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: March 31, 2006
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 a large accelerated filer,
an accelerated filer or a non-accelerated filer. (See definition of
"accelerated filer and large accelerated filer", in Rule 12b-2 of the
Exchange Act). (Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by 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 May 1, 2006:
Common Stock, $2 par value 4,540,837 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I 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. 30
Item 4. Controls and Procedures. 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 31
Item 1A. Risk Factors. 31
Item 2. Unregistered Sales of Securities and use of Proceeds. 31
Item 6. Exhibits. 32
Signatures 32
2
Part l Financial Information
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2006 2005
---- ----
(Dollars in thousands)
Assets
Cash and due from banks $ 10,909 $ 14,019
Federal funds sold and overnight deposits 1 189
-------- --------
Cash and cash equivalents 10,910 14,208
Interest bearing deposits in banks 7,299 8,598
Investment securities available-for-sale 30,386 32,408
Loans held for sale 1,791 6,546
Loans 309,217 300,677
Allowance for loan losses (3,147) (3,071)
Unearned net loan fees (139) (152)
-------- --------
Net loans 305,931 297,454
-------- --------
Accrued interest receivable 1,814 1,972
Premises and equipment, net 6,108 5,898
Other assets 7,726 7,662
-------- --------
Total assets $371,965 $374,746
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 47,817 $ 52,617
Interest bearing 262,277 260,682
-------- --------
Total deposits 310,094 313,299
Borrowed funds 15,877 16,256
Accrued interest and other liabilities 4,207 3,588
-------- --------
Total liabilities 330,178 333,143
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued at 3/31/06 and 12/31/05 9,837 9,837
Paid-in capital 142 140
Retained earnings 34,053 33,761
Treasury stock at cost; 377,774 shares at 3/31/06 and 375,948
at 12/31/05 (2,077) (2,037)
Accumulated other comprehensive loss (168) (98)
-------- --------
Total stockholders' equity 41,787 41,603
-------- --------
Total liabilities and stockholders' equity $371,965 $374,746
======== ========
See accompanying notes to the unaudited consolidated financial statements
3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2006 2005
---- ----
(Dollars in thousands
except Per Share Data)
Interest income
Interest and fees on loans $ 5,451 $ 4,639
Interest on debt securities
Taxable 298 349
Tax exempt 49 53
Dividends 23 19
Interest on federal funds sold and overnight deposits 26 13
Interest on interest bearing deposits in banks 79 59
--------- ---------
Total interest income 5,926 5,132
--------- ---------
Interest expense
Interest on deposits 1,240 765
Interest on borrowed funds 207 94
--------- ---------
Total interest expense 1,447 859
--------- ---------
Net interest income 4,479 4,273
Provision for loan losses 45 -
Net interest income after provision for loan losses 4,434 4,273
Noninterest income
Trust income 71 65
Service fees 706 674
Net gains on sales of investment securities 3 -
Net gains on sales of loans held for sale 92 96
Other income 74 50
--------- ---------
Total noninterest income 946 885
--------- ---------
Noninterest expenses
Salaries and wages 1,494 1,377
Pension and employee benefits 577 515
Occupancy expense, net 203 204
Equipment expense 256 268
Other expenses 867 817
--------- ---------
Total noninterest expense 3,397 3,181
--------- ---------
Income before provision for income taxes 1,983 1,977
Provision for income taxes 510 582
--------- ---------
Net income $ 1,473 $ 1,395
========= =========
Earnings per common share $ 0.32 $ 0.31
========= =========
Weighted average number of common
shares outstanding 4,541,507 4,554,663
========= =========
Dividends per common share $ 0.26 $ 0.64
========= =========
See accompaning notes to the unaudited consolidated financial statements
4
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
------------------ Accumulated
Shares, other Total
net of Paid-in Retained Treasury comprehensive stockholders'
Treasury Amount capital earnings stock loss equity
-------- ------ ------- -------- -------- ------------- -------------
(Dollars in Thousands)
Balances, December 31, 2005 4,542,663 $9,837 $140 $33,761 $(2,037) $ (98) $41,603
Comprehensive income:
Net income - - - 1,473 - - 1,473
Change in net unrealized loss on
investment securities available-for-sale,
net of reclassification adjustment and
tax effects - - - - - (70) (70)
Total comprehensive income - - - - - - 1,403
Cash dividends declared
($0.26 per share) - - - (1,181) - - (1,181)
Issuance of stock options - - 2 - - - 2
Purchase of treasury stock (1,826) - - - (40) - (40)
--------- ------ ---- ------- ------- ----- -------
Balances, March 31, 2006 4,540,837 $9,837 $142 $34,053 $(2,077) $(168) $41,787
========= ====== ==== ======= ======= ===== =======
See accompanying notes to the unaudited consolidated financial statements
5
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
----------------------
March 31, March 31,
2006 2005
---- ----
(Dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 1,473 $ 1,395
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 184 198
Provision for loan losses 45 -
Provision for deferred income taxes 53 -
Net amortization on investment securities 22 45
Equity in losses of limited partnerships 110 40
Issuance of stock options 2 -
Decrease in unamortized loan fees (14) (8)
Proceeds from sales of loans held for sale 6,802 6,642
Origination of loans held for sale (1,954) (3,488)
Net gain on sales of investment securities (3) -
Net gain on sales of loans held for sale (92) (96)
Net gain on disposals of premises and equipment (7) (1)
Decrease (increase) in accrued interest receivable 158 (103)
Decrease in other assets 9 93
Increase in income taxes 382 382
Increase in accrued interest payable 148 60
Increase in other liabilities 89 442
------- -------
Net cash provided by operating activities 7,407 5,601
------- -------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 1,299 693
Purchases - (92)
Investment securities available-for-sale
Sales 455 1,437
Maturities, calls and paydowns 1,441 2,248
Purchases - (999)
Purchase of Federal Home Loan Bank Stock (199) -
Increase in loans, net (8,550) (724)
Recoveries of loans charged off 40 22
Purchases of premises and equipment (394) (354)
Investments in limited partnerships - (142)
6
Three Months Ended
----------------------
March 31, March 31,
2006 2005
---- ----
(Dollars in thousands)
Proceeds from sales of premises and equipment 8 1
Net cash (used in) provided by investing activities (5,900) 2,090
------- -------
Cash Flows From Financing Activities
(Decrease) increase in borrowings outstanding, net (379) 1,521
Net decrease in non-interest bearing deposits (4,800) (4,154)
Net increase (decrease) in interest bearing deposits 1,595 (4,058)
Purchase of treasury stock (40) -
Dividends paid (1,181) (2,915)
------- -------
Net cash used in financing activities (4,805) (9,606)
------- -------
Decrease in cash and cash equivalents (3,298) (1,915)
Cash and cash equivalents
Beginning 14,208 21,117
------- -------
Ending $10,910 $19,202
======= =======
Supplemental Disclosures of Cash Flow Information
Interest paid $ 1,299 $ 799
======= =======
Income taxes paid $ 75 $ 200
======= =======
Supplemental Schedule of Noncash Investing and
Financing Activities
Investment in limited partnerships acquired by capital
contributions payable - $ 748
======= =======
Change in unrealized losses on investment
securities available-for-sale $ (107) $ (406)
======= =======
See accompanying notes to the unaudited consolidated financial statements
7
UNION BANKSHARES, INC. AND SUBSIDIARY
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 March
31, 2006 and 2005, 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, 2005. In the opinion of the
Company's management, all adjustments, consisting only of normal recurring
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 2005 Annual Report to Shareholders,
2005 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, 2006, or any other interim period.
