accounts 710 12 1922
Savings/money market accounts (5) 96 91(3) 179 176
Time deposits 15 70 8556 135 191
Borrowed funds (15) 25 1047 26 73
----- ---- ---- ---------
Total interest-bearing liabilities 2 203 205110 352 462
----- ---- ---- ---------
Net change in net interest income $162 $ 87 $249176 $ 28 $ 204
===== ==== ==== =========
SixNine Months Ended JuneSeptember 30, 2005
Compared to
SixNine Months Ended JuneSeptember 30, 2004
Increase/(Decrease) Due to Change In
---------------------------------------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (5)24 $ 3087 $ 25111
Interest bearing deposits in banks 6 6 1217 13 30
Investment securities (123) (105) (228)(271) (119) (390)
Loans, net 434 468 902801 820 1,621
FHLB of Boston stock - 8 8
---- ---- ------ 13 13
----- ----- ------
Total interest-earning assets 312 407 719571 814 1,385
Interest-bearing liabilities:
NOW accounts 8 19 27
Savings/17 31 48
Saving/money market accounts (6) 128 122(8) 306 298
Time deposits (14) 69 5540 207 247
Borrowed funds (17) (33) 16
---- ---- ----23 66 89
----- ----- ------
Total interest-bearing liabilities (29) 249 220
---- ---- ----72 610 682
----- ----- ------
Net change in net interest income $341 $158 $499
==== ==== ====$ 499 $ 204 $ 703
===== ===== ======
Quarter Ended JuneSeptember 30, 2005, compared to Quarter Ended JuneSeptember 30,
2004.
Interest and Dividend Income. The Company's interest and dividend income
increased $454$666 thousand, or 9.3%13.02%, to $5.36$5.78 million for the three months
ended JuneSeptember 30, 2005, from $4.90$5.12 million for the three months ended
JuneSeptember 30, 2004, with average earning assets increasing $6.3$19.3 million,
or 1.9%5.9%, to $330.3$347.0 million for the three months ended JuneSeptember 30, 2005,
from $324.0$327.8 million for the three months ended JuneSeptember 30, 2004. The
increase in interest income resulting from the rise in average earning
assets was augmented by the higher rates earned on the majority of these
assets in 2005 versus 2004. Average loans approximated $284.6$293.8 million at an
average yield of 7.00%7.17% for the three months ended JuneSeptember 30, 2005, up
from $268.7$273.1 million at an average yield of 6.56%6.63% for the three months ended
JuneSeptember 30, 2004, or a 5.9%7.6% increase in volume and a 4454 basis point
increase in yield. The 16
strongest growth between the two years was in the commercial real estate
market where new loan volume was strong due to relatively low long-
16
termlong-term
market interest rates, , positive local economic trends and opportunities
brought about by further consolidation in the banking industry. Quarterly
average loans secured by real estate increased $12.7$15.7 million, or 5.7%6.9%, to
$236.9$242.3 million for the secondthird quarter of 2005, from $224.2$226.6 million for the
secondthird quarter of 2004. This increase was the result of strong demand for
residential and commercial real estate in the Company's market.market including
the Company's increase presence in Franklin and Chittenden Counties in
Vermont resulting from the opening of a loan production office in St.
Albans, Vermont, during the first quarter of 2005. This demand was
influenced in part by low long-term interest rates, and high demand and
prices in the Chittenden County, Vermont, market, which is contiguous to
the Company's and is fueling growth in the Company's market. This demand
was also influenced by continued consolidation in the banking industry,
which has given Union Bank the opportunity to establish relationships with
customers that choose to do business with community banks. Municipal loans
increased $4.7decreased $1.9 million, or 29.0%8.9%, to an average of $20.9$19.7 million in 2005
from an average of $16.2$21.6 million in 2004. Average commercial loans
decreased slightly year to year, decreasing $466 thousand,
r 2.1%increased $3.3 million, or 14.6%, to $21.5$25.8 million for 2005 compared to
$22.0$22.5 million for 2004.2004, due primarily to the addition of one large
commercial relationship in 2005.
The average balance of investments (including mortgage-backed securities)
decreased $9.1$10.7 million or 20.8%24.8% to $34.5$32.6 million for the three months
ended JuneSeptember 30, 2005, from $43.6$43.3 million for the three months ended
JuneSeptember 30, 2004. The decrease in the investment portfolio in 2005
reflects the continuing growth in the loan portfolio.portfolio as well as redirecting
some of the maturing cash flow into interest bearing deposits in banks. The
average level of federal funds sold and overnight deposits decreased $534 thousandincreased $7.9
million, or 13.8%230.6%, to $3.3$11.3 million for the three months ended JuneSeptember
30, 2005, from $3.9$3.4 million for the three months ended JuneSeptember 30, 2004.2004,
as Union Bank managed cash flow and liquidity during the third quarter and
took advantage of the rapid increase in short term interest rates during
that period. Interest income from non-loan instruments was $443$541 thousand
for the secondthird quarter of 2005 and $561$593 thousand for the same period of
2004, reflecting the decreaseoverall increase in yields in the investment
portfolio andoffset by the overall
decrease in volume as the majority of paydowns
and matured, called or sold securities and interest bearing deposits in
banks were utilized to fund the loan demand.volume.
Interest Expense. The Company's interest expense increased $ 205$462 thousand,
or 25.1%57.3%, to $1.0$1.3 million for the three months ended JuneSeptember 30, 2005,
from $817$806 thousand for the three months ended JuneSeptember 30, 2004 as rates paid on
funds started to move up while the volume of average2004. Average
interest-bearing liabilities increased $4.7$21.9 million, or 1.8%8.5%, to $265.2$279.2
million for the three months ended JuneSeptember 30, 2005, from $260.5$257.3 million
for the three months ended JuneSeptember 30, 2004.2004 and the average rate paid
increase 56 basis points to 1.80% from 1.24% for the three months ended
September 30, 2005 and 2004, respectively. Average time deposits were $96.4$101.0
million for the three months ended JuneSeptember 30, 2005, and $93.9$90.9 million
for the three months ended JuneSeptember 30, 2004, or an increase of 2.7%11.1%. It appears depositors are still
cautious about locking inThe
average rate paid on time deposits increased 55 basis points, to 2.59% from
2.04% for long-term certificates of deposit.the three monts ended September 30, 2005 and 2004, respectively.
The average balances for money market and savings accounts decreased $2.2$1.5
million, or 1.9%1.3%, to $109.3$110.7 million for the three months ended JuneSeptember 30,
2005, from $111.4$112.2 million for the three months ended JuneSeptember 30, 2004.
The
12.9%An $8.9 million, or $5.8 million19.9%, increase in NOW accounts brought the average
balance up to $50.6$53.8 million from $44.8$44.9 million. DuringThe period over period
increase in NOW accounts reflects changes made earlier in 2005 to the
first quarter of 2005,
the bank subsidiary introduced a new suite ofCompany's deposit products and
ancillary benefits for its deposit account holders.product offerings. During the second quarter of 2005, as
part of thisthe new deposit product launch, some legacy account products that
did not pay interest were converted to new deposit products that pay
interest. The account conversions resulted in the transfer of over
$6.0 million from demand deposits to interest bearing checking account
(NOW's) products.
