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: September 30, 2006
Commission file number: 001-15985
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. (See definition of "accelerated
filer and large accelerated filer", in Rule 12b-2 of the Exchange Act).
(Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 3, 2006:
Common Stock, $2 par value 4,538,240 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Consolidated Financial Statements Union Bankshares, Inc.
and Subsidiary
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 38
Item 4. Controls and Procedures. 38
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 38
Item 1A. Risk Factors. 38
Item 2. Unregistered Sales of Securities and Use of Proceeds. 38
Item 6. Exhibits. 39
Signatures 39
2
Part l Financial Information
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2006 2005
------------- ------------
Assets (Dollars in thousands)
Cash and due from banks $ 10,345 $ 14,019
Federal funds sold and overnight deposits 5,304 189
-------- --------
Cash and cash equivalents 15,649 14,208
Interest bearing deposits in banks 6,107 8,598
Investment securities available-for-sale 22,323 32,408
Loans held for sale 2,423 6,546
Loans 315,592 300,677
Allowance for loan losses (3,324) (3,071)
Unearned net loan fees (127) (152)
-------- --------
Net loans 312,141 297,454
Accrued interest receivable 1,871 1,972
Premises and equipment, net 5,994 5,898
Other assets 8,531 7,662
-------- --------
Total assets $375,039 $374,746
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 50,492 $ 52,617
Interest bearing 258,440 260,682
-------- --------
Total deposits 308,932 313,299
Borrowed funds 19,075 16,256
Accrued interest and other liabilities 4,397 3,588
-------- --------
Total liabilities 332,404 333,143
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued at 9/30/06 and 12/31/05 9,837 9,837
Paid-in capital 147 140
Retained earnings 34,888 33,761
Treasury stock at cost; 377,871 shares at 9/30/06 and 375,948
at 12/31/05 (2,079) (2,037)
Accumulated other comprehensive loss (158) (98)
-------- --------
Total stockholders' equity 42,635 41,603
-------- --------
Total liabilities and stockholders' equity $375,039 $374,746
======== ========
See accompanying notes to the unaudited consolidated financial statements.
3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands except Per Share Data)
Interest income
Interest and fees on loans $ 6,122 $ 5,241 $ 17,427 $ 14,793
Interest on debt securities
Taxable 188 303 721 948
Tax exempt 47 45 145 145
Dividends 49 24 94 64
Interest on federal funds sold and overnight deposits 67 98 110 135
Interest on interest bearing deposits in banks 61 71 208 185
--------- --------- --------- ---------
Total interest income 6,534 5,782 18,705 16,270
--------- --------- --------- ---------
Interest expense
Interest on deposits 1,532 1,108 4,176 2,794
Interest on borrowed funds 287 160 700 355
--------- --------- --------- ---------
Total interest expense 1,819 1,268 4,876 3,149
--------- --------- --------- ---------
Net interest income 4,715 4,514 13,829 13,121
Provision for loan losses - - 150 -
--------- --------- --------- ---------
Net interest income after provision for loan losses 4,715 4,514 13,679 13,121
--------- --------- --------- ---------
Noninterest income
Trust income 74 67 219 196
Service fees 787 756 2,280 2,159
Net gains on sales of investment securities 5 - 22 1
Net gains on sales of loans held for sale 108 48 227 167
Other income 19 29 194 170
--------- --------- --------- ---------
Total noninterest income 993 900 2,942 2,693
--------- --------- --------- ---------
Noninterest expenses
Salaries and wages 1,536 1,444 4,541 4,229
Pension and employee benefits 541 497 1,670 1,532
Occupancy expense, net 184 190 585 592
Equipment expense 269 277 786 789
Other expenses 893 944 2,689 2,668
--------- --------- --------- ---------
Total noninterest expense 3,423 3,352 10,271 9,810
--------- --------- --------- ---------
Income before provision for income taxes 2,285 2,062 6,350 6,004
Provision for income taxes 623 568 1,681 1,682
--------- --------- --------- ---------
Net income $ 1,662 $ 1,494 $ 4,669 $ 4,322
========= ========= ========= =========
Earnings per common share $ 0.37 $ 0.33 $ 1.03 $ 0.95
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,540,740 4,554,663 4,541,022 4,554,663
========= ========= ========= =========
Dividends per common share $ 0.26 $ 0.24 $ 0.78 $ 1.12
========= ========= ========= =========
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, 2005 4,542,663 $9,837 $140 $33,761 $(2,037) $ (98) $41,603
Comprehensive income:
Net income - - - 4,669 - - 4,669
Change in net unrealized loss on
investment securities available-for-sale,
net of reclassification adjustment and
tax effects - - - - - (60) (60)
-------
Total comprehensive income - - - - - - 4,609
-------
Cash dividends declared
($0.78 per share) - - - (3,542) - - (3,542)
Issuance of stock options - - 7 - - - 7
Purchase of treasury stock (1,923) - - - (42) - (42)
--------- ------ ---- ------- ------- ----- -------
Balances, September 30, 2006 4,540,740 $9,837 $147 $34,888 $(2,079) $(158) $42,635
========= ====== ==== ======= ======= ===== =======
See accompanying notes to the unaudited consolidated financial statements.
5
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------
September 30, September 30,
2006 2005
---- ----
(Dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 4,669 $ 4,322
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 585 588
Provision for loan losses 150 -
Credit for deferred income taxes (109) (212)
Net amortization on investment securities 55 112
Equity in losses of limited partnerships 231 156
Issuance of stock options 7 -
Decrease in unamortized loan fees (26) (11)
Proceeds from sales of loans held for sale 15,476 13,810
Origination of loans held for sale (11,127) (12,116)
Net gain on sales of investment securities (22) (1)
Net gain on sales of loans held for sale (227) (167)
Net gain on disposals of premises and equipment (6) (2)
Decrease (increase) in accrued interest receivable 101 (205)
Increase in other assets (341) (115)
Increase (decrease) in income taxes 153 (105)
Decrease in accrued interest payable 289 89
Increase in other liabilities 369 749
-------- --------
Net cash provided by operating activities 10,227 6,892
-------- --------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 2,788 1,581
Purchases (297) (6,151)
Investment securities available-for-sale
Sales 7,594 1,994
Maturities, calls and paydowns 3,321 11,297
Purchases (954) (7,611)
Net purchase of Federal Home Loan Bank stock (443) -
Increase in loans, net (15,156) (18,807)
Recoveries of loans charged off 152 43
Purchases of premises and equipment (683) (875)
Investments in limited partnerships - (142)
6
Nine Months Ended
-------------------------------
September 30, September 30,
2006 2005
---- ----
(Dollars in thousands)
Proceeds from sales of premises and equipment 9 2
Proceeds from sales of repossessed property 15 11
-------- --------
Net cash used in investing activities (3,654) (18,658)
-------- --------
Cash Flows From Financing Activities
Increase in borrowings outstanding, net 2,819 5,605
Net decrease in non-interest bearing deposits (2,125) (6,031)
Net (decrease) increase in interest bearing deposits (2,242) 17,339
Purchase of treasury stock (42) -
-
Dividends paid (3,542) (5,102)
-------- --------
Net cash (used in) provided by in financing activities (5,132) 11,811
-------- --------
Increase in cash and cash equivalents 1,441 45
Cash and cash equivalents
Beginning 14,208 21,117
-------- --------
Ending $ 15,649 $ 21,162
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 4,588 $ 3,061
======== ========
Income taxes paid $ 1,685 $ 1,001
======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities
Investment in limited partnerships acquired by capital
contributions payable - $ (748)
======== ========
Change in unrealized losses on investment securities
available-for-sale $ (90) $ (230)
======== ========
Other real estate acquired in settlement of loans $ 177 $ 244
======== ========
Repossessed property acquired in settlement of loans $ 15 $ 12
======== ========
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 September 30, 2006
and 2005, and for the quarters then ended have been prepared in conformity with
U.S. generally accepted accounting principles (GAAP), general practices within
the banking industry, and the accounting policies described in the Company's
Annual Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 2005. In the opinion of the Company's management, all adjustments,
consisting only of normal recurring adjustments and disclosures necessary for a
fair presentation of the information contained herein have been made. This
information should be read in conjunction with the Company's 2005 Annual Report
to Shareholders, 2005 Annual Report on Form 10-K, and current reports on Form
8-K. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2006, or any other interim period.