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform to the 2006 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, 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.
Note 4. New Accounting Pronouncements
On March 17, 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 156, Accounting for
Servicing of Financial Assets, an amendment of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. The Statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. It requires all separately
recognized servicing assets and liabilities to be initially measured at
fair value, if practicable. It permits an entity to choose either the
amortization method or the fair value measurement method for each class of
separately recognized servicing assets and liabilities and requires
additional disclosures in the financial statements under the fair value
measurement method. SFAS No. 156 is effective for fiscal years beginning
after September 15, 2006, with early adoption permitted. The Company does
not believe the adoption of SFAS No. 156 will have a material impact on the
Company's financial position or results of operations but is still in the
process of analyzing that impact.
Note 5. Stock Option Plan
In December 2005 the Company adopted SFAS No. 123R Share Based Payment
using the modified prospective application. Under SFAS 123R, the Company
must recognize as compensation expense the grant date fair value of stock-
based awards over the vesting period of the awards. Prior to the adoption
of SFAS No. 123R the Company accounted for its stock option plan in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees as allowed under SFAS No. 123 Accounting for Stock-
Based Compensation. Under APB Opinion No. 25, the Company provided pro
forma net income disclosures for employee stock-based awards granted on or
after January 1, 1995 as if the fair value based method defined in SFAS No.
123 had been applied.
8
Had compensation cost been determined on the basis of fair value pursuant
to SFAS No. 123R, the effects on net income and earnings per common share
for the quarter ended March 31, 2005 would have been:
2005
----
Net income as reported $1,395
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax effects -
------
Pro forma net income $1,395
======
Earnings per common share
As reported $0.31
Pro forma $0.31
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 month period ended March
31, 2006 and 2005 consisted of the following components:
2006 2005
---- ----
(Dollars in thousands)
Service cost $ 110 $ 116
Interest cost on projected benefit obligation 131 121
Expected return on plan assets (124) (107)
Amortization of prior service cost 1 2
Amortization of net loss 21 15
----- -----
Net periodic benefit cost $ 139 $ 147
===== =====
Note 7. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the
three month periods ended March 31, 2006 and 2005 are as follows:
2006 2005
---- ----
(Dollars in thousands)
Unrealized holding losses on investment
securities available-for-sale $(103) $(406)
Reclassification adjustment for gains realized in income (3) -
Net unrealized losses (106) (406)
Tax effect 36 138
----- -----
Net of tax amount $ (70) $(268)
===== =====
9
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 March 31, 2006, and as of December 31,
2005, and its results of operations for the three months ended March 31,
2006 and 2005. 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 and with the Company's Annual
Report on Form 10-K for the year ended December 31, 2005. In the opinion
of 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 March 31,
2006, 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. When
management uses any of the words "believes," "expects," "anticipates,"
"intends," "plans," "seeks," "estimates", or similar expressions, they are
making forward-looking statements. Many possible events or factors,
including those beyond the control of management, could affect the future
financial results and performance of the Company. This could cause results
or performance to differ materially from those expressed in forward-looking
statements. The possible events or factors that might affect forward-
looking statements include, but are not limited to, the following:
* uses of monetary, fiscal, and tax policy by various governments;
* political, legislative, or regulatory developments in Vermont, New
Hampshire, or the United States including changes in laws concerning
accounting, taxes, banking, and other aspects of the financial
services industry;
* developments in general economic or business conditions nationally,
in Vermont, or in northern New Hampshire, including interest rate
fluctuations, market fluctuations and perceptions, job creation and
unemployment rates, ability to attract new business, and inflation
and their effects on the Company or its customers;
* changes in the competitive environment for financial services
organizations, including increased competition from tax-advantaged
credit unions;
* the Company's ability to retain key personnel;
* changes in technology, including demands for greater automation which
could present operational issues or significant capital outlays;
* acts or threats of terrorism or war, and actions taken by the United
States or other governments that might adversely affect business or
economic conditions for the Company or its customers;
* adverse changes in the securities market which could adversely affect
the value of the Company's stock;
10
* unanticipated lower revenues or increased cost of funds, loss of
customers or business, or higher operating expenses;
* the failure of assumptions underlying the establishment of the
allowance for loan losses and estimations of values of collateral and
various financial assets and liabilities;
* the amount invested in new business opportunities and the timing of
these investments
* the failure of actuarial, investment, work force, salary, and other
assumptions underlying the establishment of reserves for future
pension costs or changes in legislative or regulatory requirements;
* future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
* assumptions made regarding interest rate movement and sensitivity
could vary substantially if actual experience differs from historical
experience which could adversely affect the Company's results of
operations; and
* the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate.
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 Company. The
judgments and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions made
by management, actual results could differ from estimates and have a
material impact on the carrying value of assets, liabilities, or the
results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
the preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as
well as other factors including the effect of changes in the local real
estate market on collateral values, the effect on the loan portfolio of
current economic indicators and their probable impact on borrowers and
changes in delinquent, nonperforming or impaired loans. Changes in these
factors may cause management's estimate of the allowance for loan losses to
increase or decrease and result in adjustments to the Company's provision
for loan losses in future periods. The Company also has other key
accounting policies, which involve the use of estimates, judgments and
assumptions that are significant to understanding the results including the
liability for the defined benefit pension plan, valuation of deferred tax
assets and analysis of potential impairment of investment securities. 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.
11
OVERVIEW
The Company's net income was $1.473 million for the three months ended
March 31, 2006, compared with net income of $1.395 million for the same
period of 2005, or a 5.6% increase between years. The increase in net
interest income of $206 thousand was achieved despite a one-time negative
adjustment of $115 thousand ($76 thousand, after-tax) to reflect the
cumulative effect of inadvertent errors made in prior periods on the
accrual of interest for accounting purposes on certain loans. Also
contributing to net income for the quarter were non-interest income of $61
thousand along with the decrease in income tax expense due to increased
federal income tax credits available as a result of limited partnership
investments in affordable housing projects and the increase in non-taxable
municipal income between quarters. Income earned for the quarter was
partially offset by the increase of $216 thousand in non-interest expenses
and the $45 thousand provision for loan losses. For additional information
see quarterly results analysis beginning on page 16.
The Company's total assets decreased from $375 million at December 31,
2005, to $372 million at March 31, 2006, a decrease of 0.8%. This is a
normal seasonal decrease for the Company. Loans and loans held for sale
increased $3.8 million, net of the sale of $6.7 million in residential
real estate loans during the first quarter of 2006 reflecting the
continuing high demand for loans despite rising interest rates. Investment
securities available-for-sale decreased $2.0 million, as total deposits
experienced a seasonal decrease of $3.2 million (or 1%) during the first
quarter of 2006 and maturities in the investment portfolio and interest-
bearing deposits in banks were utilized to fund loan demand. The increase in
loans was also funded by a decrease in interest bearing deposits in banks
of $1.3 million and a decrease in cash and due from banks of $3.3 million.