The average balance of funds borrowed has decreasedincreased from $10.3$9.4 million for the
three months ended JuneSeptember 30, 2004, to $8.8$13.7 million for the three months
ended JuneSeptember 30, 2005, while the average rate paid on those funds rose from
3.48%3.63% to 4.52%4.58% between years.
Noninterest Income. The Company's noninterest income increased $38$18
thousand, or 4.4%2.0%, to $908$900 thousand for the three months ended JuneSeptember
30, 2005, from $870$882 thousand for the three months ended JuneSeptember 30, 2004.
Trust department income increased to $64$67 thousand for the three monthsthird quarter of
2005 from $47$57 thousand in the same period of 2004, or a 36.2%17.5% increase,
primarily due to the increase in 17
the overall level of the stock market since the majority of the fee income
is based on the market value of assets under management. Gain on sale of
loans decreased between years to $23$48 thousand for the secondthird quarter of 2005
from $54$62 thousand for the same period in 2004 due to Management'smanagement's decision
to lower the volume of loan sales ($3.23.9 million in 2005 versus $5.9$6.0 million
in 2004) and the increasing costs of selling in the secondary market.
Service fees (sources of which include, among others, deposit and loan
servicing fees, ATM fees, and safe deposit fees) rose 5.0%5.3% between years
increasing $35$38 thousand to $729$756 thousand for the three months ended
JuneSeptember 30, 2005, from $694$718 thousand for the three
monthsthreemonths ended JuneSeptember
30, 2004. The main components of other income in both years are net
servicing rights on loans sold and the increase in the cash surrender value
of life insurance owned.
17
Noninterest Expense. The Company's noninterest expense increased $128$330
thousand, to $3.3$3.4 million for the three months ended JuneSeptember 30, 2005,
compared to $3.1$3.0 million for the three months ended JuneSeptember 30, 2004.
Salaries and wages increased $96$86 thousand, or 7.3%6.3%, to 1.4$1.4 million for the
three months ended JuneSeptember 30, 2005, from $1.3$1.4 million for the three
months ended JuneSeptember 30, 2004. This increase is due primarily to normal
salary growth, and the addition of the St. Albans, Vermont loan production
office in the fourth quarter of 2004. Pension and employee benefits
decreased $9increased $89 thousand, or 1.7%21.8%, to $520$497 thousand for the three months
ended JuneSeptember 30, 2005, from $529$408 thousand for the three months ended
JuneSeptember 30, 2004. HealthThis increase was primarily due to increases in the
accrual of estimated pension plan expenses of $33 thousand from $116 thousand
in 2004 to $149 thousand in 2005. The third quarter accrual for 2004 was low
due to an adjustment during the third quarter of 2004 to bring the year-to-date
accrual into line with the actuarial estimate. There was also an increase of
$36 thousand in health insurance coverage provided to eligible employees,
which is self-insured by the Company up to certain individual and aggregate
stop loss coverages and the
experience during the second quarter of 2005 has been favorable.coverages. Net occupancy expense increased $9$16 thousand, or 4.8%9.2%, to
$198$190 thousand for the three months ended JuneSeptember 30, 2005, from $189$174
thousand for the three months ended JuneSeptember 30, 2004, due mainly to the
increased cost of maintenance, fuel, and utilities, and the opening of the St.
Albans, Vermont loan center.production office. Equipment expense increased $23$27
thousand, or 10.4%10.8%, to $244$277 thousand for the three months ended JuneSeptember 30,
2005, from $221$250 thousand for the same period in 2004, reflecting the
increased depreciation and maintenance contract expense on new equipment.
Other operating expenses were up $9$112 thousand, or 1.0%13.5%, to $907$944 thousand
for the three months ended JuneSeptember 30, 2005, compared to $898$832 thousand for
the same period in 2004. They would have been up $33The increase in other noninterest expenses was
primarily due to increases in professional fees, resulting mainly from $34
thousand more (orof expenses related to the Company's on going Sarbanes Oxley Act of
2002 compliance efforts, $16 thousand related to the Company's ATM's and
debit card products, an $18 thousand increase in marketing expenses, $18
thousand in training expense for a totalcompany wide computer training program,
$10 thousand in directors fees resulting from an increase in compensation
rates for directors, and contributions of 4.7%) except for$20 thousand and $10 thousand to
the impactcapital campaign of Union purchasingthe Northeastern Vermont State
Franchise Tax Credits at 60% of their value whichRegional Hospital and the
Company was able to
utilize during the second quarter of 2005.Hurricane Katrina Relief Fund, respectively.
Income Tax Expense. The Company's income tax expense increaseddecreased by $31$73
thousand, or 6.2%11.4%, to $532$568 thousand for the three months ended JuneSeptember
30, 2005, from $501$641 thousand for the comparable period of 2004, mainly due
to increased net taxable income.
Year to Date Junefederal income tax credits received from investments in
limited partnerships for affordable housing.
Year-to-Date September 30, 2005, compared to Year to Date JuneYear-to-Date September 30,
2004.
Interest and Dividend Income. The Company's interest and dividend income
increased $719 thousand,$1.4 million, or 7.4%9.3%, to $10.5$16.3 million for the first sixnine months
of 2005, from $9.8$14.9 million for the first sixnine months of 2004. This
increase was due primarily to a $902 thousand,$1.6 million, or 10.4%12.3%, increase in interest
and fees on loans, an $111 thousand increase in interest on federal funds
sold, and a $30 thousand increase in interest on interest bearing deposits
in banks, partially offset by a $228$377 thousand, or 24.6%, decrease in interest
and dividend income from investment securities available-for-sale. The
increase in loan related income is due to increases in loan portfolio
balances from $267.0$269.0 million on average in 2004 to $280.5$285.0 million in 2005. The2005
and the increases in loan rates resultedresulting from increases in the prime
lending rate over the last year. The decrease in investment income was due
primarily to decreasing balances in the investment categories from $42.3$43.5
million in 2004 on average to $37.0$35.5 million on average in 2005 as cash
flows from investments have been utilized to fund the growth in the loan
portfolio.
18
Interest expense. The Company's interest expense increased $220$682 thousand,
or 13.2%27.6%, to $1.9$3.2 million for the first sixnine months of 2005, from $1.7$2.5
million for the first sixnine months of 2004. This increase was due primarily
to increases in interest rates paid on deposits, which increased 1628 basis
points or 13.6%, to 1.34%1.46% from 1.18%. The year-to-dateYear-to-date average interest bearing deposit balances were essentially flat at $251.2deposits
increased $6.6 million, or 2.6%, to $256.0 million for 2005, compared to
$250.2$249.4 million for 2004. During the second quarter of 2005, as part of the
new deposit product launch, some legacy account products that did not pay
interest were converted to new deposit products that pay interest. The
account conversion resulted in the transfer of over $6.0 million from demand
deposits to interest bearing checking account (NOW's) products. Interest
expense on borrowed funds increased $16$89 thousand, or 8.9%33.5%, which reflects
the increase in the average rate on borrowings to 4.32%4.43% for the first sixnine
months of 2005 compared to 3.57%3.59% for the same period in 2004, while year-to-dateand average
balances decreased $905increased $831 thousand from $9.9$9.7 million infor the first nine months
of 2004 to $9.0$10.6 million for the same period in 2005.
