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, 2007
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
April 30, 2007:
Common Stock, $2 par value 4,530,414 shares
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. 31
Item 4. Controls and Procedures. 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 32
Item 1A. Risk Factors. 32
Item 2. Unregistered Sales of Securities and Use of Proceeds. 32
Item 6. Exhibits. 33
Signatures 33
2
Part l Financial Information
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2007 2006
---- ----
Assets (Dollars in thousands)
Cash and due from banks $ 9,507 $ 11,694
Federal funds sold and overnight deposits 9,258 9,263
-------- --------
Cash and cash equivalents 18,765 20,957
Interest bearing deposits in banks 10,044 5,417
Investment securities available-for-sale 26,526 23,682
Loans held for sale 4,560 3,750
Loans 303,584 313,822
Allowance for loan losses (3,342) (3,338)
Unearned net loan fees (119) (120)
-------- --------
Net loans 300,123 310,364
Accrued interest receivable 2,033 2,001
Premises and equipment, net 6,032 6,080
Other assets 8,572 8,898
-------- --------
Total assets $376,655 $381,149
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing $ 46,347 $ 54,875
Interest bearing 267,163 264,947
-------- --------
Total deposits 313,510 319,822
Borrowed funds 15,353 14,596
Liability for pension benefits 1,458 1,317
Accrued interest and other liabilities 4,379 3,491
-------- --------
Total liabilities 334,700 339,226
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued at 3/31/07 and 12/31/06 9,837 9,837
Paid-in capital 152 150
Retained earnings 35,169 35,203
Treasury stock at cost; 388,197 shares at 3/31/07 and 386,634
at 12/31/06 (2,298) (2,264)
Accumulated other comprehensive loss (905) (1,003)
-------- --------
Total stockholders' equity 41,955 41,923
-------- --------
Total liabilities and stockholders' equity $376,655 $381,149
======== ========
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,
2007 2006
---- ----
(Dollars in thousands
except Per Share Data)
Interest income
Interest and fees on loans $ 5,900 $ 5,451
Interest on debt securities
Taxable 234 298
Tax exempt 46 49
Dividends 30 23
Interest on federal funds sold and overnight
deposits 104 26
Interest on interest bearing deposits in banks 74 79
--------- ---------
Total interest income 6,388 5,926
--------- ---------
Interest expense
Interest on deposits 1,785 1,240
Interest on borrowed funds 190 207
--------- ---------
Total interest expense 1,975 1,447
--------- ---------
Net interest income 4,413 4,479
Provision for loan losses 45 45
--------- ---------
Net interest income after provision for loan losses 4,368 4,434
--------- ---------
Noninterest income
Trust income 84 71
Service fees 796 706
Net (losses) gains on sales of investment securities (10) 3
Net gains on sales of loans held for sale 27 92
Other income 46 74
--------- ---------
Total noninterest income 943 946
--------- ---------
Noninterest expenses
Salaries and wages 1,578 1,494
Pension and employee benefits 660 577
Occupancy expense, net 220 203
Equipment expense 262 256
Other expenses 948 867
--------- ---------
Total noninterest expense 3,668 3,397
--------- ---------
Income before provision for income taxes 1,643 1,983
Provision for income taxes 408 510
--------- ---------
Net income $ 1,235 $ 1,473
========= =========
Earnings per common share $ 0.27 $ 0.32
========= =========
Weighted average number of common
shares outstanding 4,531,515 4,541,507
========= =========
Dividends per common share $ 0.28 $ 0.26
========= =========
See accompanying 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, 2006 4,531,977 $9,837 $150 $35,203 $(2,264) $(1,003) $41,923
Comprehensive income:
Net income - - - 1,235 - - 1,235
Change in net unrealized loss on
investment securities
available-for-sale, net of
reclassification adjustment and
tax effects - - - - - 98 98
-------
Total comprehensive
income - - - - - - 1,333
-------
Cash dividends declared
($0.28 per share) - - - (1,269) - - (1,269)
Issuance of stock options - - 2 - - - 2
Purchase of treasury stock (1,563) - - - (34) - (34)
--------- ------ ---- ------- ------- ------- -------
Balances, March 31, 2007 4,530,414 $9,837 $152 $35,169 $(2,298) $ (905) $41,955
========= ====== ==== ======= ======= ======= =======
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,
2007 2006
---- ----
(Dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 1,235 $ 1,473
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 192 184
Provision for loan losses 45 45
(Credit) provision for deferred income taxes (111) 53
Net amortization of investment securities 4 22
Equity in losses of limited partnerships 66 110
Issuance of stock options 2 2
Write-downs of other real estate owned 10 -
Decrease in unamortized loan fees (1) (14)
Proceeds from sales of loans held for sale 3,437 6,802
Origination of loans held for sale (4,219) (1,954)
Net loss (gain) on sales of investment securities 10 (3)
Net gain on sales of loans held for sale (27) (92)
Net gain on disposals of premises and equipment - (7)
Net gain on sales of other real estate owned (20) -
(Increase) decrease in accrued interest receivable (32) 158
Decrease in other assets 131 9
Increase in income taxes 494 382
Increase in accrued interest payable 178 148
Increase in other liabilities 357 89
------- -------
Net cash provided by operating activities 1,751 7,407
------- -------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 197 1,299
Purchases (4,987) -
Investment securities available-for-sale
Sales 414 455
Maturities, calls and paydowns 695 1,441
Purchases (3,820) -
Net redemption (purchase) of Federal Home Loan Bank stock 82 (199)
Net decrease (increase) in loans 10,294 (8,550)
Recoveries of loans charged off 17 40
Purchases of premises and equipment (144) (394)
6
Three Months Ended
-----------------------
March 31, March 31,
2007 2006
---- ----
(Dollars in thousands)
Proceeds from sales of other real estate owned 3 -
Proceeds from sales of premises and equipment - 8
------- -------
Net cash provided by (used in) investing activities 2,751 (5,900)
------- -------
Cash Flows From Financing Activities
Net increase (decrease) in borrowings outstanding 757 (379)
Net decrease in noninterest bearing deposits (8,528) (4,800)
Net increase in interest bearing deposits 2,217 1,595
Purchase of treasury stock (34) (40)
Dividends paid (1,269) (1,181)
------- -------
Net cash used in financing activities (6,857) (4,805)
------- -------
Decrease in cash and cash equivalents (2,355) (3,298)
Cash and cash equivalents
Beginning 20,957 14,208
------- -------
Ending $18,602 $10,910
======= =======
Supplemental Disclosures of Cash Flow Information
Interest paid $ 1,797 $ 1,299
======= =======
Income taxes paid $ 25 $ 75
======= =======
Supplemental Schedule of Noncash Investing and
Financing Activities
Change in unrealized losses on investment securities
available-for-sale $ 148 $ (107)
======= =======
Loans originated to finance the sale of other real estate owned $ 115 $ -
======= =======
See accompanying notes to the unaudited consolidated financial statements.