The following per share information and key ratios depict several
measurements of performance or financial condition for or at the three
months ended March 31, 2006 and 2005, respectively:
2006 2005
---- ----
Return on average assets (ROA) (1) 1.58% 1.60%
Return on average equity (ROE) (1) 14.19% 13.86%
Net interest margin (1)(2) 5.29% 5.37%
Efficiency ratio (3) 61.74% 61.67%
Net interest spread (4) 4.87% 5.07%
Loan to deposit ratio 100.29% 92.04%
Net loan charge-offs to average loans
not held for sale (0.04%) -
Allowance for loan losses to loans not
held for sale 1.02% 1.13%
Non-performing assets to total assets 1.24% 0.59%
Equity to assets 11.23% 11.48%
Total capital to risk weighted assets 17.24% 18.14%
Book value per share $9.20 $8.92
Earnings per share $0.32 $0.31
Dividends paid per share (5) $0.26 $0.64
Dividend payout ratio (6) 81.25% 208.96%
--------------------
Annualized
The ratio of tax equivalent net interest income to average earning
assets.
The ratio of noninterest expense to net interest income plus
noninterest income excluding securities gains and losses.
The difference between the average rate earned on assets minus the
average rate paid on liabilities.
Includes a $0.40 special cash dividend in 2005.
Cash dividends declared and paid per share divided by consolidated
net income per share.
12
The prime interest rate rose two times during the first three months of
2006, and eight times during 2005, by 25 basis points each time, to stand
at 7.75% as of March 31, 2006 from its 5.25% level as of December 31, 2004.
This is the highest the prime rate had been since April 18, 2001. The
Company's net interest margin declined 8 basis points and net interest
spread declined 20 basis points during the first quarter of 2006 compared
to the first quarter of 2005. These declines were primarily the result of
the average interest rates paid on shorter-term deposits and borrowings
rising more than the average interest rate earned on longer term loans in
response to the increases in the prime rate. In addition traditional and
nontraditional financial institutions in the Company's market are competing
aggressively for core deposit dollars.
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 interest-bearing liabilities. The Company's net interest
income increased $206 thousand, or 4.8%, to $4.48 million for the three
months ended March 31, 2006, from $4.27 million for the three months ended
March 31, 2005 despite the one-time negative accounting adjustment to
loan interest accruals in prior periods. The net interest spread decreased
20 basis points to 4.87% for the three months ended March 31, 2006, from
5.07% for the three months ended March 31, 2005, as interest rates paid on
liabilities and earned on assets both moved upward in response to the
increases in the prime 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 first quarter of 2006 decreased 8
basis points to 5.29% from the 2005 period at 5.37% reflecting a rising
rate environment in which interest rates paid on liabilities rose at a
faster pace than interest rates earned on assets. A decrease in prime rate
would not necessarily be beneficial to the Company in the near term, see
"OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and Liability
Management."
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, the related average rates paid, and the
relative net interest spread and net interest margin. 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.
13
Three months ended March 31,
2006 2005
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 $ 2,317 $ 26 4.44% $ 2,156 $ 13 2.48%
Interest bearing deposits in banks 8,171 79 3.92% 7,398 59 3.25%
Investment securities (1), (2) 31,539 355 4.78% 39,543 410 4.38%
Loans, net (1), (3) 305,883 5,451 7.30% 276,413 4,639 6.85%
FHLB of Boston stock 1,396 15 4.34% 1,241 11 3.52%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 349,306 5,926 6.97% 326,751 5,132 6.43%
Cash and due from banks 10,353 13,617
Premises and equipment 6,058 5,214
Other assets 8,094 7,388
-------- --------
Total assets $373,811 $352,970
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 52,265 $ 82 0.63% $ 45,178 $ 51 0.46%
Savings/money market accounts 107,378 391 1.48% 110,375 241 0.89%
Time deposits 101,401 767 3.07% 90,326 473 2.12%
Borrowed funds 18,226 207 4.54% 9,142 94 4.12%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 279,270 1,447 2.10% 255,021 859 1.36%
Non-interest bearing deposits 49,044 53,909
Other liabilities 3,967 3,220
-------- --------
Total liabilities 332,281 312,150
Stockholders' equity 41,530 40,820
-------- --------
Total liabilities and
stockholders' equity $373,811 $352,970
======== ========
------ ------
Net interest income $4,479 $4,273
====== ======
Net interest spread (1) 4.87% 5.07%
==== ====
Net interest margin (1) 5.29% 5.37%
==== ====
--------------------
Average yields 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.
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 have been allocated
proportionately to the change due to volume and the change due to rate.
14
Three Months Ended March 31, 2006
Compared to
Three Months Ended March 31, 2005
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 1 $ 12 $ 13
Interest bearing deposits in banks 6 14 20
Investment securities (101) 46 (55)
Loans, net 505 307 812
FHLB of Boston stock 1 3 4
---- ---- ----
Total interest-earning assets 412 382 794
Interest-bearing liabilities:
NOW accounts 9 22 31
Savings/money market accounts (7) 157 150
Time deposits 64 230 294
Borrowed funds 103 10 113
---- ---- ----
Total interest-bearing liabilities 169 419 588
---- ---- ----
Net change in net interest income $ 243 $(37) $206
===== ==== ====
Quarter Ended March 31, 2006, compared to Quarter Ended March 31, 2005.
Interest and Dividend Income. The Company's interest and dividend income
increased $794 thousand, or 15.5%, to $5.9 million for the three months
ended March 31, 2006, from $5.1 million for the three months ended March
31, 2005, with average earning assets increasing $22.5 million, or 6.9%, to
$349.3 million for the three months ended March 31, 2006, from $326.8
million for the three months ended March 31, 2005. The increase in interest
income resulting from the rise in average earning assets was augmented by
the higher rates earned on all categories of earning assets in 2006 versus
2005. The 15.5% increase in interest income for the first quarter of 2006
compared to the first quarter of 2005 was also achieved despite the one-
time negative accounting adjustment to loan interest accruals from prior
periods. Average loans approximated $305.9 million at an average yield of
7.3% for the three months ended March 31, 2006, up $29.5 million from
$276.4 million at an average yield of 6.85% for the three months ended
March 31, 2005, or a 10.7% increase in volume and a 45 basis point increase
in yield. Quarterly average loans secured by real estate increased $23.6
million, or 10.0%, to $259.9 million for the first quarter of 2006, from
$236.3 million for the first quarter of 2005. This increase was the result
of strong demand for residential and commercial real estate in the
Company's market including the Company's increased presence in Franklin
County 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 markets, and is fueling growth in the Company's market. Municipal
loans increased $3.5 million, or 25.5%, to an average of $17.3 million in
2006 from an average of $13.8 million in 2005. Average commercial loans
increased $2.9 million, or 13.6%, to $23.9 million for 2006 compared to
$21.0 million for 2005.
The average balance of investments (including mortgage-backed securities)
decreased $8.0 million or 20.2%, to $31.5 million for the three months
ended March 31, 2006, from $39.5 million for the three months ended March
31, 2005. The decrease in the investment portfolio in 2006 reflects the
continuing growth in the loan portfolio and the seasonal declines in
deposits. The average level of federal funds sold and overnight deposits
increased $161 thousand, or 7.5%, to $2.3 million for the three months
ended March 31, 2006, from $2.2 million for the three months ended March
31, 2005. Interest income from non-loan instruments was $475 thousand for
the first quarter of 2006 and $493 thousand for the same period of 2005,
reflecting the overall increase in yields offset by the overall decrease in
volume.