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform to the 2006 presentation.
Note 2. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
condition or results of operations.
Note 3. Per Share Information
Earnings per common share amounts are computed based on the weighted average
number of shares of common stock outstanding during the period and reduced for
shares held in treasury. The assumed conversion of available stock options does
not result in material dilution.
Note 4. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans--an Amendment of
FASB Statements No. 87,88,106 and 132(R). The Statement requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. This Statement also requires an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions.
This Statement will require the Company to recognize the funded status of a
benefit plan--measured as the difference between plan assets at fair value
(with limited exceptions) and the benefit obligation--in its statement of
financial position. For a pension plan, the benefit obligation is the projected
benefit obligation. Recognize as a component of other comprehensive income, net
of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit
cost pursuant to FASB Statement No. 87, Employers' Accounting for Pensions.
Amounts recognized in accumulated other comprehensive income, including the
gains or losses and prior service costs or credits, are adjusted as they are
subsequently recognized as components of net periodic benefit cost pursuant to
the recognition and amortization provisions of those Statements. Measure
defined benefit plan assets and obligations as of the date of the employer's
fiscal year-end statement of financial position (with limited exceptions).
Disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses and prior service costs
or credits.
The Company is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of 2006. The requirement to measure plan assets and benefit obligations as
of the date of the employer's fiscal year-end is effective beginning in the
Company's 2008 fiscal year. The Company is currently evaluating the impact of
this new standard to determine its effects on the Company's consolidated
financial statements.
8
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 generally accepted accounting principles (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, if any, on the Company's consolidated financial
statements.
In September 2006, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin (SAB) No. 108 - Financial Statements - Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements. SAB 108 addresses the diversity in practice
of evaluating and quantifying financial statement misstatements and the related
accumulation of such misstatements. SAB No.108 states that both a balance sheet
and an income statement approach should be used when quantifying and evaluating
the materiality of a potential misstatement and contains guidance for
correcting errors under this dual approach. SAB No. 108 is effective for the
Company's financial statements for the fiscal year beginning January 1, 2007.
Management does not expect the adoption of SAB No. 108 to have a significant
impact on the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48") "Accounting for
Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of this new standard to determine its effects, if any, on the Company's
consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. The Statement requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain situations. It
requires all separately recognized servicing assets and liabilities to be
initially measured at fair value, if practicable. It permits an entity to
choose either the amortization method or the fair value measurement method for
each class of separately recognized servicing assets and liabilities and
requires additional disclosures in the financial statements under the fair
value measurement method. SFAS No. 156 is effective for fiscal years beginning
after September 15, 2006, with early adoption permitted. The Company does not
believe the adoption of SFAS No. 156 will have a material impact on the
Company's financial position or results of operations but is still in the
process of analyzing that impact.
Note 5. Stock Option Plan
In December 2005 the Company adopted SFAS No. 123R Share Based Payment using
the modified prospective application. Under SFAS 123R, the Company must
recognize as compensation expense the grant date fair value of stock-based
awards over the vesting period of the awards. Prior to the adoption of SFAS No.
123R the Company accounted for its stock option plan in accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees as
allowed under SFAS No. 123 Accounting for Stock-Based Compensation. Under APB
Opinion No. 25, the Company provided pro forma net income disclosures for
employee stock-based awards granted on or after January 1, 1995 as if the fair
value based method defined in SFAS No. 123 had been applied.
9
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No.123R, the effects on net income and earnings per common share for the
three and nine months ended September 30, 2005 would have been:
Three Months Ended Nine Months Ended
2005 2005
------------------ -----------------
(Dollars in thousands)
Net income as reported $1,494 $4,322
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects - -
------ ------
Pro forma net income $1,494 $4,322
====== ======
Earnings per common share
As reported $ 0.33 $ 0.95
Pro forma $ 0.33 $ 0.95
Note 6. Defined Benefit Pension Plan
Union Bank (Union), the Company's bank subsidiary, sponsors a non-contributory
defined benefit pension plan covering all eligible employees. The plan provides
defined benefits based on years of service and final average salary.
Net periodic pension benefit cost for the three and nine months ended September
30, 2006 and 2005 consisted of the following components:
Three Months Ended Nine Months Ended
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Service cost $ 129 $ 116 $ 371 $ 348
Interest cost on projected benefit obligation 131 120 406 362
Expected return on plan assets (122) (107) (364) (321)
Amortization of prior service cost 1 1 4 5
Amortization of net loss 21 15 63 45
----- ----- ----- -----
Net periodic benefit cost $ 160 $ 145 $ 480 $ 439
===== ===== ===== =====
Note 7. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the
three and nine months periods ended September 30, 2006 and 2005 are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Unrealized holding gains (losses) on investment
securities available-for-sale $ 327 $ 26 $(69) $(228)
Reclassification adjustment for gains realized in
income (5) - (22) (1)
----- ----- ---- -----
Net unrealized gains (losses) 322 26 (91) (229)
Tax effect (109) (9) 31 78
----- ----- ---- -----
Net of tax amount $ 213 $ 17 $(60) $(151)
===== ===== ==== =====
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis by management focuses on those factors
that had a material effect on Union Bankshares, Inc.'s (the Company's)
financial position as of September 30, 2006, and as of December 31, 2005, and
its results of operations for the three and nine months ended September 30,
2006 and 2005. This discussion is being presented to provide a narrative
explanation of the financial statements and should be read in conjunction with
the financial statements and related notes and with other financial data
appearing elsewhere in this filing and with the Company's Annual Report on Form
10-K for the year ended December 31, 2005. In the opinion of Company's
management, the interim unaudited data reflects all adjustments, consisting
only of normal recurring adjustments, and disclosures necessary to fairly
present the Company's consolidated financial position and results of operations
for the interim period. Management is not aware of the occurrence of any events
after September 30, 2006, which would materially affect the information
presented.
CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include financial projections, statements of plans and objectives for future
operations, estimates of future economic performance and assumptions relating
thereto. The Company may include forward-looking statements in its filings with
the Securities and Exchange Commission (SEC), in its reports to stockholders,
including this Quarterly Report, in other written materials, and in statements
made by senior management to analysts, rating agencies, institutional
investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are
subject to uncertainties, both general and specific, and risk exists that those
predictions, forecasts, projections and other estimates contained in
forward-looking statements will not be achieved. When management uses any of
the words "believes," "expects," "anticipates," "intends," "plans," "seeks,"
"estimates", or similar expressions, they are making forward-looking
statements. Many possible events or factors, including those beyond the control
of management, could affect the future financial results and performance of the
Company. This could cause results or performance to differ materially from
those expressed in forward-looking statements. The possible events or factors
that might affect forward-looking statements include, but are not limited to,
the following:
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, 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;
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;
11
o changes in accounting rules and standards and regulatory requirements for
financial reporting;
o increased competition within the Company's market area to provide
financial services;
o the 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 related
notes. The SEC has defined a company's critical accounting policies as the ones
that are most important to the portrayal of the company's financial condition
and results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
the Company has identified the accounting policies and judgments most critical
to the Company. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from estimates and have a
material impact on the carrying value of assets, liabilities, or the results of
operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as well as
other factors including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers and changes in delinquent,
nonperforming or impaired loans. Changes in these factors may cause
management's estimate of the allowance for loan losses to increase or decrease
and result in adjustments to the Company's provision for loan losses in future
periods. For additional information see, FINANCIAL CONDITION - Allowance for
Loan Losses below. 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 liability for the defined benefit pension plan, valuation of
deferred tax assets and analysis of potential impairment of investment
securities. Although management believes that its estimates, assumptions and
judgments are
12
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 $1.66 million for the quarter ended September 30,
2006, compared with net income of $1.49 million for the same period of 2005, or
an 11.2% increase between years. The Company's net income for the nine months
ended September 30, 2006 was $4.67 million, compared with net income of $4.32
million for the same period of 2005, or an 8.0% increase between years. Despite
a challenging interest rate environment, the year to date increase in net
interest income of $708 thousand was achieved by an increase in total interest
income of $2.4 million, or 15.0% in 2006 versus 2005, while interest expense
increased $1.7 million or 54.8%. Interest rates have continued to rise
throughout 2006 with four twenty-five basis point increases in the prime rate
during the first half of the year and has remained flat at 8.25% since June 29,
2006. The Company had an increase in its net interest margin from 5.26% for the
third quarter of 2005 to 5.45% for the third quarter of 2006. The net interest
margin on a year to date basis grew from 5.30% for 2005 to 5.40% for 2006.
Although the year-to-date net interest spread was down 5 basis points to 4.93%
compared to the September 30, 2005 level of 4.98%, it was slightly higher for
the third quarter of 2006, at 4.92%, up by 1 basis point compared to the third
quarter of 2005. A reduction in interest rates in the short term would not
necessarily be in the Company's best interest. Managing the interest margin in
the current rate environment will be a challenge.
The 2006 year-to-date results also reflect the $150 thousand provision for loan
losses (none in the third quarter of 2006) compared to none in 2005. The
increase in the provision for loan losses was mainly necessitated by the growth
in construction and residential real estate loans between years, a change in
the composition of the loans within the portfolio and an increase of $1.4
million in classified and problem loans.
Also contributing to the increase in net income for the quarter was an increase
in non-interest income of $93 thousand compared to the third quarter of 2005.
Non-interest income earned for the quarter was partially offset by the increase
of $71 thousand in non-interest expenses. For additional information see
quarterly results analysis beginning on page 13. Regular quarterly cash
dividends of $0.26 per share were declared and paid in January, April, and July
2006. The dividend was increased to $0.28 per share for the quarterly dividend
declared and paid in October 2006.
The Company's total assets increased from $374.7 million at December 31, 2005,
to $375.0 million at September 30, 2006. Deposits decreased from $313.3 million
at December 31, 2005 to $308.9 million at September 30, 2006, or a decrease of
1.4%. While the customer relationships we have with the State of Vermont and
the local municipalities and school districts are fairly stable, the dollar
level of deposits tends to vary widely based on their cash flow needs.
Municipal deposits were $32.0 million at December 31, 2005 and $26.8 million at
September 30, 2006.
With the Company's loan-to-deposit ratio over 100% at September 30, 2006,
deposit generation to fund loan demand has become an area of focus as deposits,
which provide a lower cost funding source than borrowings or other purchased
funds, have declined during the first nine months of 2006. Rates paid to
attract deposits have risen rapidly over the last nine months. As generational
wealth transfers to younger individuals who tend to be more widely diversified
in their investment portfolio, retaining and attracting deposits may become
more difficult. During the third quarter of 2006, the Company introduced two
new certificate of deposit products that offer a variable rate of interest.
Initial customer reaction to these products has been positive. Loans and loans
held for sale increased $10.8 million year to date, net of the sale of $15.2
million in commercial and residential real estate loans during the first nine
months of 2006. Gross average loans for the first nine months of 2006 were
$315.6 million compared to the 2005 average of $285.0 million reflecting the
continuing high demand for loans despite rising interest rates. Investment
securities available-for-sale decreased $10.1 million, as maturities and sales
in the investment portfolio were utilized to fund loan demand. The increase in
loans was also funded by a decrease in interest bearing deposits in banks of
$2.5 million, and an increase in Borrowed Funds of $2.8 million.