7
UNION BANKSHARES, INC. AND SUBSIDIARY
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, 2007 and
2006, 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, 2006. 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 2006 Annual Report
to Shareholders, 2006 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
ending December 31, 2007, or any other interim period.
Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 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
In February 2007, the Financial Accounting Board's (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge accounting provisions. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. This Statement does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value. This
Statement does not establish requirements for recognizing and measuring
dividend income, interest income, or interest expense. This Statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included
in SFAS No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair
Value of Financial Instruments. This Statement is effective prospectively for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of this new standard on the
Company's consolidated financial statements but does not expect that such
impact will be material.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of this new standard to determine its effects on the Company's
consolidated financial statements but does not expect that such impact will be
material.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect
to the accounting for separately recognized servicing assets
8
and servicing liabilities. The Statement requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain
situations. It requires all separately recognized servicing assets and
liabilities to be initially measured at fair value, if practicable. It permits
an entity to choose either the amortization method or the fair value
measurement method for each class of separately recognized servicing assets and
liabilities and requires additional disclosures in the financial statements
under the fair value measurement method. The Company adopted SFAS No.156
effective January 1, 2007 and will continue with the amortization method of
servicing rights which has no additional impact on the Company's financial
position or results of operations.
Note 5. Defined Benefit Pension Plan
Union Bank (Union), the Company's bank subsidiary, sponsors a noncontributory
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 months ended March 31, 2007 and
2006 consisted of the following components:
Three Months Ended
------------------
2007 2006
---- ----
(Dollars in thousands)
Service cost $ 132 $ 110
Interest cost on projected benefit obligation 148 131
Expected return on plan assets (150) (124)
Amortization of prior service cost 2 1
Amortization of net loss 5 21
----- -----
Net periodic benefit cost $ 137 $ 139
===== =====
Note 6. Other Comprehensive Loss
The components of other comprehensive gain (loss) and related tax effects for
the three months ended March 31, 2007 and 2006 are as follows:
Three Months Ended
------------------
2007 2006
---- ----
(Dollars in thousands)
Unrealized holding gains (losses) on investment
securities available-for-sale $ 158 $(103)
Reclassification adjustment for losses (gains)
realized in income 10 (3)
----- -----
Net unrealized gains (losses) 148 (106)
Tax effect (50) 36
----- -----
Net of tax amount $ 98 $ (70)
===== =====
Note 7. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS No. 109 (FIN 48),
on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Based on management's evaluation, management has concluded that there are no
significant uncertain tax positions requiring recognition in the Company's
financial statements. Although the Company is not currently the subject of a
tax audit by the Internal Revenue Service (IRS), the Company's tax years ending
December 31, 2003 through 2006 are open to audit by the IRS under the
applicable statute of limitations.
The Company may from time to time be assessed interest or penalties by major
tax jurisdictions, although any such assessments historically have been minimal
and immaterial to our financial results. In the event that the Company receives
an assessment for interest and/or penalties, it will be classified in the
financial statements as other expenses.
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 (Company's) financial
position as of March 31, 2007, and as of December 31, 2006, and its results of
operations for the three months ended March 31, 2007 and 2006. This discussion
is being presented to provide a narrative explanation of the financial
statements and should be read in conjunction with the consolidated financial
statements and related notes and with other financial data appearing elsewhere
in this filing and with the Company's Annual Report on Form 10-K for the year
ended December 31, 2006. 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,
2007, 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:
o uses of monetary, fiscal, and tax policy by various governments;
o political, legislative, or regulatory developments in Vermont, New
Hampshire, or the United States including changes in laws concerning
accounting, taxes, financial reporting, banking, and other aspects of the
financial services industry;
o developments in general economic or business conditions nationally, in
Vermont, or in northern New Hampshire, including interest rate
fluctuations, market fluctuations and perceptions, job creation and
unemployment rates, ability to attract new business, and inflation and
their effects on the Company or its customers;
o changes in the competitive environment for financial services
organizations, including increased competition from tax-advantaged credit
unions and out-of-market competitors offering financial services over the
internet;
o the Company's ability to attract and retain key personnel;
o changes in technology, including demands for greater automation which
could present operational issues or significant capital outlays;
o acts or threats of terrorism or war, and actions taken by the United
States or other governments that might adversely affect business or
economic conditions for the Company or its customers;
o adverse changes in the securities market which could adversely affect the
value of the Company's stock;
o any actual or alleged conduct which could harm the Company's reputation;
o natural or other disasters which could affect the ability of the Company
to operate under normal conditions;
10
o the Company's ability to retain and attract deposits;
o illegal acts of theft or fraud perpetuated against the bank or its
customers;
o unanticipated lower revenues or increased cost of funds, loss of
customers or business, or higher operating expenses;
o the failure of assumptions underlying the establishment of the allowance
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
o the amount invested in new business opportunities and the timing of these
investments;
o the failure of actuarial, investment, work force, salary, and other
assumptions underlying the establishment of reserves for future pension
costs or changes in legislative or regulatory requirements;
o future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
o assumptions made regarding interest rate movement and sensitivity could
vary substantially if actual experience differs from historical
experience which could adversely affect the Company's results of
operations; and
o the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate.
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 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. For additional information see, FINANCIAL CONDITION - Allowance for
Loan Losses below.
The Company's pension benefit obligations and net periodic benefit cost are
actuarially determined based on the following assumptions: discount rate,
estimated future return on plan assets, wage base rate, anticipated mortality
rates, Consumer Price Index rate, rate of increase in compensation levels,
anticipated service periods and retirement dates. The determination of the
pension benefit obligations and net periodic benefit cost is a critical
accounting estimate as it requires the use of estimates and judgment related to
the amount and timing of expected future cash out flows for benefit payments
and cash in flows for maturities and returns on plan assets. Changes in
estimates and assumptions could have a material impact to the Company's
financial condition or results of operations.
11
The Company also has other key accounting policies, which involve the use of
estimates, judgments and assumptions that are significant to understanding the
Company's results of operation and financial condition, including the valuation
of deferred tax assets and analysis of investment securities. Although
management believes that its estimates, assumptions and judgments are
reasonable, they are based upon information presently available. Actual results
may differ significantly from these estimates under different assumptions,
judgments or conditions.
OVERVIEW
The Company's net income was $1.235 million for the quarter ended March 31,
2007, compared with net income of $1.473 million for the same period in 2006,
or a 16.2% decrease between years. The Company faced a challenging interest
rate environment, and although total interest income increased by $462
thousand, or 7.8% in 2007 versus the first quarter of 2006, this increase was
more than offset by an increase in interest expense of $528 thousand, or 36.5%
between periods. The prime rate has remained flat at 8.25% since June 29, 2006.
The yield curve remained inverted throughout the first quarter of 2007 with
short term interest rates being higher than long term rates. The Company had a
decrease in its net interest margin from 5.29% for the first quarter of 2006 to
5.22% for the first quarter of 2007.