15
Interest Expense. The Company's interest expense increased $588 thousand,
or 68.5%, to $1.4 million for the three months ended March 31, 2006, from
$859 thousand for the three months ended March 31, 2005. Average interest-
bearing liabilities increased $24.2 million, or 9.5%, to $279.3 million for
the three months ended March 31, 2006, from $255.0 million for the three
months ended March 31, 2005, and the average rate paid increased 74 basis
points to 2.1% from 1.4% for the three months ended March 31, 2006 and
2005, respectively. Average time deposits were $101.4 million for the three
months ended March 31, 2006, and $90.3 million for the three months ended
March 31, 2005, or an increase of 12.3%. The average rate paid on time
deposits increased 95 basis points, to 3.1% from 2.1% for the three months
ended March 31, 2006 and 2005, respectively. The average balances for money
market and savings accounts decreased $3.0 million, or 2.7%, to $107.4
million for the three months ended March 31, 2006, from $110.4 million for
the three months ended March 31, 2005. A $7.1 million, or 15.7%, increase
in NOW accounts brought the average balance up to $52.3 million from $45.2
million. The period over period increase in NOW accounts reflects changes
made in 2005 to the Company's deposit product offerings. 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 conversions resulted in the
transfer of over $6 million from demand deposits to interest bearing
checking account (NOW's) products.
The average balance of funds borrowed increased from $9.1 million for the
three months ended March 31, 2005, to $18.2 million for the three months
ended March 31, 2006, while the average rate paid on those funds rose from
4.1% to 4.5% between years. These borrowings were used to fund strong
continued loan growth, and to manage cash flow and liquidity, as deposits
during the quarter experienced a seasonal decline from year-end levels.
Noninterest income. The following table sets forth changes from the first
three months of 2005 to the first three months of 2006 for components of
noninterest income:
For The Three Months Ended March 31,
(dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 71 $ 65 $ 6 9.2
Service fees 706 674 32 4.8
Net gains on sales of investment securities 3 - 3 100.0
Net gains on sales of loans held for sale 92 96 (4) (4.2)
Other 74 50 24 48.0
---- ---- --- -----
Total noninterest income $946 $885 $61 6.9
==== ==== ===
Trust income. The increase resulted primarily from increases in regular fee
income which is based on the market value of assets managed.
Service fees. The increase resulted primarily from increases in overdraft
fees of $38 thousand, or 19.0%, and ATM usage fees of $14 thousand, or
9.2%, partially offset by a decline in deposit service charges of $26
thousand, or 27.8%, which resulted from the introduction, during the first
quarter of 2005, of a group of retail deposit products that generally are
not charged monthly service fees.
Other. The increase is primarily due to the increase in net mortgage
servicing rights income.
16
Noninterest expense. The following table sets forth changes from the first
three months of 2005 to the first three months of 2006 for components of
noninterest expense:
For The Three Months Ended March 31,
(dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $1,494 $1,377 $117 8.5
Pension and employee benefits 577 515 62 12.0
Occupancy expense, net 203 204 (1) (0.5)
Equipment expense 256 268 (12) (4.5)
Equity in losses of affordable
housing investments 109 40 69 172.5
Other 758 777 (19) (2.4)
------ ------ ----
TOTAL $3,397 $3,181 $216 6.8
====== ====== ====
Salaries and wages and related expenses. The increase in 2006 over 2005 was
due primarily to regular salary activity, the expansion of the Littleton,
New Hampshire loan production office to a full service branch during the
first quarter of 2006, increases in related payroll taxes, 401(k)
contributions, and an increase in the Company's medical insurance costs.
Amortization of investments in affordable housing projects. These expenses
increased due primarily to amortization of new investments in affordable
housing projects. The Company invested in two affordable housing projects
during 2005 which resulted in the increase in expense for 2006 versus 2005.
The Company receives income tax credits from these investments.
Income Tax Expense. The Company has provided for current and deferred
federal income taxes for the current and all prior periods presented. The
Company's provisions for income taxes decreased $72 thousand, or 12.4%, to
$510 thousand for the three months ended March 31, 2006, from $582 thousand
for the same period in 2005. The Company's effective tax rate decreased
3.7% to 25.7% for the three months ended March 31, 2006, from 29.4% for the
same period in 2005. This is the result of the increase in low income
housing tax credits related to the Company's limited partnership
investments in two new affordable housing projects in its market area
during 2005 and an increase in non-taxable municipal income which were
partially offset by the increase in federal income taxes resulting from
increased taxable income.
FINANCIAL CONDITION
At March 31, 2006, the Company had total consolidated assets of $372.0
million, including gross loans and loans held for sale ("total loans") of
$311.0 million, deposits of $310.1 million and stockholders' equity of
$41.8 million. The Company's total assets experienced a seasonal decrease
of $2.8 million or 0.7% to $372.0 million at March 31, 2006, from $374.7
million at December 31, 2005. This decrease reflects the sale of $6.7
million in loans held for sale during the first quarter of 2006 and the
utilization of funds from maturing interest-bearing deposits in banks and
investment securities to fund continuing loan demand, as deposits
experienced a seasonable decline during the quarter. Net loans were $305.9
million, or 82.2% of total assets at March 31, 2006, as compared to $297.5
million, or 79.4% of total assets at December 31, 2005. Cash and cash
equivalents, including federal funds sold and overnight deposits, decreased
$3.3 million, or 23.2%, to $10.9 million at March 31, 2006, from $14.2
million at December 31, 2005. Interest bearing deposits in banks decreased
$1.3 million or 15.1% from $8.6 million at December 31, 2005 to $7.3
million at March 31, 2006 as maturing funds have been utilized to fund loan
demand.
Investment securities available-for-sale decreased from $32.4 million at
December 31, 2005, to $30.4 million at March 31, 2006, a $2.0 million, or
6.2%, decrease. Securities maturing have not been replaced dollar for
dollar in order to fund loan demand.
17
Deposits decreased $3.2 million, or 1.0%, to $310.1 million at March 31,
2006, from $313.3 million at December 31, 2005. The decrease in deposits is
a normal seasonal occurrence for the Company. Noninterest bearing accounts
decreased $4.8 million, or 9.1%, from $52.6 million at December 31, 2005,
to $47.8 million at March 31, 2006, while interest bearing deposits
increased $1.6 million, or 0.6%, 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 table on Page 14). Total borrowings
decreased $379 thousand to $15.9 million at March 31, 2006, from $16.3
million at December 31, 2005.
Total capital increased from $41.6 million at December 31, 2005 to $41.8
million at March 31, 2006, reflecting net income of $1.5 million for the
first three months of 2006, less the regular cash dividend paid of $1.2
million, the purchase of Treasury stock totaling $40 thousand and an
increase of $70 thousand in accumulated other comprehensive loss. (see
Capital Resources section on Page 29).
Loans Held for Sale and Loan Portfolios. The Company's total loans
primarily consist of adjustable-rate and fixed-rate mortgage loans secured
by one-to-four family, multi-family residential or commercial real estate.