Noninterest income: The Company's noninterest income decreased $39$21
thousand, or 2.2%0.8%, from $1.83$2.71 million for the first sixnine months of 2004 to
$1.79$2.69 million for the first sixnine months of 2005. This decrease was due
primarily to the decrease in net gains on sales of loans held for sale
from $234$296 thousand in 2004 to $119$167 thousand in 2005 as interest rates have
improved in 2005 and Union's management decided to retain higher rate loans
instead of selling them to the secondary market. Union sold $9.7$13.6 million
in residential real estate loans during the first halfnine months of 2005
versus $13.2$19.1 million during the same period in 2004. This decrease was
partially offset by increases in trust income and servicing fees. Trust
income increased $38$48 thousand, to $129$196 thousand from $91$148 thousand, or
41.8%32.4%, which was due primarily to the increase in fees charged and the
increase in the overall level of the stock market since the majority of
trust fee income is based on the market value of assets under management.
Servicing fees (sources of which include, among others, deposit and loan
servicing fees, ATM fees, and safe deposit fees) increased $47$85 thousand, 18
to
$1.40$2.16 million from $1.36$2.07 million, or 3.5%4.1%.
Noninterest expense: The Company's noninterest expense increased $133$463
thousand, or 2.1%5.0%, to $6.46$9.81 million for the first sixnine months of 2005 from
$6.33$9.35 million for the first sixnine months of 2004. Salaries and wages
increased $64$150 thousand or 2.4%3.7% to $2.79$4.23 million from $2.72$4.08 million with
the increase primarily due to normal salary increases and the addition of
the St. Albans, Vermont loan production office. Pension and employee benefits
decreased
$91 thousand, or 8.1%, to $1.04were essentially flat at $1.53 million from $1.13 million due primarily to
a decrease in health insurance expense between years.2005 and 2004. Health insurance
coverage provided to eligible employees is self-insured by the Company up
to certain individual and aggregate stop loss coverages, and the experience
during the first sixnine months of 2005 has been favorable. In addition
pension plan expenses decreased $22only increased $11 thousand, or 7.1%2.6%, from $312$428
thousand to $290
thousand, due primarily to increases in the projected earnings on the
assets in the pension plan due to increases in interest rates.$439 thousand. Net occupancy expenses increased $21$37 thousand,
or 5.5%6.7%, to $402$592 thousand from $381$555 thousand, due primarily to increases in
costs of fuel and utilities, and the opening of the St. Albans, Vermont
loan center.production office. Equipment expenses increased $71$98 thousand, or 16.1%14.2%,
to $512$789 thousand from $441$691 thousand, reflecting the increased depreciation
and maintenance contract expense on new equipment, primarily an imaging
reader sorter, ATM's, cars, generator, computer hardware and software, and
upgraded telephone systems. Other operating expenses were up $68$180 thousand,
or 4.1%7.2%, to $1.72$2.67 million from $1.66 million, as$2.49 million. As the Company continues its
compliance efforts related to \
Sarbanes-Oxley Section 404 implementation. And,implementation, it
spent $37 thousand year to date on consultant fees. The Company hired a
consultant to perform reviews and testing of the Company's information
technology systems policies and procedures during 2005 and paid $24 thousand
year-to-date for those services. In addition, Union introducedincurred product
development, conversion and marketing costs in connection with the
introduction of a new suite of deposit products and ancillary benefits for
deposit account holders, beginning in March 2005. Also, the change during the
second quarter of 2004 from paying for correspondent service charges by
leaving deposits on balance to paying hard dollars increased year to date
expense by $30$23 thousand. Contributions of $20 thousand and $10 thousand to
the capital compaign of the Northeastern Vermont Regional Hospital and the
Hurricane Katrina Relief Fund, respectively, were made. Other operating
expenses would have been up $33 thousand more (or a total of 6.1%8.6%) except
for the impact of Union purchasing Vermont State Franchise Tax Credits at
60% of their value which the Company was
able to utilizeutilized during the second quarter of
2005. 19
Income Tax Expense: The Company's income tax expense increased $78$5 thousand,
or 7.5%0.3%, to $1.11and was $1.68 million for the first sixnine months of 2005 compared to $1.04 million for the same period inand 2004.
This increase was mainly due to increased net taxable income.income mostly offset
by an increase in federal income tax credits received from investments in
limited affordable housing partnerships.
FINANCIAL CONDITION
At JuneSeptember 30, 2005, the Company had total consolidated assets of $361.3$377.0
million, including net loans and loans held for sale ("net loans") of
$289.2$294.0 million, deposits of $302.7$317.9 million and stockholders' equity of
$41.1$41.5 million. The Company's total assets increased $ 1.8$17.5 million or 0.5%4.86%
to $ 361.3$377.0 million at JuneSeptember 30, 2005, from $359.5 million at December
31, 2004, which is due to the increase in net loans and loans held for sale of $12.2$17.0 million, or
4.4%6.1%, the continuing management strategy of managing balance sheet growth
by the sale of loans totaling $9.7$13.6 million during the first sixnine months of
2005, the management strategy of utilizing cash flows from securities
available for sale to fund growth in the loan portfolio, and the effect of
the $1.8 million special dividend paid to shareholders. June thirtieth of
each year is our normal seasonal low point in terms of total assets,Net loans and deposits due to the majority of the municipalities having to be out of
debt at least one day each fiscal year. Total net loans and loans held for
sale increased $12.2were
$294.0 million or 4.4% to $289.2 million or 80.0%78.0% of total assets at JuneSeptember 30, 2005, as compared
to $277.0 million, or 77.0% of total assets at December 31, 2004. Cash and
cash equivalents, including federal funds sold and overnight deposits,
decreased $1.2 millionincreased $45 thousand or 5.6%0.2% to $19.9$21.2 million at JuneSeptember 30, 2005, from
$21.1 million at December 31, 2004. Interest bearing deposits in banks
increased $4.6 million or 60.9% as the Company used investments in
certificates of deposit at other FDIC insured financial institutions to
manage investment rates and maturities.
Investment securities available-for-sale decreased from $41.0 million at
December 31, 2004, to $31.7$34.9 million at JuneSeptember 30, 2005, a $9.3$6.0 million,
or 22.6%14.7%, decrease. Securities maturing have not been replaced dollar for
dollar in order to invest in FDIC insured interest bearing deposits and to
fund loan demand anddemand. The decline in the balance of the investment portfolio also
reflects management's decision to currently hold in portfolio a portion of
loans held-for-sale.
Deposits decreased $3.9increased $11.3 million, or 1.3%3.7%, to $302.7$317.9 million at JuneSeptember 30,
2005, from $306.6 million at December 31, 2004. Noninterest bearing
accounts decreased $6.0 million, or 10.5%, from $57.2 million at December 31,
2004, which is partiallyto $51.2 million at September 30, 2005, due primarily to the launch of
the new deposit account products in 2005 and a seasonal
fluctuationresulting migration of deposit
dollars to interest bearing deposit products. In addition, certificates of
deposit increased $8.3 million or 9.0%, as depositors appear to be beginning
to take advantage of increasing deposit rates. (See average balances and
rates in the Yields Earned and Rates Paid tablestable on Pages 14 and 15) and partially a result of the ever increasing competition
for deposit
19
dollars as both credit unions and brokers/financial advisors
aggressively seek those same dollars.Page 16). Total borrowings
increased $5.9$5.6 million to $13.8$13.5 million at JuneSeptember 30, 2005, from $7.9
million at December 31, 2004, as Union Bank ("Union") took down four
amortizing advances to match fund four larger commercial real estate loans
originated.originated during the second quarter.