The Company's total assets decreased from $381.1 million at December 31, 2006,
to $376.7 million at March 31, 2007 or a decrease of 1.2%. Deposits decreased
from $319.8 million at December 31, 2006 to $313.5 million at March 31, 2007,
or a decrease of 2.0%. The contraction in both total assets and total deposits
is a seasonal trend during the first calendar quarter of each year. Total loans
including loans held for sale decreased 3.0% from $317.6 million at December
31, 2006 to $308.1 million at March 31, 2007. Almost $4 million of the change
is due to the completion of residential construction loans which is normal
during the first calendar quarter while commercial construction loans
outstanding increased $1.6 million and $2 million is due to decreased municipal
borrowing.
Noninterest expenses are up $271 thousand or 8.0% for the first quarter of 2007
to $3.7 million from $3.4 million for the first quarter of 2006. More than half
that increase is due to personnel costs, including approximately $84 thousand
or 5.6% for direct salary and wages due to year end 2006 raises and the opening
of the Littleton, New Hampshire branch in March 2006. Approximately $83
thousand relates to benefit costs, most of which is an increase in health
insurance expense. The costs to bring or maintain properties in Other Real
Estate Owned account for approximately $40 thousand of the increase.
12
The following unaudited per share information and key ratios depict several
measurements of performance or financial condition for or at the three months
ended March 31, 2007 and 2006, respectively:
Quarter Ended March 31,
-----------------------
2007 2006
---- ----
Return on average assets (ROA) (1) 1.31% 1.58%
Return on average equity (ROE) (1) 11.85% 14.19%
Net interest margin (1)(2) 5.22% 5.29%
Efficiency ratio (3) 67.07% 61.74%
Net interest spread (4) 4.64% 4.87%
Loan to deposit ratio 98.29% 100.29%
Net loan charge-offs (recoveries) to average loans
not held for sale (1) 0.05% (0.04%)
Allowance for loan losses to loans not
held for sale 1.10% 1.02%
Non-performing assets to total assets 1.63% 1.24%
Equity to assets 11.14% 11.23%
Total capital to risk weighted assets 17.60% 17.24%
Book value per share $9.26 $9.20
Earnings per share $0.27 $0.32
Dividends paid per share $0.28 $0.26
Dividend payout ratio (5) 103.70% 81.25%
--------------------
(1) Annualized
(2) The ratio of tax equivalent net interest income to average earning
assets.
(3) The ratio of noninterest expense to net interest income plus noninterest
income excluding securities gains and losses.
(4) The difference between the average rate earned on assets minus the
average rate paid on liabilities.
(5) Cash dividends declared and paid per share divided by consolidated net
income per share.
The prime interest rate has remained flat at 8.25% since June 29, 2006. The
prime rate was 7.25% as of December 31, 2005 and rose twice during the first
quarter in 2006, by 25 basis points each time to reach 7.75% at March 31 2006.
The current prime rate of 8.25% is the highest the prime rate has been since
March 20, 2001. The Company's net interest margin decreased 7 basis points and
net interest spread declined 23 basis points during the first three months of
2007 compared to the first three months of 2006. This decline in the net
interest spread was primarily the result of average interest rates paid on
deposits rising as traditional and nontraditional financial institutions and
tax-exempt credit unions in the Company's market compete aggressively for core
deposit dollars, resulting in pricing pressures.
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 decreased $66
thousand, or 1.5%, to $4.4 million for the three months ended March 31, 2007,
from $4.5 million for the three months ended March 31, 2006. The net interest
spread decreased 23 basis points to 4.64% for the three months ended March 31,
2007, from 4.87% for the three months ended March 31, 2006. As time deposit
"specials" abounded throughout the market place, interest rates paid to attract
and retain time deposits moved up more quickly than rates earned on loans and
other earning assets. The net interest margin for the first quarter of 2007
decreased 7 basis points to 5.22% from the 2006 period at 5.29%. 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
13
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.
Three months ended March 31,
2007 2006
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 $ 8,078 $ 104 5.16% $ 2,317 $ 26 4.44%
Interest bearing deposits in banks 6,789 74 4.40% 8,171 79 3.92%
Investment securities (1), (2) 24,851 284 4.90% 31,539 355 4.78%
Loans, net (1), (3) 309,444 5,900 7.84% 305,883 5,451 7.30%
FHLB of Boston stock 1,405 26 7.53% 1,396 15 4.34%
-------- ------ ----- -------- ------ -----
Total interest-earning assets (1) 350,567 6,388 7.50% 349,306 5,926 6.97%
Cash and due from banks 10,402 10,353
Premises and equipment 6,072 6,058
Other assets 8,857 8,094
-------- --------
Total assets $375,898 $373,811
======== ========
Average Liabilities and Stockholders' Equity:
NOW accounts $ 50,355 $ 94 0.76% $ 52,265 $ 82 0.63%
Savings/money market accounts 94,902 409 1.75% 107,378 391 1.48%
Time deposits 118,741 1,282 4.38% 101,401 767 3.07%
Borrowed funds 15,368 190 4.93% 18,226 207 4.54%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 279,366 1,975 2.86% 279,270 1,447 2.10%
Non-interest bearing deposits 49,481 49,044
Other liabilities 5,351 3,967
-------- --------
Total liabilities 334,198 332,281
Stockholders' equity 41,700 41,530
-------- --------
Total liabilities and
stockholders' equity $375,898 $373,811
======== ========
Net interest income $4,413 $4,479
====== ======
Net interest spread (1) 4.64% 4.87%
===== =====
Net interest margin (1) 5.22% 5.29%
===== =====
--------------------
(1) Average yields reported on a tax-equivalent basis.
(2) Average balances of investment securities are calculated on the amortized cost basis.
(3) Includes loans held for sale and is net of unearned income and allowance for loan losses.
14
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:
o changes in volume (change in volume multiplied by prior rate);
o changes in rate (change in rate multiplied by prior volume); and
o total change in rate and volume.
Changes attributable to both rate and volume have been allocated proportionately
to the change due to volume and the change due to rate.
Three Months Ended March 31, 2007
Compared to
Three Months Ended March 31, 2006
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 73 $ 5 $ 78
Interest bearing deposits in banks (14) 9 (5)
Investment securities (80) 9 (71)
Loans, net 61 388 449
FHLB of Boston stock - 11 11
---- ---- ----
Total interest-earning assets 40 422 462
Interest-bearing liabilities:
NOW accounts (3) 15 12
Savings/money market accounts (49) 67 18
Time deposits 147 368 515
Borrowed funds (34) 17 (17)
---- ---- ----
Total interest-bearing liabilities 61 467 528
---- ---- ----
Net change in net interest income $(21) $(45) $(66)
==== ==== ====
Quarter Ended March 31, 2007, compared to Quarter Ended March 31, 2006.