As of March 31, 2006, the Company's total loan portfolio was $311.0
million, or 83.6% of assets, up from $307.2 million, or 82.0% of assets as
of December 31, 2005, and from $277.9 million or 78.8% of assets as of
March 31, 2005. Total loans have increased $3.8 million or 1.2% and
portfolio loans have increased $8.5 million or 2.8% since December 31,
2005. The Company sold $6.7 million of loans held for sale during the first
quarter of 2006 resulting in a gain on sale of loans of $92 thousand,
compared with loan sales of $6.5 million and related gain on sale of loans
of $9.6 thousand for the first quarter of 2005.
The following table shows information on the composition of the Company's
total loan portfolio as of March 31, 2006 and December 31, 2005:
Loan Type March 31, 2006 December 31, 2005
--------- ------------------ ------------------
(Dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Residential real estate $116,151 37.3 $106,470 34.7
Construction real estate 15,856 5.1 18,066 5.9
Commercial real estate 131,377 42.2 130,483 42.5
Commercial 20,592 6.6 20,650 6.7
Consumer 7,671 2.5 7,999 2.6
Municipal loans 17,570 5.7 17,009 5.5
Loans Held for Sale 1,791 0.6 6,546 2.1
-------- ----- -------- -----
Total loans 311,008 100.0 307,223 100.0
Deduct:
Allowance for loan losses (3,147) (3,071)
Unearned net loan fees (139) (152)
-------- --------
Net loans & Loans Held for Sale $307,722 $304,000
======== ========
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).
The Company services a $225.4 million residential real estate mortgage
portfolio, approximately $83.2 million of which was serviced for
unaffiliated third parties at March 31, 2006. 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 $4.6 million of commercial and commercial real
estate loans for unaffiliated third parties as of March 31, 2006. The
Company capitalizes servicing rights on these fees 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 $323 thousand at March 31, 2006, with an estimated market
value in excess of their carrying value.
18
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 March 31, 2006 was $7.7 million.
Asset Quality. The Company, like all financial institutions, is exposed to
certain credit risks including those related to the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors the Company's loan and investment portfolios
and other real estate owned for potential problems and reports to the
Company's and the subsidiary's Boards of Directors at regularly scheduled
meetings.
The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors and includes a loan review department
supervised by an experienced, former regulatory examiner, low individual
lending limits for officers, Board approval for large credit relationships
and a quality control process for loan documentation that includes post-
closing reviews. The Company also maintains a monitoring process for credit
extensions. The Company performs periodic concentration analyses based on
various factors such as industries, collateral types, large credit sizes,
and officer portfolio loads. The Company has established underwriting
guidelines to be followed by its officers, exceptions are required to be
approved by a senior loan officer or the Board of Directors. The Company
monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not
become subject to increasing pressures from deteriorating borrower credit
due to general or local economic conditions.
Restructured loans include the Company's troubled debt restructurings that
involved forgiving a portion of interest or principal on any loans,
refinancing loans at a rate materially less than the market rate,
rescheduling loan payments, or granting other concessions to a borrower due
to financial or economic reasons related to the debtor's financial
difficulties. Restructured loans do not include qualifying restructured
loans that have complied with the terms of their restructure agreement for
a satisfactory period of time. Restructured loans in compliance with
modified terms totaled $21 thousand at both March 31, 2006 and December 31,
2005. There were two restructured loans with balances of $117 thousand and
$121 thousand at March 31, 2006 and December 31, 2005, respectively, that
were not in compliance with their modified terms. These restructured loans
were a result of rescheduling loan payments. At March 31, 2006, 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 $1.3 million, or 0.43%
of gross loans at March 31, 2006, $1.3 million, or 0.42%, at December 31,
2005, and $1.3 million, or 0.47%, at March 31, 2005. The aggregate interest
income not recognized on such nonaccrual loans amounted to approximately
$270 thousand and $358 thousand as of March 31, 2006 and 2005, respectively
and $268 thousand as of December 31, 2005.
The Company had $3.3 million in loans past due 90 days or more and still
accruing at both March 31, 2006, and December 31, 2005. Certain loans past
due 90 days or more and still accruing interest are covered by guarantees
of U.S. Government or state agencies. Approximately $1.9 million of the
balances in this category are covered by such guarantees at March 31, 2006.
The balance in loans past due 90 days or more and still accruing interest
at both dates is primarily due to three commercial real estate loan
relationships that management is monitoring closely. At March 31, 2006, and
December 31, 2005,
19
respectively, the Company had internally classified certain loans totaling
$2.6 million and $2.8 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, 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.
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are to be sold and are initially recorded at
the lesser of the recorded loan or fair value via an appraisal for more
significant properties and management's estimate for minor properties at
the date of acquisition establishing a new carrying basis. The Company had
no property classified as OREO at either March 31, 2006 or December 31,
2005.
Allowance for Loan Losses. Some of the Company's loan customers ultimately
do not make all of their contractually scheduled payments, requiring the
Company to charge off a portion or all of the remaining principal balance
due. The Company maintains an allowance for loan losses to absorb such
losses. The allowance is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan
portfolio; however, actual loan losses may vary from current estimates.
Adequacy of the allowance for loan losses is determined using a consistent,
systematic methodology, which analyzes the risk inherent in the loan
portfolio. In addition to evaluating the collectibility of specific loans
when determining the adequacy of the allowance, management also takes into
consideration other factors such as changes in the mix and size of the loan
portfolio, historic loss experience, the amount of delinquencies and loans
adversely classified, industry trends, and the impact of the local and
regional economy on the Company's borrowers. The adequacy of the allowance
for loan losses is assessed by an allocation process whereby specific loss
allocations are made against certain adversely classified loans and general
loss allocations are made against segments of the loan portfolio which have
similar attributes. While the Company allocates the allowance for loan
losses based on the percentage category to total loans, the portion of the
allowance for loan losses allocated to each category does not represent the
total available for future losses which may occur within the loan category
since the total allowance for possible loan losses is a valuation reserve
applicable to the entire portfolio.
The allowance is increased by a provision for loan losses, which is charged
to earnings, and reduced by charge-offs, net of recoveries. The provision
for loan losses represents the current period credit cost associated with
maintaining an appropriate allowance for loan losses. Based on an
evaluation of the loan portfolio, management presents a quarterly analysis
of the allowance to the Board of Directors, indicating any changes in the
allowance since the last review and any recommendations as to adjustments
in the allowance. Additionally, various regulatory agencies periodically
review the Company's allowance as an integral part of their examination
process.
For the quarter ended March 31, 2006, the methodology used to determine the
provision for loan losses was unchanged from the prior year. The
composition of the Company's loan portfolio remained relatively unchanged
from December 31, 2005, and there was no material change in the lending
programs or terms during the quarter.