13
The following unaudited per share information and key ratios depict several
measurements of performance or financial condition for or at the quarters and
nine months ended September 30, 2006 and 2005, respectively:
Quarter Ended Year to Date
------------- ------------
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
Return on average assets (ROA) (1) 1.77% 1.60% 1.67% 1.60%
Return on average equity (ROE) (1) 15.83% 14.57% 14.93% 14.12%
Net interest margin (1)(2) 5.45% 5.26% 5.40% 5.30%
Efficiency ratio (3) 58.91% 61.91% 60.33% 62.03%
Net interest spread (4) 4.92% 4.91% 4.93% 4.98%
Loan to deposit ratio 102.94% 93.48% 102.94% 93.48%
Net loan charge-offs (recoveries) to average loans
not held for sale (0.11%) 0.00% (0.04%) 0.02%
Allowance for loan losses to loans not
held for sale 1.05% 1.04% 1.05% 1.04%
Non-performing assets to total assets 1.22% 1.00% 1.22% 1.00%
Equity to assets 11.37% 11.00% 11.37% 11.00%
Total capital to risk weighted assets 17.54% 17.32% 17.54% 17.32%
Book value per share $9.39 $9.11 $9.39 $9.11
Earnings per share $0.37 $0.33 $1.03 $0.95
Dividends paid per share (5) $0.26 $0.24 $0.78 $1.12
Dividend payout ratio (6) 70.27% 72.73% 75.73% 117.89%
-------------------
Annualized
The ratio of tax equivalent net interest income to average earning assets.
The ratio of noninterest expense to net interest income plus noninterest
income excluding securities gains and losses.
The difference between the average rate earned on assets minus the average
rate paid on liabilities.
Includes a $0.40 special cash dividend in January 2005.
Cash dividends declared and paid per share divided by consolidated net
income per share.
The prime interest rate rose four times during the first nine months of 2006,
and eight times during 2005, by 25 basis points each time, to stand at 8.25% as
of September 30, 2006 from its 5.25% level as of December 31, 2004. This is the
highest the prime rate has been since March 20, 2001. The Company's net
interest margin increased 10 basis points and net interest spread declined 5
basis points during the first nine months of 2006 compared to the first nine
months of 2005. 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 are competing aggressively for core deposit dollars, resulting
in pricing pressures. The 10 basis point increase in the net interest margin
was due primarily to repricing of adjustable rate loans in the Company's
portfolio.
RESULTS OF OPERATIONS
Net Interest Income. The largest component of the Company's operating income is
net interest income, which is the difference between interest and dividend
income received from interest-earning assets and the interest expense paid on
interest-bearing liabilities. The Company's net interest income increased $201
thousand, or 4.5%, to $4.72 million for the three months ended September 30,
2006, from $4.51 million for the three months ended September 30, 2005. The
Company's net interest income increased $708 thousand or 5.4% to $13.68 million
for the nine months ended September 30, 2006 from $13.12 million for the same
period in 2005. The net interest spread increased 1 basis point to 4.92% for
the three months ended September 30, 2006, from 4.91% for the three months
ended September 30, 2005, and declined 5 basis points to 4.93% for the nine
months ended September 30, 2006 from 4.98% for the
14
same period in 2005 as interest rates paid on liabilities and earned on assets
both moved upward in response to the increases in the prime rate. However, as
the yield curve inverted, the interest rates on short term and nonmaturity
deposits moved up more quickly than the rates earned on loans and other earning
assets. The net interest margin for the third quarter of 2006 increased 19
basis points to 5.45% from the 2005 period at 5.26% reflecting the result of
earlier prime rate increases on the variable rate loan portfolio and helping to
alleviate some of the downward pressure on the declining net interest spread.
The net interest margin increased 10 basis points to 5.40% for the first nine
months of 2006 compared to 5.30% for the same period in 2005. A decrease in
prime rate would not necessarily be beneficial to the Company in the near term,
see "OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and Liability
Management."
Yields Earned and Rates Paid. The following table shows, for the periods
indicated, the total amount of income recorded from interest-earning assets and
the related average yields, the interest expense associated with
interest-bearing liabilities, the related average rates paid, and the relative
net interest spread and net interest margin. Yield and rate information is
calculated on an annualized tax equivalent basis. Yield and rate information
for a period is average information for the period, and is calculated by
dividing the annualized income or expense item for the period by the average
balance of the appropriate balance sheet item during the period. Net interest
margin is annualized tax equivalent net interest income divided by average
interest-earning assets. Nonaccrual loans are included in asset balances for
the appropriate periods, but recognition of interest on such loans is
discontinued and any remaining accrued interest receivable is reversed in
conformity with federal regulations.
15
Three months ended September 30,
2006 2005
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Average Assets
Federal funds sold and
overnight deposits $ 5,064 $ 67 5.16% $ 11,301 $ 98 3.40%
Interest bearing deposits in banks 6,261 61 3.90% 8,095 71 3.51%
Investment securities (1), (2) 22,949 243 4.62% 32,602 359 4.66%
Loans, net (1), (3) 315,648 6,122 7.80% 293,794 5,241 7.17%
FHLB of Boston stock 1,638 41 9.80% 1,241 13 4.15%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 351,560 6,534 7.49% 347,033 5,782 6.71%
Cash and due from banks 10,555 12,096
Premises and equipment 6,070 5,400
Other assets 7,878 8,247
-------- --------
Total assets $376,063 $372,776
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 52,850 $ 94 0.71% $ 53,831 $ 67 0.50%
Savings/money market accounts 99,872 420 1.67% 110,678 382 1.37%
Time deposits 104,637 1,018 3.86% 100,992 659 2.59%
Borrowed funds 22,668 287 4.95% 13,686 160 4.58%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 280,027 1,819 2.57% 279,187 1,268 1.80%
Non-interest bearing deposits 49,532 48,436
Other liabilities 4,507 4,136
-------- --------
Total liabilities 334,066 331,759
Stockholders' equity 41,997 41,017
-------- --------
Total liabilities and
stockholders' equity $376,063 $372,776
======== ========
Net interest income $4,715 $4,514
====== ======
Net interest spread (1) 4.92% 4.91%
==== ====
Net interest margin (1) 5.45% 5.26%
==== ====
--------------------
Average yields reported on a tax-equivalent basis.
Average balances of investment securities are calculated on the amortized
cost basis.
Includes loans held for sale and is net of unearned income and allowance
for loan losses.
16
Nine months ended September 30,
2006 2005
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Average Assets
Federal funds sold and
overnight deposits $ 2,952 $ 110 4.91% $ 5,629 $ 135 3.16%
Interest bearing deposits in banks 7,157 208 3.89% 7,349 185 3.37%
Investment securities (1), (2) 26,924 886 4.71% 35,531 1,121 4.46%
Loans, net (1), (3) 310,815 17,427 7.59% 285,012 14,793 6.98%
FHLB of Boston stock 1,508 74 6.49% 1,241 36 3.86%
-------- ------- ---- -------- ------- ----
Total interest-earning assets (1) 349,356 18,705 7.26% 334,762 16,270 6.56%
Cash and due from banks 10,229 12,819
Premises and equipment 6,100 5,332
Other assets 7,899 7,726
-------- --------
Total assets $373,584 $360,639
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 52,258 $ 267 0.68% $ 49,903 $ 181 0.49%
Savings/money market accounts 103,734 1,242 1.60% 110,133 917 1.11%
Time deposits 103,662 2,667 3.44% 95,955 1,696 2.36%
Borrowed funds 19,529 700 4.73% 10,573 355 4.43%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 279,183 4,876 2.33% 266,564 3,149 1.58%
Non-interest bearing deposits 48,457 49,526
Other liabilities 4,252 3,750
-------- --------
Total liabilities 331,892 319,840
Stockholders' equity 41,692 40,799
-------- --------
Total liabilities and
stockholders' equity $373,584 $360,639
======== ========
Net interest income $13,829 $13,121
======= =======
Net interest spread (1) 4.93% 4.98%
==== ====
Net interest margin (1) 5.40% 5.30%
==== ====
--------------------
Average yields reported on a tax-equivalent basis.