Interest and Dividend Income. The Company's interest and dividend income
increased $462 thousand, or 7.8%, to $6.4 million for the three months ended
March 31, 2007, from $5.9 million for the three months ended March 31, 2006,
with average earning assets increasing $1.3 million, or 0.4%, to $350.6 million
for the three months ended March 31, 2007, from $349.3 million for the three
months ended March 31, 2006. 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 2007 versus 2006. Average loans approximated
$309.4 million at an average yield of 7.84% for the three months ended March
31, 2007, up $3.5 million from $305.9 million at an average yield of 7.30% for
the three months ended March 31, 2006, or a 1.2% increase in volume and a 54
basis point increase in yield.
The average balance of investments (including mortgage-backed securities)
decreased $6.7 million or 21.2%, to $24.9 million for the three months ended
March 31, 2007, from $31.5 million for the three months ended March 31, 2006.
The decrease in the investment portfolio from the first quarter of 2006
reflects the continuing growth in the loan portfolio, as investment maturities
were used to fund loan growth, which continued to outpace the growth in
deposits. The average level of federal funds sold and overnight deposits
increased $5.8 million, or 248.6%, to $8.1 million for the three months ended
March 31, 2007, from $2.3 million for the three months ended March 31, 2006.
The inverted yield curve throughout the quarter is evident by the yield earned
on Federal Funds sold and overnight deposits of 5.16%. The average level of
interest bearing deposits in banks for the quarter was $6.8 million down $1.4
million or 16.9% from the 2006 average level of $8.2 million. Interest income
from non-loan instruments increased only slightly between periods, with $488
thousand for the first quarter of 2007 and $475 thousand for the same period of
2006, reflecting the overall increase in yields, offset by the overall decrease
in volume.
15
Interest Expense. The Company's interest expense increased $528 thousand, or
36.5%, to $2.0 million for the three months ended March 31, 2007, from $1.4
million for the three months ended March 31, 2006, of which $61 thousand was a
result of the increase in volume while the remaining $467 thousand increase was
due to rate increases fueled by stiff competition for deposit dollars.
Interest expense on deposits increased $545 thousand or 44.0% to $1.8 million
for the quarter ended, March 31, 2007 from $1.2 million for the quarter ended,
March 31, 2006. Competition for deposits has remained stiff. Management also
believes that consumers have become more rate sensitive over the last eighteen
months due to advertised "specials" and the proliferation of non-local
financial institutions trying to gather deposits throughout the market area.
Average time deposits rose to $118.7 million for the three months ended March
31, 2007, from $101.4 million for the three months ended March 31, 2006, or an
increase of 17.1%. The average rate paid on time deposits increased 131 basis
points, to 4.38% from 3.07% for the three months ended March 31, 2007 and 2006,
respectively. The average balances for money market and savings accounts
decreased $12.5 million, or 11.6%, to $94.9 million for the three months ended
March 31, 2007, from $107.4 million for the three months ended March 31, 2006
as the spread widened for interest rates on time deposits, which appeared to
motivate customers to move funds into those higher paying instruments. A $1.9
million, or 3.7% decrease in NOW accounts brought the average balance down to
$50.4 million from $52.3 million between the two years.
Interest expense on borrowed funds dropped from $207 thousand for the quarter
ended, March 31, 2006 to $190 thousand for the quarter ended, March 31, 2007 as
the average funds borrowed from the FHLB of Boston dropped from $17.8 million
to $15.3 million between years.
Provision for Loan Losses. The loan loss provision for the quarters ended March
31, 2007 and 2006 was $45 thousand. Recoveries on loans previously charged off
resulted in an addition to the Allowance for Loan Losses of $17 thousand during
the first quarter of 2007 versus $40 thousand during the same period in 2006.
For further details see, FINANCIAL CONDITION -"Allowance for Loan Losses"
below.
Noninterest income. The following table sets forth changes from the first three
months of 2006 to the first three months of 2007 for components of noninterest
income:
For The Quarter Ended March 31,
(Dollars in thousands) 2007 2006 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 84 $ 71 $ 13 18.3
Service fees 796 706 90 12.7
Net (losses) gains on sales of investment securities (10) 3 (13) (433.3)
Net gains on sales of loans held for sale 27 92 (65) (70.7)
Other 46 74 (28) (37.8)
---- ---- ----
Total noninterest income $943 $946 $ (3) (0.3)
==== ==== ====
Trust income. The increase resulted primarily from increases in regular fee
income which is based on the market value of assets managed and the addition of
new customers.
Service fees. The increase resulted primarily from increases in overdraft fees
of $53 thousand, or 22.6% due to the mid-March 2006 increase from $22 per item
to $25 per item, and ATM usage fees of $14 thousand, or 8.7%, partially offset
by a decline in deposit service charges of $8 thousand, or 13.6%.
Net gains on sales of loans held for sale. Residential real estate loans of
$3.4 million were sold for a net gain of $27 thousand during the first quarter
of 2007 versus sales of $6.8 million for a net gain of $92 thousand during the
first quarter of 2006.
Other. The decrease between periods is primarily due to the reduction in net
mortgage servicing rights of $33 thousand from 2006 to 2007. There was also a
decrease of $7 thousand in royalties from oil and gas leases. These two
reductions were partially offset by a $19 thousand gain on the sale of Other
Real Estate Owned.
16
Noninterest expense. The following table sets forth changes from the first
three months of 2006 to the first three months of 2007 for components of
noninterest expense:
For The Quarter Ended March 31,
(Dollars in thousands) 2007 2006 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $1,578 $1,494 $ 84 5.6
Pension and employee benefits 660 577 83 14.4
Occupancy expense, net 220 203 17 8.4
Equipment expense 262 256 6 2.3
Equity in losses of affordable
housing investments 66 109 (43) (39.4)
Other 882 758 124 16.4
------ ------ ----
Total noninterest expense $3,668 $3,397 $271 8.0
====== ====== ====
Salaries and wages and related expenses. The increase in 2007 over 2006 was due
primarily to regular salary activity and 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, an increase in the accrual
for pension plan expense and a $68 thousand or 30.9% increase in the Company's
medical and dental insurance costs account for the majority of the increase in
pension and employee benefits.
Occupancy Expense. The increase for 2007 over 2006 was due primarily to the new
Littleton, New Hampshire branch opened in March of 2006 and the increased costs
of fuel and utilities throughout the offices.
Equity in losses of affordable housing investments. The expense for 2006
included a catch up adjustment for $43 thousand related to two 2005 investments
once the 2005 audited financial statements were received.
Other. Increase between years due to an increase in contributions expense,
legal fees, trust department expenses, Vermont franchise taxes due to the
expiration of state tax credits, and the costs to bring or maintain properties
in Other Real Estate Owned.
Income Tax Expense. The Company has provided for current and deferred federal
income taxes for the current and all prior periods presented. The Company's
provision for income taxes was $408 thousand for the three months ended March
31, 2007 and $510 thousand for 2006, mostly as a result of the decrease in
taxable net income compared to the 2006 comparison period. The Company's
effective tax rate decreased to 24.8% for the three months ended March 31,
2007, from 25.7% for the same period in 2006, reflecting an increase in
non-taxable municipal loan income.