20
The following table reflects activity in the allowance for loan losses for
the three months ended March 31, 2006 and 2005:
Three Months Ended, March 31,
-----------------------------
2006 2005
---- ----
(Dollars in thousands)
Balance at beginning of period $3,071 $3,067
Charge-offs:
Real Estate - 3
Commercial - -
Consumer and other 9 18
------ ------
Total charge-offs 9 21
------ ------
Recoveries:
Real Estate 22 12
Commercial 12 -
Consumer and other 6 10
------ ------
Total recoveries 40 22
------ ------
Net recoveries (charge-offs) 31 1
Provision for loan losses 45 -
------ ------
Balance at end of period $3,147 $3,068
====== ======
The following table shows the internal 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:
March 31, 2006 December 31, 2005
----------------- -----------------
(Dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 626 36.3 $ 571 35.4
Commercial 1,864 43.7 1,826 43.4
Construction 159 5.1 181 6.0
Other Loans
Commercial 346 6.7 343 6.9
Consumer installment 120 2.5 123 2.6
Municipal, Other and
Unallocated 32 5.7 27 5.7
------ ----- ------ -----
Total $3,147 100.0 $3,071 100
====== ===== ====== =====
Ratio of Net Charge Offs to
Average Loans not held
for sale (1) (0.04) 0.02
===== =====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.02 1.02
===== =====
Ratio of Allowance for Loan
Losses to non-performing
loans (2) 68.22 66.66
===== =====
Annualized
Non-performing loans include loans in non-accrual status, loans past
due 90 days or more and still accruing, and restructured loans.
Not withstanding the categories shown in the table above all funds in the
allowance for loan losses are available to absorb loan losses in the
portfolio, regardless of loan category.
21
Management of the Company believes that the allowance for loan losses at
March 31, 2006, is adequate to cover losses inherent in the Company's loan
portfolio as of such date. However there can be no assurance that the
Company will not sustain losses in future periods, which could be greater
than the size of the allowance at March 31, 2006. See CRITICAL ACCOUNTING
POLICIES. While the Company recognizes that an economic slowdown may
adversely impact its borrowers' financial performance and ultimately their
ability to repay their loans, management continues to be cautiously
optimistic about the key credit indicators from the Company's loan
portfolio.
Investment Activities. At March 31, 2006, the reported value of investment
securities available-for-sale was $30.4 million or 8.2% 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 March 31,
2006 reflects a negative valuation adjustment of $255 thousand. The offset
of this adjustment, net of income tax effect, was an $168 thousand loss
reflected in the Company's other comprehensive loss component of
stockholders' equity at March 31, 2006.
The amount in Investment securities available-for-sale decreased from $32.4
million at December 31, 2005, to $30.4 million at March 31, 2006, as loan
demand remained strong and securities maturing, sold or paying down have
not been replaced dollar for dollar.
At December 31, 2005, the Company had twenty-eight debt securities with a
fair value of $10.7 million with an unrealized loss of $324 thousand, or 1%
of the value of the amortized cost of the entire investment portfolio, that
had existed for more than 12 months. The Company sold one security year to
date which had been deemed to be other than temporarily impaired as of
December 31, 2005.
At March 31, 2006, thirty-four securities with a fair value of $11.9
million or 39.3% of the portfolio have been in a loss position for more
than twelve months with unrealized losses totaling $477 thousand. The
primary factor causing these unrealized losses is the change in the
interest rate environment over the past 21 months 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 weighted average nominal rates at
which interest was paid on such deposits for the periods ended March 31,
2006, and December 31, 2005:
Three Months Ended March 31, Year Ended December 31,
2006 2005
------------------------------- ------------------------------
(Dollars in thousands)
Percent Percent
Average Of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------ -------- -------
Non-time deposits:
Demand deposits $ 49,044 15.8 - $ 50,007 16.2 -
NOW accounts 52,265 16.9 0.63% 51,813 16.8 0.51%
Money Market accounts 59,493 19.2 2.21% 59,300 19.2 1.60%
Savings accounts 47,885 15.4 0.57% 50,369 16.4 0.69%
-------- ----- -------- -----
Total non-time deposits: 208,687 67.3 0.92% 211,489 68.6 0.74%
-------- ----- -------- -----
Time deposits:
Less than $100,000 63,182 20.4 2.79% 61,834 20.1 2.23%
$100,000 and over 38,219 12.3 3.53% 35,018 11.3 2.98%
-------- ----- -------- -----
Total time deposits 101,401 32.7 3.07% 96,852 31.4 2.50%
-------- ----- -------- -----
Total deposits $310,088 100.0 1.62% $308,341 100.0 1.29%
======== ===== ======== =====
22
The following table sets forth information regarding the Company's time
deposits in amounts of $100,000 or more at March 31, 2006, and December 31,
2005, that mature during the periods indicated:
March 31, 2006 December 31, 2005
-------------- -----------------
(Dollars in thousands)
Within 3 months $25,816 $11,545
3 to 6 months 3,800 15,660
6 to 12 months 8,566 6,941
Over 12 months 2,187 1,436
------- -------
$40,369 $35,582
======= =======
The Company's customers have been opening certificates of deposit to take
advantage of increasing time deposit rates. The largest increase in total
time deposits over $100,000 between periods was in the municipal deposit
category.
Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB)
were $15.9 million at March 31, 2006, at a weighted average rate of 4.53%,
and $16.3 million at December 31, 2005, at a weighted average rate of
4.51%. The change between year end 2005 and the end of the first quarter
2006 is a net decrease of $379 thousand or 2.3%.
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the
potential of loss in a financial instrument arising from adverse changes in
market prices, interest rates, foreign currency exchange rates, commodity
prices, and equity prices. The Company's market risk arises primarily from
interest rate risk inherent in its lending, investing, deposit taking and
borrowing activities as yields on assets change in a different time period
or in a different amount from that of interest costs on liabilities. Many
other factors also affect the Company's exposure to changes in interest
rates, such as general and local economic and financial conditions,
competitive pressures, customer preferences, and historical pricing
relationships.
The earnings of the Company and its subsidiary are affected not only by
general economic conditions, but also by the monetary and fiscal policies
of the United States and its agencies, particularly the Federal Reserve
System. The monetary policies of the Federal Reserve System influence to a
significant extent the overall growth of loans, investments, deposits and
borrowings; the level of interest rates earned on assets and paid for
liabilities; and interest rates charged on loans and paid on deposits. The
nature and impact of future changes in monetary policies are often not
predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as
to the level of risk assumed by the Company in its balance sheet. The Board
of Directors reviews and approves risk management policies, including risk
limits and guidelines and reviews quarterly the current position in
relationship to those limits and guidelines. Daily oversight functions are
delegated to the Asset Liability Management Committee ("ALCO"). The ALCO,
consisting of senior business and finance officers, actively measures,
monitors, controls and manages the interest rate risk exposure that can
significantly impact the Company's financial position and operating
results. The Company does not have any market risk sensitive instruments
acquired for trading purposes. The Company attempts to structure its
balance sheet to maximize net interest income and shareholder value while
controlling its exposure to interest rate risk. The ALCO formulates
strategies to manage interest rate risk by evaluating the impact on
earnings and capital of such factors as current interest rate forecasts and
economic indicators, potential changes in such forecasts and indicators,
liquidity, and various business strategies. The ALCO's methods for
evaluating interest rate risk include an analysis of the Company's
interest-rate sensitivity "gap", which provides a static analysis of the
maturity and repricing characteristics of the Company's entire balance
sheet, and a simulation analysis, which calculates projected net interest
income based on alternative balance sheet and interest rate
23
scenarios, including "rate shock" scenarios involving immediate substantial
increases or decreases in market rates of interest.