Average balances of investment securities are calculated on the amortized
cost basis.
Includes loans held for sale and is net of unearned income and allowance
for loan losses.
Rate/Volume Analysis. The following tables describe the extent to which changes
in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities information is
provided on changes attributable to:
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.
17
Three Months Ended September 30, 2006
Compared to
Three Months Ended September 30, 2005
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (69) $ 38 $(31)
Interest bearing deposits in banks (16) 7 (9)
Investment securities (112) (4) (116)
Loans, net 404 477 881
FHLB of Boston stock 5 23 28
----- ---- ----
Total interest-earning assets 212 541 753
Interest-bearing liabilities:
NOW accounts (1) 29 28
Savings/money market accounts (39) 77 38
Time deposits 25 334 359
Borrowed funds 113 14 127
----- ---- ----
Total interest-bearing liabilities 98 454 552
----- ---- ----
Net change in net interest income $ 114 $ 87 $201
===== ==== ====
Nine Months Ended September 30, 2006
Compared to
Nine Months Ended September 30, 2005
Increase/(Decrease) Due to Change In
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (80) $ 56 $ (25)
Interest bearing deposits in banks (5) 28 23
Investment securities (299) 70 (235)
Loans, net 1,346 1,288 2,634
FHLB of Boston stock 9 29 38
------ ------ ------
Total interest-earning assets 971 1,471 2,435
Interest-bearing liabilities:
NOW accounts 10 76 86
Savings/money market accounts (57) 381 325
Time deposits 145 826 971
Borrowed funds 318 27 345
------ ------ ------
Total interest-bearing liabilities 416 1,310 1,727
------ ------ ------
Net change in net interest income $ 555 $ 161 $ 708
====== ====== ======
Quarter Ended September 30, 2006, compared to Quarter Ended September 30, 2005.
Interest and Dividend Income. The Company's interest and dividend income
increased $752 thousand, or 13.0%, to $6.53 million for the three months ended
September 30, 2006, from $5.78 million for the three months ended September 30,
2005, with average earning assets increasing $4.5 million, or 1.3%, to $351.6
million for the three months ended September 30, 2006, from $347.0 million for
the three months ended September 30, 2005. The increase in interest income
resulting from the rise in average earning assets was augmented by the higher
rates earned on the majority of categories of earning assets in 2006 versus
2005. Average loans approximated $315.6 million at an average yield of 7.80%
for the three months ended September 30, 2006, up $21.8 million from $293.8
million at an average yield of 7.17% for the three months ended September 30,
2005, or a 7.4% increase in volume and a 63 basis
18
point increase in yield. Quarterly average loans secured by real estate
increased $25.0 million, or 10.3%, to $267.3 million for the third quarter of
2006, from $242.3 million for the third quarter of 2005. This increase was
primarily the result of strong demand for residential and commercial real
estate in the Company's market including the Company's increased presence in
Franklin County in Vermont resulting from the opening of a loan production
office in St. Albans, Vermont, during the first quarter of 2005. This demand
was influenced in part by low long-term interest rates, and high demand and
prices in the Chittenden County, Vermont market, which is contiguous to the
Company's markets, and is fueling growth in the Company's market. The growth
was also augmented by the opening of a full service branch in March of 2006 in
Littleton, New Hampshire. Average commercial loans decreased $1.5 million, or
6.2%, to $24.3 million for 2006 compared to $25.8 million for 2005.
The average balance of investments (including mortgage-backed securities)
decreased $9.7 million or 29.6%, to $22.9 million for the three months ended
September 30, 2006, from $32.6 million for the three months ended September 30,
2005. The decrease in the investment portfolio in 2006 reflects the continuing
growth in the loan portfolio, as investment maturities and sales were used to
fund loan growth, which continued to outpace the growth in deposits. The
average level of federal funds sold and overnight deposits decreased $6.2
million, or 55.2%, to $5.1 million for the three months ended September 30,
2006, from $11.3 million for the three months ended September 30, 2005. The
average level of interest bearing deposits in banks for the quarter was $6.3
million down $1.8 million or 22.7% from the 2005 average level of $8.1 million.
Interest income from non-loan instruments was $412 thousand for the third
quarter of 2006 and $541 thousand for the same period of 2005, reflecting the
overall increase in yields, offset by the overall decrease in volume.
Interest Expense. The Company's interest expense increased $551 thousand, or
43.5%, to $1.82 million for the three months ended September 30, 2006, from
$1.27 million for the three months ended September 30, 2005, of which $106
thousand was a result of the increase in volume while the remaining $446
thousand increase was due to rate increases fueled by the twelve increases in
the Federal Reserve's target Federal Funds rate between February 2, 2005 and
June 29, 2006 and stiff competition for deposit dollars. Average
interest-bearing liabilities increased $840 thousand, or 0.3%, to $280.0
million for the three months ended September 30, 2006, from $279.2 million for
the three months ended September 30, 2005, and the average rate paid increased
77 basis points to 2.57% from 1.80% for the three months ended September 30,
2006 and 2005, respectively. Average time deposits were $104.6 million for the
three months ended September 30, 2006, and $101.0 million for the three months
ended September 30, 2005, or an increase of 3.6%. The average rate paid on time
deposits increased 127 basis points, to 3.86% from 2.59% for the three months
ended September 30, 2006 and 2005, respectively. The average balances for money
market and savings accounts decreased $10.8 million, or 9.8%, to $99.9 million
for the three months ended September 30, 2006, from $110.7 million for the
three months ended September 30, 2005 as the spread widened for interest rates
on time deposits, which appeared to motivate customers to move funds into those
higher paying instruments. A portion of this decrease was due to the
non-recurrance of a $4.7 million escrow savings deposit in place during the
third quarter of 2005 at a rate of 5%. A $981 thousand, or 1.8% decrease in NOW
accounts brought the average balance down to $52.9 million from $53.8 million.
The average balance of borrowed funds increased from $13.7 million for the
three months ended September 30, 2005, to $22.7 million for the three months
ended September 30, 2006, while the average rate paid on those funds rose from
4.58% to 4.95% between years. These borrowings were used to fund strong
continued loan growth, and to manage cash flow and liquidity.