FINANCIAL CONDITION
At March 31, 2007 the Company had total consolidated assets of $376.7 million,
including gross loans and loans held for sale ("total loans") of $308.1
million, deposits of $313.5 million and stockholders' equity of $42.0 million.
The Company's total assets decreased $4.5 million or 1.2% to $376.7 million at
March 31, 2007, from $381.1 million at December 31, 2006. Net loans and loans
held for sale were $304.7 million, or 80.9% of total assets at March 31, 2007,
as compared to $314.1 million, or 82.4% of total assets at December 31, 2006.
Cash and cash equivalents, including federal funds sold and overnight deposits,
decreased $2.4 million, or 11.2%, to $18.6 million at March 31, 2007, from
$21.0 million at December 31, 2006. Interest bearing deposits in banks
increased $4.8 million or 88.4% from $5.4 million at December 31, 2006 to $10.2
million at March 31, 2007 as these FDIC insured deposits were one of the most
attractive investment alternatives during the first quarter of 2007.
Investment securities available-for-sale increased from $23.7 million at
December 31, 2006, to $26.5 million at March 31, 2007, a $2.8 million, or
12.0%, increase. As loan demand was not as strong during the first quarter of
2007, the opportunity was taken to rebuild the investment portfolio to a more
normal level. The securities available-for-sale and interest bearing deposits
in banks increased from 7.6% of total assets at December 31, 2006 to 9.8% at
March 31, 2007.
17
Deposits decreased $6.3 million, or 2.0%, to $313.5 million at March 31, 2007,
from $319.8 million at December 31, 2006, reflecting a pattern of the seasonal
variation in dollars on deposit. Noninterest bearing deposits decreased $8.5
million, or 15.5%, from $54.9 million at December 31, 2006, to $46.3 million at
March 31, 2007 while interest bearing deposits increased $2.2 million, or 0.8%,
from $264.9 million at December 31, 2006 to $267.2 million at March 31, 2007.
(See average balances and rates in the Yields Earned and Rates Paid table on
Page 14). Total borrowings increased $757 thousand or 5.2% to $15.4 million at
March 31, 2007, from $14.6 million at December 31, 2006 in order to match fund
some specific loans as lower cost deposits seasonally declined during the first
three months of 2007.
Total capital increased $32 thousand from December 31, 2006 to $42.0 million at
March 31, 2007, reflecting net income of $1.2 million for the first three
months of 2007, less the regular cash dividend paid of $1.3 million, the
purchase of Treasury stock totaling $34 thousand and a decrease of $98 thousand
in accumulated other comprehensive loss. (See Capital Resources section on Page
30)
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,
2007, the Company's total loan portfolio was $308.1 million, or 81.8% of
assets, down from $317.6 million, or 83.3% of assets as of December 31, 2006,
and from $311.0 million or 83.6% of assets as of March 31, 2006. Total loans
(including loans held for sale) have decreased $9.5 million since December 31,
2006 while average loans (including loans held for sale) were $305.9 million
for the 2006 comparison period and have grown to $309.4 million or 1.1% for the
first three months of 2007. The Company sold $3.4 million of loans held for
sale during the first three months of 2007 resulting in a gain on sale of loans
of $27 thousand, compared with loan sales of $6.8 million and related gain on
sale of loans of $92 thousand for the first three months of 2006.
The following table shows information on the composition of the Company's total
loan portfolio as of March 31, 2007 and December 31, 2006:
Loan Type March 31, 2007 December 31, 2006
--------- -------------- -----------------
(Dollars in thousands)
Amount Percent Amount Percent
Residential real estate $111,134 36.1 $114,139 35.9
Construction real estate 20,208 6.6 22,568 7.1
Commercial real estate 129,121 41.9 130,848 41.2
Commercial 18,544 6.0 19,253 6.1
Consumer 7,207 2.3 7,717 2.4
Municipal loans 17,370 5.6 19,297 6.1
Loans Held for Sale 4,560 1.5 3,750 1.2
-------- ----- -------- -----
Total loans 308,144 100.0 317,572 100.0
Deduct:
Allowance for loan losses 3,342 3,338
Unearned net loan fees 119 120
-------- --------
Net loans and loans held for sale $304,683 $314,114
======== ========
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/"Freddie Mac") and the Vermont Housing Finance Agency (VHFA). The
Company services a $197.5 million residential real estate mortgage portfolio,
approximately $86.4 million of which was serviced for unaffiliated third
parties at March 31, 2007. 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 $6.4 million
of commercial and commercial real estate loans for unaffiliated third parties
as of March 31, 2007. 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
18
retained was $305 thousand at March 31, 2007, with an estimated market value in
excess of their carrying value.
In the ordinary course of business, the Company occasionally participates out,
on a non-recourse basis, a portion of commercial or real estate loans to other
financial institutions for liquidity or credit concentration management
purposes. The total of loans participated out as of March 31, 2007 was $12.3
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, conservative 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, and exceptions are required to be approved by a senior loan officer
or the Board of Directors. The Company monitors its delinquency levels for any
negative or adverse trends. There can be no assurance, however, that the
Company's loan portfolio will not become subject to increasing pressures from
deteriorating borrower credit due to general or local economic conditions.
Restructured loans include the Company's troubled debt restructurings that
involved forgiving a portion of interest or principal on any loans, refinancing
loans at a rate materially less than the market rate, rescheduling loan
payments, or granting other concessions to a borrower due to financial or
economic reasons related to the debtor's financial difficulties. Restructured
loans do not include qualifying restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period of time.
Restructured loans in compliance with modified terms totaled $1.3 million at
March 31, 2007 and December 31, 2006 all of which is guaranteed by the U.S.
Department of Agriculture-Rural Development. At, March 31, 2007 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 $3.0 million, or 0.99% of
gross loans at March 31, 2007, $2.5 million, or 0.80%, at December 31, 2006,
and $1.3 million, or 0.43%, at March 31, 2006. The increase over the last three
months is primarily due to one residential construction loan and two
residential mortgages, all with loan to value ratios less than 75% being placed
in nonaccrual status. Certain loans in non-accrual status are covered by
guarantees of U.S. Government or state agencies. Approximately $511 thousand of
the balances in this category were covered by such guarantees at March 31,
2007. The aggregate interest income not recognized on such nonaccrual loans
amounted to approximately $389 thousand and $270 thousand as of March 31, 2007
and 2006, respectively and $371 thousand as of December 31, 2006.
The Company had $2.9 million in loans past due 90 days or more and still
accruing at March 31, 2007 and $2.2 million at December 31, 2006. The increase
between periods was mainly due to one commercial
19
real estate loan that has subsequently been brought current. Certain loans past
due 90 days or more and still accruing interest are covered by guarantees of
U.S. Government or state agencies. Approximately $185 thousand of the balances
in this category were covered by such guarantees at March 31, 2007.