Total capital decreased from $42.4 million at December 31, 2004 to $41.1$41.5
million at JuneSeptember 30, 2005, reflecting net income of $2.83$4.32 million for
the first sixnine months of 2005, less the regular and special dividends paid
totaling approximately $4.0 million.$5.1 million and a reduction of $151 thousand in
accumulated other comprehensive income. (see Capital Resources section on
Page 30)31)
Loans Held for Sale and Loan Portfolios. The Company's total loans (which
includes loans held for sale
and loan portfoliossale) primarily consists of adjustable-rate and
fixed-rate mortgage loans secured by one-to-four family, multi-family
residential or commercial real estate. As of JuneSeptember 30, 2005, the
Company's grosstotal loan portfolio totaled $292.3was $297.2 million, or 80.9%,78.8% of assets,
up from $280.2 million or 77.9% of assets as of December 31, 2004, and from
$266.3$284.9 million or 77.4%79.1% of assets as of JuneSeptember 30, 2004. GrossTotal loans and loans held for sale have
increased $12.1$17.0 million or 4.3%6.1% since December 31, 2004. The Company sold
$3.2$3.9 million of loans held for sale during the secondthird quarter of 2005
resulting in a gain on sale of loans of $23$48 thousand for the quarter and sold
$13.6 million year to date resulting in a gain of $167 thousand. 20
The following table shows information on the composition of the Company's
gross loans held for sale and loan portfolio as of JuneSeptember 30, 2005 and December 31, 2004:
Loan Type JuneSeptember 30, 2005 December 31, 2004
- --------- ----------------------------------- -----------------
(dollars in thousands)
Residential real estate $108,192 37.0%$112,388 37.8% $106,526 38.0%
Construction real estate 19,912 6.8%18,743 6.3% 20,050 7.2%
Commercial real estate 112,632 38.5%116,297 39.2% 111,497 39.8%
Commercial 27,371 9.4%22,052 7.4% 19,979 7.1%
Consumer 8,253 2.8%8,003 2.7% 8,729 3.1%
Municipal loans 15,979 5.5%19,689 6.6% 13,454 4.8%
-------- ----- -------- -----
Total loans 292,339297,172 100.0% 280,235 100.0%
Deduct:
Allowance for loan losses (3,022)(3,023) (3,067)
Net deferred loan fees, premiums & discounts (156)(155) (166)
-------- --------
$289,161$293,994 $277,002
======== ========
The Company originates and sells some 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).
Management expects to continue to use this strategy in an effort to protect
the interest margin from the effect of making long-term loans in the low
long-term interest rate environment which has continued throughout the
secondthird quarter of 2005 despite the increases in the prime rate. The Company
services an $183.4a $206.4 million residential real estate mortgage portfolio,
approximately $79.8$80.4 million of which iswas serviced for unaffiliated third
parties at JuneSeptember 30, 2005. Additionally, the Company originates
commercial real estate and commercial loans under various SBA programs that
provide an agency guarantee for a portion of the loan amount. The Company
occasionally sells the guaranteed portion of the loan to other financial
concerns and will retain servicing rights, which generates fee income. The
Company serviced $5.3$4.4 million of commercial and commercial real estate loans
for unaffiliated third parties as of JuneSeptember 30, 2005. The Company
capitalizes servicing rights on these sales and recognizes gains and losses
on the sale of the principal portion of these loans as they occur. The
unamortized balance of servicing rights on loans sold with servicing
retained was $328$322 thousand at JuneSeptember 30, 2005, with an estimated market
value in excess of their carrying value.
In the ordinary course of business, the Company occasionally participates
out a portion of commercial/commercial real estate loans to other financial
institutions for liquidity or credit concentration management purposes. The
total of loans participated out as of JuneSeptember 30, 2005 was $7.0$7.4 million. 20
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 on a periodic basis and
reports to the Company's and the subsidiary's Boards of Directors at
regularly scheduled meetings.
The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, a loan review department supervised
by an experienced former regulatory examiner, low individual lending limits
for officers, Board approval for large credit relationships, and a quality
control process for loan documentation that includes post-closing reviews.
The Company also maintains a monitoring process for credit extensions. The
Company performs periodic concentration analyses based on various factors
such as industries, collateral types, large credit sizes, and officer
portfolio loads. The Company has established underwriting guidelines to be
followed by its officers. The Company monitors its delinquency levels for
any negative or adverse trends. The Company continues to invest in its loan
portfolio monitoring system to enhance its risk management capabilities.
There can be no assurance, however, the Company's loan portfolio will not
become subject to increasing pressures from deteriorating borrower credit
due to general or local economic conditions.
21
By definition restructured loans may include troubled debt restructurings
that involved forgiving a portion of interest or principal on a loan,
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 that the Company would not otherwise consider. Restructured
loans do not include qualifying restructured loans that have complied with
the terms of their restructure agreement for a satisfactory period of time.
The Company's restructured loans in compliance with modified terms totaled
$21 thousand at JuneSeptember 30, 2005, compared to $656 thousand at December
31, 2004. There arewere four restructured loans with principal balances
totaling $163$164 thousand that are not in compliance with the modified terms
as of JuneSeptember 30, 2005. These four loans are in nonaccrual status. At
December 31, 2004, there were three restructured loans at a value of $159
thousand that were not in compliance with the modified terms. The
restructured loans at both JuneSeptember 30, 2005, and December 31, 20052004, were
a result of rescheduling loan payments. At JuneSeptember 30, 2005, the Company
was not committed to lend any additional funds to borrowers whose terms
have been restructured.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. 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 $1.2$1.3 million, or 0.41%0.45%,
of gross loans at JuneSeptember 30, 2005, $1.2 million, or 0.43%, at December 31,
2004, and $1.7$1.6 million, or 0.65%0.57%, at JuneSeptember 30, 2004. The aggregate
interest income not recognized on such nonaccrual loans amounted to
approximately $232$249 thousand and $418$406 thousand as of JuneSeptember 30, 2005 and
2004, respectively and $338 thousand as of December 31, 2004.
The Company had $4.0$2.2 million and $4.1 million in loans past due 90 days or
more and still accruing at JuneSeptember 30, 2005, and December 31, 2004,
respectively. The balance in loans past due 90 days or more and still
accruing interest at both dates is primarily due to onethree commercial real
estate loan relationshiprelationships that management is monitoring closely. The liquid
assets and real estate collateralizing this loan relationship are
sufficient in management's view to mitigate credit risk. At
JuneSeptember 30, 2005, and December 31, 2004, respectively, the Company had
internally classified certain loans totaling $642 thousand$2.6 million and $1.6 million.
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, 21 loans are
internally classified when a review indicates any of the following
conditions makes the likelihood of collection uncertain:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
The difference between year end 2004 and September 30, 2005 is mainly due
to one large commercial real estate relationship which while well
collateralized is being monitored closely by management. This credit was past
due 90 days or more at December 31, 2004, was current as of September 2005
and is presently 30 days past due. The credit is well collateralized with
both real estate and marketable securities.