Members of ALCO meet at least weekly to set loan and deposit rates, make
investment decisions, monitor liquidity and evaluate the loan demand
pipeline. Deposit runoff is monitored daily and loan prepayments evaluated
monthly. The Company historically has maintained a substantial portion of
its loan portfolio on a variable rate basis and plans to continue this
Asset/Liability Management (ALM) strategy in the future. Portions of the
variable rate loan portfolio have interest rate floors and caps which are
taken into account by the Company's ALM modeling software to predict
interest rate sensitivity, including prepayment risk. As of March 31, 2006,
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 2005 for a 50 basis point increase in the rate environment in 25
basis point increments (Prime at December 31, 2005, was 7.25% and was 7.75%
on March 31, 2006), projected the following for the three months ended
March 31, 2006, compared to the actual results:
March 31, 2006
---------------------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(Dollars in thousands)
Net Interest Income $4,572 $4,479 (2.0)
Net Income $1,602 $1,473 (8.1)
Return on Assets 1.77% 1.58% (10.7)
Return on Equity 16.01% 14.19% (11.4)
One of the reasons the actual results were lower than projected is that the
simulation model assumed the two 25 basis point increases in prime would
happen on the first of February and March respectively while they actually
happened on January 31st and March 28th. Another reason for the lower
actual results is the rapid rise during the first quarter of 2006 of rates
paid on deposits in order to remain competitive.
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's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-
sheet instruments. For interest rate caps and floors written on adjustable
rate loans, the contract or notional amounts do not represent exposure to
credit loss. The Company controls the risk of interest rate cap agreements
through credit approvals, limits, and monitoring procedures.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
24
As of March 31, 2006, and December 31, 2005, the contract or notional
amount of financial instruments whose contract or notional amount
represents credit risk was as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
(Dollars in thousands)
Commitments to originate loans $14,579 $ 9,722
Unused lines of credit 30,356 35,349
Standby letters of credit 1,485 918
Credit Card arrangements 2,319 2,236
------- -------
Total $48,739 $48,225
======= =======
The increase in commitments to originate loans reflects a broadening of the
Company's customer base in its market area, which was influenced in part by
strong local loan demand and increased lending activity in Franklin and
Chittenden county areas.
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.
The Company's contractual obligations at March 31, 2006, and December 31,
2005, were as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
(Dollars in thousands)
Operating lease commitments $ 204 $ 232
Maturities on borrowed funds 15,877 16,256
Deposits without stated maturity (1) 204,943 216,273
Certificates of deposit (1) 105,151 97,026
Pension plan contributions (2) 462 498
Deferred compensation payouts 551 730
Equity investment commitments in
housing limited partnerships 356 704
Construction contract (3) - 318
-------- --------
Total $327,554 $332,037
======== ========
--------------------
While Union has a contractual obligation to depositors should they
wish to withdraw all or some of the funds on deposit, management
believes, based on historical analysis, that the majority of these
deposits will remain on deposit for the foreseeable future. The
amounts exclude interest accrued.
Funding requirements for pension benefits after 2006 are excluded due
to the significant variability in the assumptions required to project
the amount and timing of future cash contributions.
Contract to construct a new branch in Littleton, New Hampshire.
The Company's subsidiary bank is required (as are all banks) to maintain
vault cash or a noninterest bearing reserve balance as established by
Federal Reserve regulations. The average total reserve for the 14-day
maintenance period including March 31, 2006 was $320 thousand and for
December 31 2005 was $330 thousand, both of which were satisfied by vault
cash. The Company has also committed to maintain a noninterest bearing
contracted clearing balance of $1 million at March 31, 2006 with the
Federal Reserve Bank of Boston.
25
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 and loans reflect estimated
prepayments, which were estimated based on analyses of broker
estimates, the results of a prepayment model utilized by the Company,
and empirical data;
* other non-mortgage related fixed-rate loans reflect scheduled
contractual amortization, with no estimated prepayments; and
* 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.
26
The following table shows the Company's rate sensitivity analysis as of
March 31, 2006:
March 31, 2006
Cumulative repriced within
-------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------- ------- ------ ------ ------ -----
(Dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 1 $ - $ - $ - $ - $ 1
Interest bearing deposits in banks 589 2,279 3,547 884 - 7,299
Investment securities available-for-sale (1)(3) 3,334 3,559 12,540 6,174 3,884 29,491
FHLB Stock - - - - 1,440 1,440
Loans and loans held for sale (2)(3) 124,286 60,150 67,242 45,472 13,719 310,869
-------- ------- -------- -------- -------- --------
Total interest sensitive assets $128,210 $65,988 $ 83,329 $ 52,530 $19,043 $349,100
Interest sensitive liabilities:
Time deposits $ 40,658 $44,929 $ 17,308 $ 2,256 $ - $105,151
Money markets 13,018 - - - 46,038 59,056
Regular savings 7,794 - - - 39,130 46,924
NOW accounts 29,025 - - - 22,121 51,146
Borrowed funds 4,808 2,885 1,333 829 6,022 15,877
-------- ------- -------- -------- -------- --------
Total interest sensitive liabilities $ 95,303 $47,814 $ 18,641 $ 3,085 $113,311 $278,154
Net interest rate sensitivity gap $ 32,907 $18,174 $ 64,688 $ 49,445 $(94,268) $ 70,946
Cumulative net interest rate
sensitivity gap $ 32,907 $51,080 $115,768 $165,213 $ 70,946
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 8.8% 13.7% 31.1% 44.4% 19.1%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive assets 9.4% 14.6% 33.2% 47.3% 20.3%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive liabilities 11.8% 18.4% 41.6% 59.4% 25.5%
Investment securities available-for-sale exclude marketable equity
securities with a fair value of $896 thousand that may be sold by the
Company at any time.
Balances shown net of unearned income of $139 thousand.
Estimated repayment assumptions considered in Asset/Liability model.
27
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and
capital (Net Fair Value) under various interest rate scenarios, balance
sheet trends, and strategies over a relatively short time horizon. These
simulations incorporate assumptions about balance sheet dynamics such as
loan and deposit growth, product pricing, prepayment speeds on mortgage
related assets, principal maturities on other financial instruments, and
changes in funding mix. While such assumptions are inherently uncertain as
actual rate changes rarely follow any given forecast and asset-liability
pricing and other model inputs usually do not remain constant in their
historical relationships, management believes that these assumptions are
reasonable. Based on the results of these simulations, the Company is able
to quantify its estimate of interest rate risk and develop and implement
appropriate strategies.
The following chart reflects the 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, applied proportionately, of up and down
300 basis points from the March 31, 2006 prime rate of 7.75%, this is the
highest and lowest internal slopes monitored. This slope range was
determined to be the most relevant during this economic cycle.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
(Dollars in thousands)
Return Return
on on Net Fair
12 Months Prime Net Interest Change Net Assets Equity Value
Ending Rate Income % Income % % Ratio
--------- ----- ------------ ------ ------ ------ ------ --------
March-07 10.75% $21,925 13.59 $8,236 2.23 18.73 9.70%
7.75% $19,302 0.00 $6,426 1.66 14.44 11.28%
4.75% $16,553 (14.24) $4,529 1.06 9.51 12.87%
The resulting projected cumulative effect of these estimates on Net
Interest Income and the Net Fair Value Ratio for the twelve month period
ending March 31, 2007, are within approved ALCO guidelines. The simulations
of earnings do not incorporate any management actions, which might moderate
the negative consequences of interest rate deviations. Therefore, they do
not reflect likely actual results, but serve as conservative estimates of
interest rate risk.