At March 31, 2007, and December 31, 2006, respectively, the Company had
internally classified certain loans totaling $23 thousand and $319 thousand,
respectively. 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:
o the financial condition of the borrower is unsatisfactory;
o repayment terms have not been met;
o the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
o confidence is diminished;
o loan covenants have been violated;
o collateral is inadequate; or
o other unfavorable factors are present.
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are 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 $3 thousand of
land and $288 thousand of commercial real estate property classified as OREO at
March 31, 2007 compared to $3 thousand of land, $98 thousand of residential
real estate and $298 thousand of commercial real estate property at December
31, 2006. The other real estate owned was included in Other Assets on the
Consolidated Balance Sheet at both time periods.
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 for
internal analytical purposes 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
available to cover losses in the entire portfolio.
The allowance for loan losses 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 for loan losses to the Board of Directors, indicating any
changes since the last review and any recommendations as to adjustments.
Additionally, various regulatory agencies periodically review the Company's
allowance for loan losses as an integral part of their examination process.
20
For the three months ended March 31, 2007, the methodology used to determine
the provision for loan losses was unchanged from the prior year. The Company's
loan portfolio balance decreased $10.2 million or 3.3% from December 31, 2006.
There was a reduction in the balance of all loan types between December 31,
2006 and March 31, 2007. The overall reduction in the loan portfolio decreased
the estimated allowance for loan losses, however a rise of $1.2 million in
nonperforming loans (mainly due to one commercial real estate loan which has
subsequently been brought current) increased the estimated allowance for loan
losses. As a result of the increase in nonperforming loans, the Company
designated a loan loss provision for the three months ended March 31, 2007 of
$45 thousand which, together with net charge-offs after recoveries left the
allowance for loan losses at $3.3 million at March 31, 2007. There was no
material change in the lending programs or terms during the quarter.
The following table reflects activity in the allowance for loan losses for the
three months ended March 31, 2007 and 2006:
Three Months Ended, March 31,
-----------------------------
2007 2006
---- ----
(Dollars in thousands)
Balance at beginning of period $3,338 $3,071
Charge-offs
Real Estate 30 -
Commercial - -
Consumer and other 28 9
------ ------
Total charge-offs 58 9
------ ------
Recoveries
Real Estate 7 22
Commercial 1 12
Consumer and other 9 6
------ ------
Total recoveries 17 40
------ ------
Net (charge-offs) recoveries (41) 31
------ ------
Provision for loan losses 45 45
------ ------
Balance at end of period $3,342 $3,147
====== ======
21
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, 2007 December 31, 2006
------------------ -----------------
(Dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 677 36.6 $ 640 34.8
Commercial 1,908 42.5 1,901 41.7
Construction 263 6.7 296 7.2
Other Loans
Commercial 297 6.1 312 6.1
Consumer installment 110 2.4 125 2.5
Municipal, Other and
Unallocated 87 5.7 64 7.7
------ ----- ------ -----
Total $3,342 100.0 $3,338 100.0
====== ===== ====== =====
Ratio of Net Charge Offs
(Recoveries) to Average Loans
not held for sale (1) 0.05 (0.03)
===== =====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.10 1.06
===== =====
Ratio of Allowance for Loan
Losses to non-performing
loans (2) 55.93 70.26
===== =====
--------------------
(1) Annualized
(2) Non-performing loans include loans in non-accrual status and loans past
due 90 days or more and still accruing.
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.
Management of the Company believes that the allowance for loan losses at March
31, 2007, was adequate to cover losses inherent in the Company's loan portfolio
as of such date. There can be no assurance that the Company will not sustain
losses in future periods, which could be greater than the size of the allowance
for loan losses at March 31, 2007. 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, 2007, the reported value of investment
securities available-for-sale was $26.5 million or 7.0% of assets. The amount
in investment securities available-for-sale increased from $23.7 million, or
6.2% of assets at December 31, 2006, as the Company rebuilt the investment
portfolio some in light of decreased loan demand.
The Company had no securities classified as held-to-maturity or trading. The
reported value of investment securities available-for-sale at March 31, 2007
reflects a negative valuation adjustment of $85 thousand. The offset of this
adjustment, net of income tax effect, was a $56 thousand loss reflected in the
Company's other comprehensive loss component of stockholders' equity at March
31, 2007.
At December 31, 2006, the Company had thirty-eight debt securities with a fair
value of $15.0 million with an unrealized loss of $400 thousand, or 63.3% of
the value of the amortized cost of the entire investment portfolio, that had
existed for more than 12 months.
22
At March 31, 2007, thirty-seven securities with a fair value of $14.3 million
or 53.9% of the portfolio have been in a loss position for more than twelve
months with unrealized losses totaling $288 thousand. These unrealized losses
are attributed to the interest rate environment. As increases in interest rates
have slowed down and the negative yield curve has eased some, the fair value of
the investment portfolio has improved over the end of the previous quarter. The
Company has the ability to hold all of these securities, classified as
available-for-sale, for the foreseeable future. Management deems the unrealized
losses on the Company's securities not to be other than temporary.
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, 2007, and
December 31, 2006:
Three Months Ended March 30, Year Ended December 31,
2007 2006
--------------------------------- ---------------------------------
(Dollars in thousands)
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
Non-time deposits:
Demand deposits $ 49,481 15.8 - $ 49,328 15.9 -
NOW accounts 50,355 16.0 0.76% 52,937 17.1 0.74%
Money Market accounts 51,709 16.5 2.67% 56,286 18.1 2.48%
Savings accounts 43,193 13.8 0.65% 46,061 14.8 0.60%
-------- ----- -------- -----
Total non-time deposits 194,738 62.1 1.05% 204,612 65.9 1.01%
-------- ----- -------- -----
Time deposits:
Less than $100,000 74,181 23.7 4.06% 66,982 21.6 3.34%
$100,000 and over 44,560 14.2 4.91% 38,706 12.5 4.14%
-------- ----- -------- -----
Total time deposits 118,741 37.9 4.38% 105,688 34.1 3.64%
-------- ----- -------- -----
Total deposits $313,479 100.0 2.31% $310,300 100.0 1.90%
======== ===== ======== =====
The Company's customers have been opening certificates of deposit to take
advantage of increasing time deposit rates as evidenced by the $5.9 million or
15.1% increase in average time deposits of $100,000 and over and the $7.2
million or 10.7% increase in time deposits less than $100,000 in 2007 year to
date versus 2006.
As a participant in the Certificate of Deposit Account Registry Service (CDARS)
of Promontory Interfinancial Network, LLC, there were $2.8 million of deposits
on the balance sheet at March 31, 2007 which are considered to be "brokered"
deposits, but those deposits are matched dollar for dollar with Union's
customer deposits which have been placed in other financial institutions in
order to provide those customers with full FDIC insurance coverage.