22
At JuneSeptember 30, 2005, the Company held real estate acquired by foreclosure
or through repossession worth $279$244 thousand, which consisted of one
property with open land as well as residential and commercial components, and a
second residential real estate property.components.
At December 31, 2004, the Company held one real estate property acquired by
foreclosure worth $35 thousand.
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 for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio; however, actual loan losses may vary from current
estimates.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the composition of the
portfolio, growth of the portfolio, credit concentrations, trends in
historical loss experience, delinquency and past due trends, specific
impaired loans, and economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net of
recoveries on loans previously charged off. The provision for loan losses
represents the current period credit cost associated with maintaining an
appropriate allowance for loan losses. 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. Based on an
evaluation of the loan portfolio, management presents a quarterly analysis
of the allowance for loan losses to the Board of Directors, indicating any
changes in the allowance since the last review and any recommendations as
to adjustments in the allowance.
For the quarter ended JuneSeptember 30, 2005, the methodology used to determine
the provision for loan losses was unchanged from the prior year. The
composition of the Company's loan portfolio remained relatively unchanged
from December 31, 2004, and there was no material change in the lending
programs or terms during the quarter.
22
The following table reflects activity in the allowance for loan losses for
the three and nine months ended JuneSeptember 30, 2005 and 2004:
Three Months Ended, June 30, SixNine Months Ended,
JuneSeptember 30, ---------------------------- -------------------------September 30,
------------------- ------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars in thousands)
Balance at beginning of period $3,068 $3,019$3,022 $3,023 $3,067 $3,029
Charge-offs:
Real Estate 25 8- 3 28 3437
Commercial 6 13 -19 13 -
Consumer and other 17 1 35 5 20 40 25
------ ------ ------ ------
Total charge-offs 55 9 76 3911 36 87 75
------ ------ ------ ------
Recoveries:
Real Estate 1 - - 1213 -
Commercial 1 2 1 566 3 71
Consumer and other 8 11 18 289 10 27 38
------ ------ ------ ------
Total recoveries 9 13 31 3312 76 43 109
------ ------ ------ ------
Net recoveries (charge-offs) (46) 4 (45) (6)1 40 (44) 34
------ ------ ------ ------
Provision for loan losses - 30 - - -30
------ ------ ------ ------
Balance at end of period $3,022 $3,023 $3,022$3,093 $3,023 $3,093
====== ====== ====== ======
23
The following table shows the breakdown of the Company's allowance for loan
losses 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
the dates indicated.indicated:
JuneSeptember 30, December 31,
2005 2004
----------------- -----------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 518 31.6%550 32.2% $ 553 32.8%
Commercial 1,570 41.8%1,729 42.5% 1,733 42.5%
Construction 199 7.0%187 6.5% 199 7.3%
Home equity loans 3435 1.6% 32 1.6%
Other Loans
Commercial 514 9.6%360 7.6% 349 7.5%
Consumer installment 126 2.9%2.8% 138 3.3%
Municipal, Other and
Unallocated 61 5.6%36 6.8% 63 5.0%
------ ----- ------ -----
Total $3,022$3,023 100.0% $3,067 100.0%
====== ===== ====== =====
Ratio of Net Charge Offs to
Average Loans not held
for sale (1) 0.03%0.02% 0.00%
===== ========= ====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.10%1.02% 1.13%
===== ========= ====
Annualized
Management of the Company believes that the allowance for loan losses at
JuneSeptember 30, 2005, is adequate to cover losses inherent in the Company's
loan portfolio as of such date. However there can be no assurance that the
Company will not sustain losses in future periods, which could be greater
than the size of the allowance for loan losses at JuneSeptember 30, 2005. See
CRITICAL ACCOUNTING POLICIES. 23 While the Company recognizes that any
economic slowdown may adversely impact its borrowers' financial performance
and ultimately their ability to repay their loans, management continues to
be cautiously optimistic about the key credit indicators from the Company's
loan portfolio.
Investment Activities. At JuneSeptember 30, 2005, the reported value of
investment securities available-for-sale was $31.7$34.9 million or 8.8%9.3% of its
assets. The Company had no securities classified as held-to-maturity or
trading. The reported value of investment securities available-for-sale at
JuneSeptember 30, 2005, reflects a positive valuation adjustment of $317$342
thousand. The offset of this adjustment, net of income tax effect, was $209$226
thousand reflected in the Company's other comprehensive income component of
stockholders' equity.equity at September 30, 2005.
The amount in investmentInvestment securities available-for-sale has decreased from
$41.0 million at December 31, 2004, to $31.7$34.9 million at JuneSeptember 30, 2005,
as loan demand has remained strong and securities maturing, called or
paying down have not been replaced.replaced dollar for dollar. Union also sold $2
million of securities year to date to clean up small remaining balances on
mortgage backed securities.
At December 31, 2004, the Company had only one adjustable rate mortgage
backed security with a fair value of $29 thousand with an unrealized loss
of less than $1 thousand that had existed for more than 12 months. That
security was sold along with the small remaining balances of nine other
mortgage backed securities in May of 2005 for a net gain on the 10
securities of $1 thousand.
At JuneSeptember 30, 2005, twenty-onetwenty-two securities with a fair value of $9.1$8.8
million or 28.7%25.2% of the portfolio have been in a loss position for more
than twelve months with unrealized losses totaling $119$160 thousand. The
primary factor causing these unrealized losses is the change in the
interest rate environment over the 24
past year especially in the near-term market. Management deems the unrealized
losses on all these securities to be temporary since there are no credit
quality issues and the Company has the ability to hold these securities,
classified as available-for-sale, for the foreseeable future.
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 periods ending JuneSeptember
30, 2005, and December 31, 2004:
SixNine Months Ended, JuneSeptember 30, Year Ended December 31,
2005 2004
-------------------------- ------------------------------------------------------- -------------------------------
(dollars in thousands)
Percent Percent
Average Of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
--------------- -------- ------- --------------- -------- -------
Non-time deposits:
Demand deposits $ 50,050 16.6%49,526 16.2% $ 49,638 16.6%
NOW accounts 47,906 15.9% 0.48%49,903 16.3% 0.49% 45,619 15.2% 0.41%
Money Markets 60,710 20.2% 1.31%59,590 19.5% 1.46% 64,668 21.6% 0.87%
Savings 49,146 16.3% 0.57%50,543 16.6% 0.70% 47,225 15.7% 0.58%
-------- ----- -------- -----
Total non-time deposits: 207,812 69.0%209,562 68.6% 207,150 69.1%
-------- ----- -------- -----
Time deposits:
Less than $100,000 62,788 20.8% 2.07%62,345 20.4% 2.13% 65,663 21.9% 2.00%
$100,000 and over 30,607 10.2% 2.60%33,610 11.0% 2.78% 26,993 9.0% 2.28%
-------- ----- -------- -----
Total time deposits 93,395 31.0%95,955 31.4% 92,656 30.9%
-------- ----- -------- -----
Total deposits $301,207$305,517 100.0% 1.13%1.22% $299,806 100.0% 0.98%
======== ===== ==== ======== ===== ====
24
The following table sets forth information regarding the amounts of the Company's time
deposits in amounts of $100,000 or more at JuneSeptember 30, 2005, and
December 31, 2004, that mature during the periods indicated:
JuneSeptember 30, 2005 December 31, 2004
------------------------------- -----------------
(dollars in thousands)
Within 3 months $15,987$16,052 $ 8,149
3 to 6 months 6,5363,637 11,717
6 to 12 months 3,52918,423 6,298
Over 12 months 2,7522,883 3,160
------- -------
$28,804$40,995 $29,324
======= =======
The increase in total time deposits over $100,000 between periods is
mainly due to the local municipal deposits resulting from concentrated
efforts to develop that market and the deposits received for funding of
the construction of a local elementary school. The near term maturity of
these municipal deposits is tied to their fiscal year and state funding
requirements and is consistent year to year.
Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB)
were $13.8$13.5 million at JuneSeptember 30, 2005, at a weighted average rate of
4.54%. Borrowings from the FHLB of Boston were $7.9 million at December 31,
2004, at a weighted average rate of 4.09%. The change between year end 2004
and the end of the secondthird quarter of 2005 is a net increase of $5.9$5.6 million
which was comprised of borrowing $7.9 million in long term amortizing
advances to match fund new loans offset by $500$800 thousand in continuing
paydowns on existing long-term amortizing advances and a $1.5 million payoff
of a short-term liquidity advance. 25
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 and deposit taking
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 and deposits;
the level of interest rates earned on assets and paid for liabilities; and
interest rates charged on loans and paid on deposits. The nature and impact
of future changes in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as
to the level of risk assumed by the Company in its balance sheet. The Board
of Directors reviews and approves risk management policies, including risk
limits and guidelines and reviews quarterly the current position in
relationship to those limits and guidelines. Daily oversight functions are
delegated to the Asset Liability Management Committee ("ALCO"). The ALCO,
consisting of senior business and finance officers, actively measures,
monitors, controls and manages the interest rate risk exposure that can
significantly impact the Company's financial position and operating
results. The Company does not have any market risk sensitive instruments
acquired for trading purposes. The Company attempts to structure its
balance sheet to maximize net interest income and shareholder value while
controlling its exposure to interest rate risk. The ALCO formulates
strategies to manage interest rate risk by evaluating the impact on
earnings and capital of such factors as current interest rate forecasts and
economic indicators, potential changes in such forecasts and indicators,
liquidity, and various business strategies. The ALCO's methods for
evaluating interest rate risk include an analysis of the Company's
interest-rate sensitivity "gap", which provides a static analysis of the
maturity and repricing characteristics of the Company's entire balance
sheet, and a simulation analysis, which calculates projected net interest
income based on alternative balance sheet and interest rate scenarios,
including "rate shock" scenarios involving immediate substantial increases
or decreases in market rates of interest.
25
The Company's ALCO meets 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. As of JuneSeptember 30,
2005, the investment portfolio was all classified as available-for-sale and
the modified duration was relatively short. The Company does not utilize
any derivative products or invest in any "high risk" instruments.
The Company's interest rate sensitivity analysis (simulation) as of
December 2004 for a 75150 basis point increase in the rate environment in 25
basis point increments (prime(Prime at December 31, 2004, was 5.25% and was 6.25%6.75%
on JuneSeptember 30, 2005 but the 25 basis point move happened on the thirtieth of
June so there would have been no impact until the July 2005), projected the following for the sixnine months ended
JuneSeptember 30, 2005, compared to the actual results of:results:
26
JuneSeptember 30, 2005
-------------------------------------------------------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(dollars in thousands)
Net Interest Income $9,034 $8,607 (4.73)%$14,026 $13,121 (6.5%)
Net Income $2,957 $2,828 (4.36)%$ 4,764 $ 4,322 (9.3%)
Return on Assets 1.68%1.77% 1.60% (4.76)%(9.6%)
Return on Equity 14.19% 13.89% (2.11)%14.91% 14.12% (5.3%)
One of the reasons for the actual results being lower than projected is
that the simulation model assumed the six 25 basis point increases in prime
would happen on the first of each month February and March 1st,through July, respectively
while they actually happened on February 2nd, March 22nd, May 3rd, June 30th
August 9th and May 3rd.September 20th. Another reason for the lower actual results is
a flattening of the yield curve over the last nine months which was not
built into the model assumptions in December of 2004.
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 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 these instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of JuneSeptember 30, 2005, and
December 31, 2004, the contract or notional amount of financial instruments
whose contract or notional amount represents credit risk was as follows:
JuneSeptember 30, 2005 December 31, 2004
------------------------------- -----------------
(dollars in thousands)
Commitments to originate loans $16,402$24,189 $13,773
Unused lines of credit 26,70130,592 31,908
Standby letters of credit 826885 1,004
Credit Card arrangements 2,2852,298 2,273
Equity investment commitments to
housing limited partnerships 453748 1,349
------- -------
Total $46,671$58,712 $50,307
======= =======
26The increase in commitments to originate loans was influenced in part by
strong loan demand in the Company's market, and continued consolidation in
the banking industry, which has given Union Bank the opportunity to establish
relationships with customers that choose to do business with community banks.
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 or other termination
clauses and may require payment of a fee. Since many of the loan
commitments are expected to expire without being drawn upon and not all
credit lines will be utilized, the total commitment amounts do not
necessarily represent future cash requirements.
27
The Company's contractual obligations at JuneSeptember 30, 2005, and December
31, 2004, were as follows:
JuneSeptember 30, 2005 December 31, 2004
------------------------------- -----------------
(dollars in thousands)
Operating lease commitments $ 297267 $ 329
Maturities on borrowed funds 13,80313,539 7,933
Deposits without stated maturity (1) 211,365217,420 214,402
Certificates of deposit (1) 91,317100,486 92,196
Pension plan contributions (2) 402356 475
Deferred compensation payouts 736729 927
Construction contract (3) 597 -
Equity investment commitments in
housing limited partnerships 748 -
-------- --------
Total $318,668$334,142 $316,262
======== ========
- --------------------
While the Company has a contractual obligation to depositors should
they wish to withdraw all or some of the funds on deposit with the
Bank subsidiary, management believes, based on historical analysis,
that the majority of these deposits will remain on deposit for the
foreseeable future. The amounts exclude interest accrued.
Funding requirements for pension benefits after 2005 are excluded due
to the significant variability in the assumptions required to project
the amount and timing of future cash contributions.
Contract to construct a new branch in Littleton, New Hampshire.