Liquidity. Managing liquidity risk is essential to maintaining both
depositor confidence and stability in earnings. Liquidity is a measurement
of the Company's ability to meet potential cash requirements, including
ongoing commitments to fund deposit withdrawals, repay borrowings, fund
investment and lending activities, and for other general business purposes.
The Company's principal sources of funds are deposits, amortization and
prepayment of loans and securities, maturities of investment securities and
other short-term investments, sales of securities and loans available-for-
sale, earnings and funds provided from operations. Maintaining a relatively
stable funding base, which is achieved by diversifying funding sources,
competitively pricing deposit products, and extending the contractual
maturity of liabilities, reduces the Company's exposure to rollover risk on
deposits and limits reliance on volatile short-term purchased funds. Short-
term funding needs arise from declines in deposits or other funding
sources, funding of loan commitments, draws on unused lines of credit and
requests for new loans. The Company's strategy is to fund assets, to the
maximum extent possible, with core deposits that provide a sizable source
of relatively stable and low-cost funds. For the quarter ended, March 31,
2006, the Company's ratio of average loans to average deposits was 98.7%
compared to the prior year of 92.2%. The increase in the loan to deposit
ratio between years was mainly funded by the decrease in investment
securities available-for-sale and 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 FHLB of Boston, it has access
to unused pre-approved lines of credit up to $6.7 million at March 31, 2006
over and above the term advances already drawn on the line. This line of
credit could be used for either short or long term liquidity or other
needs. Union Bank maintains a $5 million pre-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
28
outstanding on either line at March 31, 2006. Union is a member of the
Certificate of Deposit Account Registry Service ("CDARS") of Promontory
Interfinancial Network which allows Union to provide higher FDIC deposit
insurance to customers by exchanging deposits with other members and allows
Union to purchase deposits from other members as another source of funding.
There were no purchased deposits at either March 31, 2006 or December 31,
2005 although Union had exchanged $1.1 million and $1.7 million,
respectively, with other CDARS members as of those dates.
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 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 81.4% of the Company's time deposits will mature
within twelve months, management believes, based upon past experience,
(percentage of time deposits to mature within twelve months has ranged from
72% to 84% over the preceding six years) 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. A reduction in total
deposits could be offset by purchases of federal funds, purchases of
deposits, short-or-long-term FHLB borrowings, utilization of the repurchase
agreement line, or liquidation of investment securities, purchased
brokerage certificates of deposit or loans held for sale. Such steps could
result in an increase in the Company's cost of funds and adversely impact
the net interest spread and margin. Management believes the Company has
sufficient liquidity to meet all reasonable borrower, depositor, and
creditor needs in the present economic environment. However, any
projections of future cash needs and flows are subject to substantial
uncertainty. Management continually evaluates opportunities to buy/sell
securities and loans available-for-sale, obtain credit facilities from
lenders, or restructure debt for strategic reasons or to further strengthen
the Company's financial position.
Capital Resources. Capital management is designed to maintain an optimum
level of capital in a cost-effective structure that meets target regulatory
ratios; supports management's internal assessment of economic capital;
funds the Company's business strategies; and builds long-term stockholder
value. Dividends are generally increased in line with long-term trends in
earnings per share growth and conservative earnings projections, while
sufficient profits are retained to support anticipated business growth,
fund strategic investments and provide continued support for deposits.
The total dollar value of the Company's stockholders' equity was $41.8
million at March 31, 2006, reflecting net income of $1.5 million for the
first three months of 2006, less cash dividends paid of $1.2 million, the
purchase of 1,826 shares of Treasury stock totaling $40 thousand, and an
increase of $70 thousand in accumulated other comprehensive loss compared
to $41.6 million at year end 2005.
Union Bankshares, Inc. has 5 million shares of $2.00 par value common stock
authorized. As of March 31, 2006, the Company had 4,918,611 shares issued,
of which 4,540,837 were outstanding and 377,774 were held in Treasury.
The Board of Directors has authorized the repurchase of up to 100,000
shares of common stock, or approximately 2.2% of the Company's outstanding
shares, for an aggregate repurchase cost not to exceed $2.15 million.
Shares can be repurchased in the open market or in negotiated transactions.
The
29
repurchase program is open for an unspecified period of time. As of March
31, 2006 the Company had repurchased 16,826 shares under this program, for
a total cost of $355 thousand.
As of March 31, 2006, there were outstanding employee incentive stock
options with respect to 12,825 shares of the Company's common stock,
granted pursuant to Union Bankshare's 1998 Incentive Stock Option Plan. As
of such date, 9,575 options were currently exercisable but only 3,325 of
those shares were "in the money". Of the 75,000 shares authorized for
issuance under the 1998 Plan, 48,700 shares remain available for future
option grants. During the first quarter of 2006, no incentive stock options
granted pursuant to the 1998 plan were exercised and none were granted.
Union Bankshares, Inc. and Union Bank are subject to various regulatory
capital requirements administered by the federal banking agencies.
Management believes, as of March 31, 2006, that both companies meet all
capital adequacy requirements to which they are subject. As of March 31,
2006, 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 March 31, 2006, that management
believes have changed either company's category.
Union Bank's and the Company's actual capital amounts and ratios as of
March 31, 2006, 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 $45,114 17.22% $20,959 8.0% $26,199 10.0%
Company $45,262 17.24% $21,003 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $41,807 15.96% $10,478 4.0% $15,717 6.0%
Company $41,955 15.98% $10,502 4.0% N/A N/A
Tier I capital to average assets
Union Bank $41,807 11.20% $14,931 4.0% $18,664 5.0%
Company $41,955 11.22% $14,957 4.0% N/A N/A
Regulatory Matters. The Company and Union are subject to periodic
examinations by the various regulatory agencies. These examinations
include, but are not limited to, procedures designed to review lending
practices, risk management, credit quality, liquidity, compliance and
capital adequacy. During 2005 the Vermont State Department of Banking, the
Federal Deposit Insurance Corporation, and the Federal Reserve Bank of
Boston performed various examinations of the Company and Union pursuant to
their regular, periodic regulatory reviews. No comments were received from
these various bodies that would have a material adverse effect on either
Company's liquidity, capital resources, or operations.
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 23
through 30 in this Form 10-Q.
30
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer, with the
assistance of the Disclosure Control Committee, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of 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 1A. Risk Factors.
There have been no material changes in the Company's risk factors from
those previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 2005.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number of
Total Number of Shares Shares that May Yet
Purchased as Part of Be Purchased Under
Total Number of Average Price Publicly Announced Plans the Plans or
Period Shares Purchased Paid per Share or Programs (1) Programs
------ ---------------- -------------- ------------------------ -------------------
January, 2006 1,564 $22.00 1,564 83,436
February, 2006 - - - 83,436
March, 2006 262 $21.22 262 83,174
On November 18, 2005, the Company announced a stock repurchase
program. The Board of Directors has authorized the repurchase of up
to $2.15 million or 100,000 shares of common stock, or approximately
2.2% of the Company's outstanding shares. Shares can be repurchased
in the open market or in negotiated transactions. The repurchase
program is open for an unspecified period of time.
31
Item 6. Exhibits.
14.2 Code of Ethics (for all directors, officers, and employees as
revised, May 3, 2006)
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.
May 12, 2006 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)
32
EXHIBIT INDEX
14.2 Code of Ethics (for all directors, officers and employees as revised,
May 3, 2006)
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