23
The following table sets forth information regarding the Company's time
deposits in amounts of $100,000 and over at March 31, 2007, and December 31,
2006, that mature during the periods indicated:
March 31, 2007 December 31, 2006
-------------- -----------------
(Dollars in thousands)
Within 3 months $23,841 $13,466
3 to 6 months 8,870 17,254
6 to 12 months 10,314 11,299
Over 12 months 2,694 2,219
------- -------
$45,719 $44,238
======= =======
The shortening of the maturity time periods from December 31, 2006 to March 31,
2007 is a normal seasonal occurrence as the majority of municipal certificates
of deposit are written for one year and mature June 30th.
Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB) were
$15.4 million at March 31 2007, at a weighted average rate of 4.93%, and $14.6
million at December 31, 2006, at a weighted average rate of 4.82%. The change
between year end 2006 and the end of the first quarter 2007 is a net increase
of $0.8 million or 5.5% due partially to the match funding of two large
commercial real estate loans offset by monthly principal payments on amortizing
notes.
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 including interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as to
the level of risk assumed by the Company in its balance sheet. The Board of
Directors reviews and approves risk management policies, including risk limits
and guidelines and reviews quarterly the current position in relationship to
those limits and guidelines. Daily oversight functions are delegated to the
Asset Liability Management Committee ("ALCO"). The ALCO, consisting of senior
business and finance officers, actively measures, monitors, controls and
manages the interest rate risk exposure that can significantly impact the
Company's financial position and operating results. The ALCO sets liquidity
targets based on the Company's financial position and existing and projected
economic and market conditions. The Company does not have any market risk
sensitive instruments acquired for trading purposes. The Company attempts to
structure its balance sheet to maximize net interest income and shareholder
value while controlling its exposure to interest rate risk and strategies might
include selling or participating out loans held for sale or investments
available-for-sale. The ALCO formulates strategies to manage interest rate risk
by evaluating the impact on earnings and capital of such factors as current
interest rate forecasts and economic indicators, potential changes in such
forecasts and indicators, liquidity, and various business strategies. The
ALCO's methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap", which provides a static analysis of
the maturity and repricing characteristics of the Company's entire balance
sheet, and a simulation analysis, which calculates projected net interest
income based on alternative
24
balance sheet and interest rate scenarios, including "rate shock" scenarios
involving immediate substantial increases or decreases in market rates of
interest.
Members of ALCO meet informally 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, 2007, 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
2006 for a flat rate environment (Prime at December 31, 2006 and March 31,
2007, was 8.25%) projected the following for the three months ended March 31,
2007, compared to the actual results:
March 31, 2007
-------------------------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(Dollars in thousands)
Net Interest Income $4,346 $4,413 1.5%
Net Income $1,237 $1,235 (0.2%)
Return on Assets 1.38% 1.31% (5.1%)
Return on Equity 12.37% 11.85% (4.2%)
Actual net interest income is higher than projected mainly due to a $49
thousand interest income recovery on a troubled mortgage loan which paid off.
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 or
certificates of deposit. Such instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable-rate
loans, the contract or notional amounts do not represent management's estimate
of the actual exposure to credit loss. The Company controls the risk of
interest rate cap agreements through credit approvals, limits, and monitoring
procedures.
25
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of March 31, 2007 and December 31,
2006, the contract or notional amount of financial instruments whose contract
or notional amount represents credit risk was as follows:
March 31, 2007 December 31, 2006
-------------- -----------------
(Dollars in thousands)
Commitments to originate loans $10,082 $12,176
Unused lines of credit 34,013 36,574
Standby letters of credit 1,966 1,046
Credit Card arrangements 1,554 1,457
Equity investment commitment to housing
limited partnership 917 917
Commitments to purchase investment
securities 349 -
------- -------
Total $48,881 $52,170
======= =======
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 significant fixed and determinable contractual obligations to
third parties at March 31, 2007, and December 31, 2006, were as follows:
March 31, 2007 December 31, 2006
-------------- -----------------
(Dollars in thousands)
Operating lease commitments $ 292 $ 316
Maturities on borrowed funds 15,353 14,596
Deposits without stated maturity (1) 191,759 202,997
Certificates of deposit (1) 121,751 116,825
Pension plan contributions (2) 680 700
Deferred compensation payouts (3) 476 551
Equity in housing limited partnerships - 356
Construction contract (4) 20 28
-------- --------
Total $330,331 $336,369
======== ========
--------------------
(1) 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.
(2) Funding requirements for pension benefits after 2007 are excluded due to
the significant variability in the assumptions required to project the
amount and timing of future cash contributions.
(3) The Company owns life insurance on the lives of the payees, in an amount
estimated by management to be sufficient to reimburse the Company for the
deferred compensation payments should the Company desire to utilize the
death benefit proceeds for that purpose. The policies have a current cash
surrender value of $1.9 million.
(4) Contract to install central air conditioning in one location.
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 Bank's daily total reserve for the 14 day maintenance period
including March 31, 2007 was $332 thousand and for December 31, 2006 was $2.3
million, both of which were satisfied by vault cash. The Bank reclassifies
transaction deposit accounts that meet certain criteria to savings accounts, in
accordance with Federal Reserve banking regulations, for the purpose of
reporting deposits subject to reserves to the Federal Reserve Bank of Boston.
Fluctuations in the number and balances of transaction deposit accounts
reclassified for reporting deposits subject to reserves impact the total
reserve requirement for each 14 day maintenance period. The Company has also
committed to maintain a noninterest bearing contracted clearing balance of $1.0
million at March 31, 2007 with the Federal Reserve Bank of Boston.
26
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is
defined as the difference between interest earning assets and interest bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling
interest earning assets and interest bearing liabilities into periods based
upon the next date on which such assets and liabilities could mature or
reprice. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except that:
o adjustable-rate loans, investment securities, variable-rate time
deposits, and FHLB advances are included in the period when they are
first scheduled to adjust and not in the period in which they mature;
o fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker estimates,
the results of a prepayment model utilized by the Company, and empirical
data;
o other nonmortgage related fixed-rate loans reflect scheduled contractual
amortization, with no estimated prepayments; and
o NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by the Company of the sensitivity of each such category
of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and
considers them reasonable. However, the interest rate sensitivity of the
Company's assets and liabilities in the tables could vary substantially if
different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
27
The following table shows the Company's rate sensitivity analysis as of March
31, 2007:
Cumulative repriced within
-------------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------- ------- ------ ------ ------ -----
(Dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 9,258 $ - $ - $ - $ - $ 9,258
Interest bearing deposits in banks 198 3,157 5,328 1,273 88 10,044
Investment securities available-for-sale (1)(3) 1,135 5,139 10,836 3,631 5,428 26,169
FHLB Stock - - - - 1,385 1,385
Loans and loans held for sale (2)(3) 107,745 58,118 83,020 44,839 14,303 308,025
-------- ------- -------- -------- --------- --------
Total interest sensitive assets $118,336 $66,414 $ 99,184 $ 49,743 $ 21,204 $354,881
Interest sensitive liabilities:
Time deposits $48,381 $56,070 $ 16,187 $ 1,113 $ - $121,751
Money markets 9,700 - - - $ 42,027 51,727
Regular savings 3,549 - - - 39,312 42,861
NOW accounts 12,908 - - - 37,916 50,824
Borrowed funds 1,422 572 1,525 3,175 8,659 15,353
-------- ------- -------- -------- --------- --------
Total interest sensitive liabilities $ 75,960 $56,642 $ 17,712 $ 4,288 $ 127,914 $282,516
Net interest rate sensitivity gap $42,376 $9,772 $ 81,472 $ 45,455 $(106,710) $ 72,365
Cumulative net interest rate
sensitivity gap $ 42,376 $52,148 $133,620 $179,075 $ 72,365
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 11.3% 13.9% 35.5% 47.6% 19.3%
Cumulative net interest rate sensitivity
gap as a percentage of total
Interest sensitive assets 11.9% 14.7% 37.7% 50.5% 20.4%
Cumulative net interest rate sensitivity
gap as a percentage of total
Interest sensitive liabilities 15.1% 18.5% 47.4% 63.4% 25.7%
(1) Investment securities available-for-sale exclude marketable equity securities with a fair value of $357 thousand that may
be sold by the Company at any time.