The Company's subsidiary is also required to maintain cash on hand or
balances in a noninterest-bearing reserve balance byaccount at the Federal Reserve Bank of
Boston which was $413 thousand at September 30, 2005, and $6.3 million at
December 31, 2004. Beginning on July 26, 2005, Union began reclassifying
transaction deposit accounts that meet certain criteria to savings accounts,
in accordance with Federal Reserve banking regulations, for the purpose of
reporting deposits subject to reserves to the Federal Reserve Bank of
Boston. The requiredThis reclassification has reduced Union's daily reserve has not materially changed since December 31, 2004.requirement
by approximately $4 million.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates,
a negative gap would tend to result in an increase in net interest income,
while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market interest
rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by
scheduling interest-earning assets and interest-bearing liabilities into
periods based upon the next date on which such assets and liabilities could
mature or reprice. The amounts of assets and liabilities shown within a
particular period were determined in accordance with the contractual terms
of the assets and liabilities, except that:
* adjustable-rate loans, investment securities, variable rate time
deposits, and FHLB advances are included in the period when they are
first scheduled to adjust and not in the period in which they mature;
* fixed-rate mortgage-related securities, loans and borrowed funds
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; and
2728
* NOW, money markets, and savings deposits, which do not have
contractual maturities, reflect estimated levels of attrition, which
are based on detailed studies by the Company of the sensitivity of
each such category of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience
and considers them reasonable. However, the interest rate sensitivity of
the Company's assets and liabilities in the tables could vary substantially
if different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
The following table shows the Company's rate sensitivity analysis as of
JuneSeptember 30, 2005:
JuneSeptember 30, 2005
Cumulative repriced within
-------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years 5 Years Total
-------- ------- ------ ------ ------------- -----
(dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 3,948 - - -8,628 $ - $ 3,948- $ - $ - $ 8,628
Interest bearing deposits in banks 199 2,170 2,8623,877 2,686 4,435 885 99 6,215
Investments196 12,079
Investment securities available-for-
saleavailable-for-sale (1) 2,355 4,845 9,218 7,362 6,692 30,4724,583 3,574 12,675 5,998 6,770 33,600
FHLB Stock - - - - 1,241 1,241
Loans and loans held for sale (2) 116,971 67,705 62,162 30,868 14,477 292,183118,898 65,457 63,595 34,816 14,251 297,017
-------- ------- -------- -------- ----------------- --------
Total interest sensitive assets $123,473 $74,720$135,986 $71,717 $ 74,24280,705 $ 39,11541,699 $ 22,509 $334,059
======== ======= ======== ======== ========= ========22,458 $352,565
Interest sensitive liabilities:
Time deposits $ 32,444 $36,39326,473 $51,652 $ 20,01919,742 $ 2,4612,618 $ - $ 91,317$100,485
Money markets 11,54813,617 - - - 46,508 58,05644,314 57,931
Regular savings 11,14614,410 - - - 42,999 54,14538,437 52,847
NOW accounts 22,63432,046 - - - 30,587 53,22123,407 55,453
Borrowed funds 273 2,431 3,701 1,414 5,984 13,803283 2,345 3,847 1,496 5,568 13,539
-------- ------- -------- -------- ----------------- --------
Total interest sensitive liabilities $ 78,045 $38,82486,829 $53,997 $ 23,72023,589 $ 3,875 $ 126,078 270,542
======== ======= ======== ======== ========= ========4,114 $111,726 $280,255
Net interest rate sensitivity gap $ 45,428 $35,89649,157 $17,720 $ 50,52257,116 $ 35,240 $(103,569) $ 63,51737,585 ($89,268) $72,310
Cumulative net interest rate
sensitivity gap $ 45,428 $81,324 $131,846 $167,08649,157 $66,877 $123,993 $161,578 $ 63,51772,310
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 12.6% 22.5% 36.5% 46.2% 17.6%13.0% 17.7% 32.9% 42.9% 19.2%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive assets 13.6% 24.3% 39.5% 50.0%13.9% 19.0% 35.2% 45.8% 20.5%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive liabilities 16.8% 30.1% 48.7% 61.8% 23.5%17.5% 23.9% 44.2% 57.7% 25.8%
Investment securities available-for-sale exclude marketable equity
securities with a fair value of $1.2$1.3 million that may be sold by the
Company at any time.
Balances shown net of unearned income of $156$155 thousand.
2829
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 and 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 cumulative results of the latest
simulation analysis for the next twelve months on Net Interest Income, Net
Income, Return on Assets, Return on Equity and Net Fair Value Ratio. The
projection utilizes a rate shock of up 300 basis points and down 200300 basis points from the
current prime rate of 6.25%6.75%, this risethat is applied proportionately, these are the
highest internal slope monitored andmonitored. Since interest rates paid on interest
bearing deposits have not risen as quickly as rates earned on interest
earning assets, a rate shock of down 200 or 300 basis points was chosen as withwill only bring
the current relatively low level of interest rates on those lower rate deposits down to a floor rate which has been
set by the potential for interest-
bearing deposit accounts to respond to further drops in projected rates is
limited, therefore calculations for rate decreases greater than 200 basis
points could have been misleading.Company. This slope range was determined to be the most relevant
during this economic cycle.
UNION BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
JUNESEPTEMBER 30, 2005
(in thousands)
- -----------------------------------------------------------------------------
Return Return
on on Net Fair
12 Months Prime Net Interest Change Net Assets Equity Value
Ending Rate Income % Income % % Ratio
- --------- ----- ------------ ------ ------ ------ ------ --------
June-06 9.25% $21,223 16.82 $7,841 2.20 18.54 17.12
6.25% 18,166 0.00 5,765 1.54 13.35 17.37
4.25 16,050 (11.65) 4,328 1.07 9.51 17.22September-06 9.75% $21,730 16.3 $8,187 2.22 19.43 9.28%
6.75% $18,681 - $6,094 1.61 14.40 11.01%
3.75% $15,520 (16.9) $3,924 0.96 8.86 12.77%
The resulting projected cumulative effect of these estimates on Net
Interest Income and the Net Fair Value Ratio for the twelve month period
ending JuneSeptember 30, 2006, are within the approved ALCO guidelines. The
simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk.
Liquidity. Managing liquidity risk is essential to maintaining both
depositor confidence and stability in earnings. Liquidity is a measurement
of the Company's ability to meet potential cash requirements, including
ongoing commitments to fund deposit withdrawals, repay borrowings, fund
investment and lending activities, and for other general business purposes.
The Company's principal sources of funds are deposits, amortization and
prepayment of loans and securities, maturities of investment securities and
other short-term investments, sales of securities and loans available-for-
sale, earnings and funds provided from operations. Maintaining a relatively
stable funding base, which is achieved by diversifying funding sources,
competitively pricing deposit products, and extending the contractual
maturity of liabilities, reduces the Company's exposure to roll overrollover 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 29
sizable source of
relatively stable and low-cost funds. For the quarter ended, JuneSeptember 30,
2005, the Company's ratio of average loans to average deposits was 94.0%94.3%
compared to the prior year of 90.6%91.3%. The increase in the loan to deposit
ratio between years was mainly funded by the decrease in Investment Securitiesinvestment
30
securities available-for-sale and Due From Banks.cash and due from banks as well as Federal
Home Loan Bank (FHLB) of Boston advances.
In addition, as Union Bank is a member of the FHLBFederal Home Loan Bank
of Boston, it has access to unused pre-approved lines of credit of $3.8$4.1
million or 1.1% of total assets. Union Bank maintains a $5 million pre-approvedpre-
approved Federal Fund line of credit with an upstream correspondent bank
and a repurchase agreement line with a selected brokerage house, there were
no balances outstanding on either line at JuneSeptember 30, 2005.
While scheduled loan and securities payments and FHLB advances are
relatively predictable sources of funds, deposit flows and prepayments on
loans and mortgage-backed securities are greatly influenced by general
interest rates, economic conditions, and competition. The Company's
liquidity is actively managed on a daily basis, monitored by the ALCO, and
reviewed periodically with the subsidiary's Board of Directors. The
Company's ALCO sets liquidity targets based on the Company's financial
condition and existing and projected economic and market conditions. The
ALCO measures the Company's marketable assets and credit facilities
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 commitment to its depositors, to fund
loan commitments and unused lines of credit, and to maintain a portfolio of
investment securities.