Provision for Loan Losses. The loan loss provision for the quarters ended
September 30, 2006 and 2005 was $0. However, recoveries on loans previously
charged off resulted in an addition to the Allowance for Loan Losses of $103
thousand during the third quarter of 2006 versus $12 thousand during the same
period in 2005. For further details see, FINANCIAL CONDITION -"Allowance for
Loan Losses" below.
19
Noninterest income. The following table sets forth changes from the third
quarter of 2005 to the third quarter of 2006 for components of noninterest
income:
For The Quarter Ended September 30,
(Dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 74 $ 67 $ 7 10.4
Service fees 787 756 31 4.1
Net gains on sales of investment securities 5 - 5 100.0
Net gains on sales of loans held for sale 108 48 60 125.0
Other 19 29 (10) (34.5)
---- ---- ---
Total noninterest income $993 $900 $93 10.3
==== ==== ===
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 $24 thousand, or 8.8%, and ATM usage fees of $16 thousand, or 9.5%,
partially offset by a decline in deposit service charges of $12 thousand, or
20.4%, which resulted from the introduction, during the first and second
quarters of 2005, of a group of retail deposit products that generally are not
charged monthly service fees.
Other. The decrease is primarily due to the decrease in net mortgage servicing
rights income and the decrease in royalties on oil and gas leases.
Noninterest expense. The following table sets forth changes from the third
quarter of 2005 to the third quarter of 2006 for components of noninterest
expense:
For The Quarter Ended September 30,
(Dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $1,536 $1,444 $ 92 6.4
Pension and employee benefits 541 497 44 8.9
Occupancy expense, net 184 190 (6) (3.2)
Equipment expense 269 277 (8) (2.9)
Equity in losses of affordable
housing investments 66 61 5 8.2
Other 827 883 (56) (6.3)
------ ------ ----
Total noninterest expense $3,423 $3,352 $ 71 2.1
====== ====== ====
Salaries and wages and related expenses. The increase in 2006 over 2005 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 $25 thousand or 14.2% increase in the Company's
medical and dental insurance costs account for the majority of the increase in
pension and employee benefits.
Other. Approximately 50% of the decrease in other expenses is due to the
renegotiation of the service contract for the debit card and ATM program.
Year to Date September 30, 2006, compared to Year to Date September 30, 2005.
Interest and Dividend Income. The Company's interest and dividend income
increased $2.44 million, or 15.0%, to $18.70 million for the nine months ended
September 30, 2006, from $16.27 million for the nine months ended September 30,
2005, with average earning assets increasing $14.6 million, or 4.4%, to $349.4
million for the nine months ended September 30, 2006, from $334.8 million for
the nine months ended September 30, 2005. The increase in interest income
resulting from the rise in average earning assets was augmented by the higher
rates earned on all categories of earning assets in 2006 versus 2005. Average
loans approximated $310.8 million at an average yield of 7.59% for the nine
months ended September 30, 2006, up $25.8 million from $285.0 million at an
average yield of 6.98% for the nine months ended September 30, 2005, or a 9.1%
increase in volume and a 61 basis point increase in yield.
20
The majority of the increase was in loans secured by real estate almost evenly
split between rate and increases.
The average balance of investments (including mortgage-backed securities)
decreased $8.6 million or 24.2%, to $26.9 million for the nine months ended
September 30, 2006, from $35.5 million for the nine months ended September 30,
2005, as investment maturities and sales were used to fund loan growth, which
continued to outpace the growth in deposits. The decrease in the investment
portfolio in 2006 reflects the continuing growth in the loan portfolio. The
average level of federal funds sold and overnight deposits decreased $2.7
million, or 47.6%, to $3.0 million for the nine months ended September 30,
2006, from $5.6 million for the nine months ended September 30, 2005. The
average level of interest bearing deposits in banks for the first nine months
of 2006 was $7.2 million down $192 thousand or 2.6% from the 2005 average level
of $7.3 million. Interest income from non-loan instruments was $1.28 million
year to date for 2006 and $1.48 million for the same period of 2005, reflecting
the overall increase in yields, offset by the overall decrease in volume.
Interest Expense. The Company's interest expense increased $1.73 million, or
54.8%, to $4.88 million for the nine months ended September 30, 2006, from
$3.15 million for the nine months ended September 30, 2005, of which $423
thousand was a result of the increase in volume and $1.3 million was due to
increases in rates fueled by the twelve increases in the Federal Reserve's
target Federal Funds rate between February 2, 2005 and June 29, 2006. Average
interest-bearing liabilities increased $12.6 million, or 4.7%, to $279.2
million for the nine months ended September 30, 2006, from $266.6 million for
the nine months ended September 30, 2005, and the average rate paid increased
75 basis points to 2.33% from 1.58% for the nine months ended September 30,
2006 and 2005, respectively. Average time deposits were $103.7 million for the
nine months ended September 30, 2006, compared to $96.0 million for the nine
months ended September 30, 2005, or an increase of 8.0%. The average rate paid
on time deposits increased 108 basis points, to 3.44% from 2.36% for the nine
months ended September 30, 2006 and 2005, respectively. The average balances
for money market and savings accounts decreased $6.4 million, or 5.8%, to
$103.7 million for the nine months ended September 30, 2006, from $110.1
million for the nine months ended September 30, 2005. A $2.4 million, or 4.7%
increase in NOW accounts brought the average balance up to $52.3 million from
$49.9 million. The period over period increase in NOW accounts reflects changes
made in 2005 to the Company's deposit product offerings. In May of 2005, as
part of the new deposit product launch, some legacy account products that did
not pay interest were converted to new deposit products that pay interest. The
account conversions during the second quarter of 2005 resulted in the transfer
of over $6 million from demand deposits to interest bearing checking account
(NOW's) products.
The average balance of borrowed funds increased from $10.6 million for the nine
months ended September 30, 2005, to $19.5 million for the nine months ended
September 30, 2006, while the average rate paid on those funds rose from 4.43%
to 4.73% between years. These borrowings were used to fund strong continued
loan growth, and to manage cash flow and liquidity.
Provision for Loan Losses. The loan loss provision year to date as of September
30, 2006 was $150 thousand compared to $0 for the same period in 2005. An
increase in the loan portfolio in total and an increase in classified and
problem loans account for the increased provision, which was supplemented by an
increase of $109 thousand in the allowance for loan losses due to recoveries on
loans previously charged off. For further details see, FINANCIAL CONDITION -
"Allowance for Loan Losses" below.