(2) Balances shown net of unearned income of $119 thousand.
(3) Estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and capital
(Net Fair Value) under various interest rate scenarios, balance sheet trends,
and strategies over a relatively short time horizon. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, product pricing, prepayment speeds on mortgage related assets,
principal maturities on other financial instruments, and changes in funding
mix. While such assumptions are inherently uncertain as actual rate changes
rarely follow any given forecast and asset-liability pricing and other model
inputs usually do not remain constant in their historical relationships,
management believes that these assumptions are reasonable. Based on the results
of these simulations, the Company is able to quantify its estimate of interest
rate risk and develop and implement appropriate strategies.
The following chart reflects the cumulative results of the Company's 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. Shocks are
intended to capture interest rate risk under extreme conditions by immediately
shifting
28
to the new level. The projection utilizes a rate shock, applied
proportionately, of up and down 300 basis points from the March 31, 2007 prime
rate of 8.25%, this is the highest and lowest internal slopes monitored. This
slope range was determined to be the most relevant during this economic cycle.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
(Dollars in thousands)
Return on Return on Net Fair
12 Months Prime Net Interest Change Net Assets Equity Value
Ending Rate Income % Income % % Ratio
March-08 11.25% $20,178 12.0 $7,052 1.88 16.4 9.0%
8.25% $18,024 0.00 $5,560 1.41 12.6 11.1%
5.25% $15,717 (12.8) $3,963 .89 8.2 12.5%
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, 2008, are within approved ALCO guidelines for interest rate risk for a flat
up 300 basis point rate environment but in a down 300 basis point rate
environment both Return on Assets and Return on Equity are below policy
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 under different rate scenarios.
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, 2007, the Company's ratio of average loans to average
deposits was 98.7% compared to the prior year of 100.6%.
In addition, as Union Bank is a member of the FHLB of Boston, it has access to
an unused line of credit up to $4.6 million at March 31, 2007 over and above
the term advances already drawn on the line based on FHLB estimate as of that
date and with the purchase of required capital stock that amount would rise to
$37.8 million. This line of credit could be used for either short or long term
liquidity or other needs. In addition to its borrowing arrangements with the
FHLB of Boston, Union Bank maintains a $7.5 million pre-approved Federal Funds
line of credit with an upstream correspondent bank and a repurchase agreement
line with a selected brokerage house. There were no balances outstanding on
either line at March 31, 2007. Union is a member of the Certificate of Deposit
Account Registry Service ("CDARS") of Promontory Interfinancial Network which
allows Union to provide higher FDIC deposit insurance to customers by
exchanging deposits with other members and allows Union to purchase deposits
from other members as another source of funding. There were no purchased
deposits at either March 31, 2007 or December 31, 2006 although Union had
exchanged $2.8 million and $2.5 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
29
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 85% 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 seven 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. The inverted yield curve for the last nine months and the
proliferation of certificate of deposit specials have contributed to the
shortening of the maturities in time 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 $42.0 million
at March 31, 2007, reflecting net income of $1.2 million for the first three
months of 2007, less cash dividends paid of $1.3 million, the purchase of 1,563
shares of Treasury stock totaling $34 thousand, and a decrease of $98 thousand
in accumulated other comprehensive loss, compared to stockholders' equity of
$41.9 million at year end 2006.
Union Bankshares, Inc. has 5 million shares of $2.00 par value common stock
authorized. As of March 31, 2007, the Company had 4,918,611 shares issued, of
which 4,530,414 were outstanding and 388,197 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 repurchase
program is open for an unspecified period of time. As of March 31, 2007 the
Company had repurchased 1,563 shares under this program, for a total cost of
$34 thousand, year to date and 27,249 shares at a total cost of $576 thousand
since the inception of the program.
As of March 31, 2007, there were outstanding employee incentive stock options
with respect to shares of the Company's common stock, granted pursuant to Union
Bankshares' 1998 Incentive Stock Option Plan. As of such date, 12,825 options
were currently exercisable but only 3,325 of those options were "in the money".
Of the 75,000 shares authorized for issuance under the 1998 Plan, 45,450 shares
remain available for future option grants. During the first quarter of 2007, no
incentive stock options were granted or exercised pursuant to the 1998 plan.
30
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, 2007, that both companies meet all capital adequacy
requirements to which they are subject. As of March 31, 2007, 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,
2007, 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, 2007, 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 $45,819 17.49% $20,958 8.0% $26,197 10.0%
Company $46,214 17.60% $21,006 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $42,473 16.22% $10,474 4.0% $15,711 6.0%
Company $42,860 16.32% $10,505 4.0% N/A N/A
Tier I capital to average assets
Union Bank $42,473 11.33% $14,995 4.0% $18,744 5.0%
Company $42,860 11.42% $15,012 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 2006 the
Securities and Exchange Commission, 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 the Company's
liquidity, financial position, capital resources, or results of 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 24
through 31 in this Form 10-Q.
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 end of the
period covered by this report and concluded that those disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files with the Commission is accumulated
31
and communicated to the Company's management, including its principal executive
and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
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, 2006.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------------------------------------------------
Maximum Number of
Shares that May Yet Be
Total Numbers of Shares Purchased Purchased Under
Total Number of Average Price as Part of Publicly Announced Plans the Plans or
Period Shares Purchased Paid per Share or Programs (1) Programs
------------------------------------------------------------------------------------------------------------------------
January 2007 81 $21.25 81 74,233
February 2007 15 $21.84 15 74,218
March 2007 1,467 $21.50 1,467 72,751
(1) Since November 18, 2005, the Company has maintained an informal stock repurchase program pursuant to which the
Company may repurchase 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. As of March 31, 2007 the Company had repurchased
1,563 shares under this program for a total cost of $34 thousand during 2007. Since inception of the program, the
Company has repurchased 27,249 shares at a total cost of $576 thousand.
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Item 6. Exhibits.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 11, 2007 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)
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EXHIBIT INDEX
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
34