The Company's management monitors current and projected cash flows and
adjusts positions as necessary to maintain adequate levels of liquidity.
Although approximately 74.7%76.7% of the Company's time deposits will mature
within twelve months, management believes, based upon past experience, the
relationships developed with local municipalities, and the introduction of
new deposit products in 2005, that Union Bank will retain a substantial
portion of these deposits. Management will continue to offer a competitive
but prudent pricing strategy to facilitate retention of such deposits. Any
reduction in total deposits could be offset by purchases of federal funds,
short-term FHLB of Boston borrowings, utilization of the repurchase
agreement line, or liquidation of investment securities, purchased brokerage
certificates of deposit, or loans available-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 flows are subject to substantial uncertainty. WeManagement continually
evaluateevaluates opportunities to buy/sell securities and loans available-for-sale,
obtain credit facilities from lenders, or restructure our debt for
strategic reasons or to further strengthen our financial position.
Capital Resources. Capital management is designed to maintain an optimum
level of capital in a cost-effective structure that meets target regulatory
ratios; supports the internal assessment of economic capital; funds the
Company's business strategies; and builds long-term stockholder value.
The total dollar value of the Company's stockholders' equity was $41.1$41.5
million at JuneSeptember 30, 2005, reflecting net income of $2.8$4.3 million for
the first sixnine months of 2005, less cash dividends paid of $4.0$5.1 million, and
a reduction of $168$151 thousand in Accumulated Other Comprehensive Incomeaccumulated other comprehensive income
compared to $42.4 million at year end 2004. The reduction in the capital
between December 31, 2004, and JuneSeptember 30, 2005, was primarily a result
of the special dividend of $0.40 per share that was paid in January 2005
totaling $1.8 million, which was in addition to the regular dividends of
$0.24, or $1.1 million each, that were paid in January, April, and AprilJuly of
2005. The special dividend was declared as the Company's primary capital
ratio on December 31, 2004, approached 12%, 2004 earnings were better than
anticipated, and the current tax treatment of dividends is beneficial to
shareholders.
Union Bankshares, Inc. has 5 million shares of $2.00 par value common stock
authorized. As of JuneSeptember 30, 2005, the Company had 4,915,611 shares
issued, of which 4,554,663 were outstanding and 360,948 were held in
Treasury.
31
As of JuneSeptember 30, 2005, there were outstanding employee incentive stock
options with respect to 12,575 shares of the Company's common stock,
granted pursuant to Union Bankshare's 1998 Incentive Stock 30
Option Plan. All theAs
of such date all outstanding options outstanding arewere currently exercisable but only
6,325 of those shares arewere "in the money". Of the 75,000 shares authorized
for issuance under the 1998 Plan, 51,950 shares remain available for future
option grants. During the secondthird quarter of 2005, no incentive stock options
granted pursuant to the 1998 plan were exercised.exercised, but 3,000 shares have
been exercised so far in the fourth quarter of 2005.
Union Bankshares, Inc. and Union Bank Inc. are subject to various regulatory
capital requirements administered by the federal banking agencies.
Management believes, as of JuneSeptember 30, 2005, that both companies meet all
capital adequacy requirements to which they are subject. As of JuneSeptember
30, 2005, the most recent calculation categorizes Union Bank as well
capitalized under the regulatory framework for prompt corrective action.
The prompt corrective action capital category framework applies to FDIC
insured depository institutions such as Union but does not apply directly
to bank holding companies such as the Company. To be categorized as well
capitalized, Union Bank 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 JuneSeptember 30, 2005, that management
believes have changed either companies'company's category.
Union Bank's and the Company's actual capital amounts and ratios as of
JuneSeptember 30, 2005, are presented in the table:
Minimums
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions
---------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
Total capital to risk weighted assets
Union Bank $43,663 17.6% $19,847$44,101 17.2% $20,498 8.0% $11,277$25,622 10.0%
Company 44,040 17.7% 19,905$44,489 17.3% $20,544 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $40,468 16.3% $ 9,931$40,857 15.9% $10,249 4.0% $14,896$15,373 6.0%
Company 40,845 16.4% 9,962$41.245 16.1% $10,272 4.0% N/A N/A
Tier I capital to average assets
Union Bank $40,468 11.4% $14,199$40,857 11.0% $14,877 4.0% $17,749$18,596 5.0%
Company 40,845 11.5% 14,207$41,245 11.1% $14,911 4.0% N/A N/A
Regulatory Matters. The Company and its subsidiary bankUnion 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 2004 the Vermont State Department of Banking, the
Federal Deposit Insurance Corporation, and the Federal Reserve Bank of
Boston performed various examinations of the Company and Union pursuant to
their regular, periodic regulatory reviews. No comments were received from
these various bodies that would have a material adverse effect on eitherthe
Company's or Union's liquidity, capital resources, or operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information called for by this item is incorporated by reference in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "OTHER FINANCIAL CONSIDERATIONS" on pages 2526
through 3132 in this Form 10-Q.
3132
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange
Act) as of the report date and concluded that those disclosure controls and
procedures are effective in alerting them in a timely manner to material
information about the Company and its consolidated subsidiary required to
be disclosed in the Company's periodic reports filed with the Securities
and Exchange Commission.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation. While the Company believes that its
existing disclosure controls and procedures have been effective to
accomplish these objectives, the Company intends to continue to examine,
refine and formalize its disclosure controls and procedures and to monitor
ongoing developments in this area.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There are no known pending legal proceedings to which the Company or its
subsidiary is a party, or to which any of their properties is subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, any
such liability will not have a material effect on the consolidated
financial position of the Company and its subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 18, 2005. Of
4,554,663 shares outstanding on the record date of the meeting (April 1,
2005), 3,818,008 shares were represented in person or by proxy. The only
matter voted on by the shareholders at the meeting was to fix the number of
directors at eight and to elect the following individuals as directors for
the ensuing year. The Board of Directors nominated businessman and former
bank executive Steven J. Bourgeois to fill the vacancy created by the
retirement of William T. Costa, Jr. who had reached the mandatory
retirement age.
Votes Votes Votes Broker
Nominees For Withheld Abstained Non-votes
----- -------- --------- ---------
Cynthia D. Borck 3,815,889 600 1,519 -
Steven J. Bourgeois 3,807,739 8,750 1,519 -
Kenneth D. Gibbons 3,807,439 9,050 1,519 -
Franklin G. Hovey, II 3,815,564 925 1,519 -
Richard C. Marron 3,812,889 3,600 1,519 -
Robert P. Rollins 3,813,111 3,378 1,519 -
Richard C. Sargent 3,804,736 11,753 1,519 -
John H. Steel 3,816,489 - 1,519 -
32
Item 6. Exhibits.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AugustNovember 11, 2005 Union Bankshares, Inc.
/s/ Kenneth D. Gibbons
-----------------------------------------------------------
Kenneth D. Gibbons
Director, President and Chief Executive
Officer
/s/ Marsha A. Mongeon
----------------------------------------------------------
Marsha A. Mongeon
Chief Financial Officer and Treasurer
(Principal Financial Officer) 33
EXHIBIT INDEX
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
33
34