21
Noninterest income. The following table sets forth changes from year to date
2005 to year to date 2006 for components of noninterest income:
For Year to Date September 30,
(Dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 219 $ 196 $ 23 11.7
Service fees 2,280 2,159 121 5.6
Net gains on sales of investment securities 22 1 21 2,100.0
Net gains on sales of loans held for sale 227 167 60 35.9
Other 194 170 24 14.1
------ ------ ----
Total noninterest income $2,942 $2,693 $249 9.2
====== ====== ====
Trust income. The increase resulted 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 $113 thousand, or 15.6%, increase in loan servicing fee income of $22
thousand or 9.8% and ATM usage fees of $43 thousand, or 9.4%, partially offset
by a decline in deposit service charges of $67 thousand, or 30.3%, which
resulted from the introduction, during the first and second quarters of 2005,
of a group of retail deposit products that generally are not charged monthly
service fees.
Other. The increase mainly resulted from a $18 thousand increase in mortgage
servicing rights between years and an increase of $10 thousand in income from
the cash surrender value of life insurance policies held on certain directors,
former directors and executive officers.
Noninterest expense. The following table sets forth changes from year to date
2005 to year to date 2006 for components of noninterest expense:
For Year to Date September 30,
(Dollars in thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $ 4,541 $4,229 $312 7.4
Pension and employee benefits 1,670 1,532 138 9.0
Occupancy expense, net 585 592 (7) (1.2)
Equipment expense 786 789 (3) (0.4)
Equity in losses of affordable
housing investments 231 156 75 48.1
Other 2,458 2,512 (54) (2.1)
------- ------ ----
Total noninterest expense $10,271 $9,810 $461 4.7
======= ====== ====
Salaries and wages and related expenses. The increase in 2006 over 2005 was due
primarily to regular salary activity, the expansion of the Littleton, New
Hampshire loan production office to a full service branch during the first
quarter of 2006, increases in related payroll taxes, 401(k) contributions, and
pension expense and an increase in the Company's medical and dental insurance
costs.
Equity in losses of affordable housing investments. These expenses increased
due primarily to amortization of new investments in affordable housing
projects. The Company invested in two affordable housing projects during 2005
which resulted in the increase in amortization expense for 2006 versus 2005.
The Company receives income tax credits from these investments, which also
assists the Company in meeting its obligations under the Federal Community
Reinvestment Act of 1977, as amended.
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 $1.68 million for the nine months ended
September 30, 2006 and 2005, despite an increase in net income compared to the
2005 comparison period. The Company's effective tax rate decreased to 26.5% for
the nine months ended September 30, 2006, from 28.0% for the same period in
2005, reflecting an increase in low income housing tax credits related to the
Company's limited partnership investments in two new affordable housing
projects in its market area during 2005 and an increase in non-taxable
municipal loan income
22
which were partially offset by the increase in federal income taxes resulting
from increased taxable income.
FINANCIAL CONDITION
At September 30, 2006, the Company had total consolidated assets of $375.0
million, including gross loans and loans held for sale ("total loans") of
$318.0 million, deposits of $308.9 million and stockholders' equity of $42.6
million. The Company's total assets experienced an increase of $293 thousand or
0.1% to $375.0 million at September 30, 2006, from $374.7 million at December
31, 2005. Net loans and loans held for sale were $314.6 million, or 83.9% of
total assets at September 30, 2006, as compared to $304.0 million, or 81.1% of
total assets at December 31, 2005. Cash and cash equivalents, including federal
funds sold and overnight deposits, increased $1.4 million, or 10.1%, to $15.6
million at September 30, 2006, from $14.2 million at December 31, 2005.
Interest bearing deposits in banks decreased $2.5 million or 29.0% from $8.6
million at December 31, 2005 to $6.1 million at September 30, 2006 as maturing
funds have been utilized to fund loan demand.
Investment securities available-for-sale decreased from $32.4 million at
December 31, 2005, to $22.3 million at September 30, 2006, a $10.1 million, or
31.1%, decrease. Securities maturing were not replaced and $7.6 million was
sold during the first nine months of the year at a gain of $22 thousand in
order to fund loan demand.
Deposits decreased $4.4 million, or 1.4%, to $308.9 million at September 30,
2006, from $313.3 million at December 31, 2005 due mainly to the variation in
dollars on deposit from the State of Vermont and local municipalities and
school districts which were $5.2 million lower at September 30, 2006 than at
December 31, 2005. These deposit dollars vary widely based on their cash flow
needs. Noninterest bearing accounts decreased $2.1 million, or 4.0%, from $52.6
million at December 31, 2005, to $50.5 million at September 30, 2006 and
interest bearing deposits decreased $2.2 million, or 0.9%, from $260.7 million
at December 31, 2005 to $258.4 million at September 30, 2006. (See average
balances and rates in the Yields Earned and Rates Paid table on Page 16). Total
borrowings increased $2.8 million or 17.3% to $19.1 million at September 30,
2006, from $16.3 million at December 31, 2005 in order to match fund some
specific loans and to manage liquidity needs, as lower cost deposits declined
during the first nine months of 2006.
Total capital increased from $41.6 million at December 31, 2005 to $42.6
million at September 30, 2006, reflecting net income of $4.7 million for the
first nine months of 2006, less the regular cash dividend paid of $3.5 million,
the purchase of Treasury stock totaling $42 thousand and an increase of $60
thousand in accumulated other comprehensive loss. (See Capital Resources
section on Page 36)
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 September 30,
2006, the Company's total loan portfolio was $318.0 million, or 84.8% of
assets, up from $307.2 million, or 82.0% of assets as of December 31, 2005, and
from $297.2 million or 78.8% of assets as of September 30, 2005. Total loans
have increased $10.8 million since December 31, 2005 while average loans
(including loans held for sale) were $288.9 million for the 2005 comparison
period and have grown to $310.8 million or 7.6% for the first nine months of
2006. The Company sold $15.2 million of loans held for sale during the first
nine months of 2006 resulting in a gain on sale of loans of $227 thousand,
compared with loan sales of $13.6 million and related gain on sale of loans of
$167 thousand for the first nine months of 2005.
23
The following table shows information on the composition of the Company's total
loan portfolio as of September 30, 2006 and December 31, 2005:
Loan Type September 30, 2006 December 31, 2005
--------- ------------------ -------------------
(Dollars in thousands)
Amount Percent Amount Percent
Residential real estate $113,736 35.7 106,470 34.7
Construction real estate 23,845 7.5 18,066 5.9
Commercial real estate 130,746 41.1 130,483 42.5
Commercial 19,097 6.0 20,650 6.7
Consumer 7,794 2.5 7,999 2.6
Municipal loans 20,374 6.4 17,009 5.5
Loans Held for Sale 2,423 0.8 6,546 2.1
-------- ----- -------- -----
Total loans 318,015 100.0 307,223 100.0
Deduct:
Allowance for loan losses (3,324) (3,071)
Unearned net loan fees (127) (152)
-------- --------
Net loans & Loans Held for Sale $314,564 $304,000
======== ========
The Company originates and sells some residential mortgages into the secondary
market, with most such sales made to the Federal Home Loan Mortgage Corporation
(FHLMC/"Freddie Mac") and the Vermont Housing Finance Agency (VHFA). The
Company services a $199.3 million residential real estate mortgage portfolio,
approximately $84.2 million of which was serviced for unaffiliated third
parties at September 30, 2006. Additionally, the Company originates commercial
real estate and commercial loans under various SBA programs that provide an
agency guarantee for a portion of the loan amount. The Company occasionally
sells the guaranteed portion of the loan to other financial concerns and will
retain servicing rights, which generates fee income. The Company serviced $5.8
million of commercial and commercial real estate loans for unaffiliated third
parties as of September 30, 2006. The Company capitalizes servicing rights on
these fees and recognizes gains and losses on the sale of the principal portion
of these loans as they occur. The unamortized balance of servicing rights on
loans sold with servicing retained was $318 thousand at September 30, 2006,
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/commercial real estate loans
to other financial institutions for liquidity or credit concentration
management purposes. The total of loans participated out as of September 30,
2006 was $7.0 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, 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
24
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 $1.5 million at
September 30, 2006 and $21 thousand at December 31, 2005 of the amount that is
restructured and in compliance at September 30, 2006 $1.3 million is guaranteed
by the U.S. Department of Agriculture-Rural Development (USDA-RD) and $142
thousand while in compliance with modified terms is in non-accrual status.
There was one loan totaling $121 thousand at September 30, 2006 that was not in
compliance with its modified terms, and was in non-accrual status as of that
date. At September 30, 2006, the Company was not committed to lend any
additional funds to borrowers whose terms have been restructured.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt
exists as to the full collection of interest and principal. Normally, when a
loan is placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of interest and principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Company had loans on nonaccrual status totaling $1.7 million, or 0.55% of
gross loans at September 30, 2006, $1.3 million, or 0.42%, at December 31,
2005, and $1.3 million, or 0.45%, at September 30, 2005. Certain loans in
non-accrual status are covered by guarantees of U.S. Government or state
agencies. Approximately $184 thousand of the balances in this category were
covered by such guarantees at September 30, 2006. The aggregate interest income
not recognized on such nonaccrual loans amounted to approximately $327 thousand
and $249 thousand as of September 30, 2006 and 2005, respectively and $268
thousand as of December 31, 2005.
The Company had $1.3 million in loans past due 90 days or more and still
accruing at September 30, 2006 and $3.3 million at December 31, 2005. Certain
loans past due 90 days or more and still accruing interest are covered by
guarantees of U.S. Government or state agencies. Approximately $348 thousand of
the balances in this category were covered by such guarantees at September 30,
2006. At September 30, 2006, and December 31, 2005, respectively, the Company
had internally classified certain loans totaling $2.6 million and $2.8 million.
In management's view, such loans represent a higher degree of risk and could
become nonperforming loans in the future. While still on a performing status,
in accordance with the Company's credit policy, loans are internally classified
when a review indicates any of the following conditions makes the likelihood of
collection uncertain:
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 $101 thousand of
residential and $76 thousand of
25
commercial real estate property classified as OREO at September 30, 2006 and
none at December 31, 2005.
Allowance for Loan Losses. Some of the Company's loan customers ultimately do
not make all of their contractually scheduled payments, requiring the Company
to charge off a portion or all of the remaining principal balance due. The
Company maintains an allowance for loan losses to absorb such losses. The
allowance is maintained at a level which, in management's judgment, is adequate
to absorb credit losses inherent in the loan portfolio; however, actual loan
losses may vary from current estimates.
Adequacy of the allowance for loan losses is determined using a consistent,
systematic methodology, which analyzes the risk inherent in the loan portfolio.
In addition to evaluating the collectibility of specific loans when determining
the adequacy of the allowance, management also takes into consideration other
factors such as changes in the mix and size of the loan portfolio, historic
loss experience, the amount of delinquencies and loans adversely classified,
industry trends, and the impact of the local and regional economy on the
Company's borrowers. The adequacy of the allowance for loan losses is assessed
by an allocation process whereby specific loss allocations are made against
certain adversely classified loans and general loss allocations are made
against segments of the loan portfolio which have similar attributes. While 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 is increased by a provision for loan losses, which is charged to
earnings, and reduced by charge-offs, net of recoveries. The provision for loan
losses represents the current period credit cost associated with maintaining an
appropriate allowance for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly analysis of the allowance to the
Board of Directors, indicating any changes in the allowance since the last
review and any recommendations as to adjustments in the allowance.
Additionally, various regulatory agencies periodically review the Company's
allowance as an integral part of their examination process.
For the quarter ended September 30, 2006, the methodology used to determine the
provision for loan losses was unchanged from the prior quarter and year. The
Company's loan portfolio balance increased $14.9 million or 5.0% from December
31, 2005. The largest growth came from the construction ($5.8 million),
residential real estate ($7.3 million) and municipal ($3.4 million) loan
portfolios. Growth in these areas was partially offset by declines in the
commercial loan portfolio of $1.5 million. The overall growth in the loan
portfolio increased the estimated loan loss reserve by $170 thousand. A rise of
$1.4 million in classified and problem loans further increased the estimated
reserve by $57 thousand. As a result of these factors, the Company designated a
loan loss provision for the nine months ended September 30, 2006 of $150
thousand which, together with net recoveries after charge-offs brought the
reserve to $3.3 million at September 30, 2006. There was no material change in
the lending programs or terms during the quarter.
26
The following table reflects activity in the allowance for loan losses for the
three and nine months ended September 30, 2006 and 2005:
Three Months Ended, Nine Months Ended,
------------------- ------------------
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $3,235 $3,022 $3,071 $3,067
Charge-offs
Real Estate - - - 28
Commercial 3 6 3 19
Consumer and other 11 5 46 40
------ ------ ------ ------
Total charge-offs 14 11 49 87
------ ------ ------ ------
Recoveries
Real Estate 1 1 25 13
Commercial 1 2 13 3
Consumer and other 101 9 114 27
------ ------ ------ ------
Total recoveries 103 12 152 43
------ ------ ------ ------
Net recoveries (charge-offs) 89 1 103 (44)
- --- ------
Provision for loan losses - - 150 -
------ ------ ------ ------
Balance at end of period $3,324 $3,023 $3,324 $3,023
====== ====== ====== ======
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:
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 699 36.1 $ 571 35.4
Commercial 1,829 41.4 1,826 43.4
Construction 308 7.6 181 6.0
Other Loans
Commercial 308 6.0 343 6.9
Consumer installment 124 2.5 123 2.6
Municipal, Other and
Unallocated 56 6.4 27 5.7
------ ----- ------ -----
Total $3,324 100.0 $3,071 100.0
====== ===== ====== =====
Ratio of Net Charge Offs
(Recoveries) to Average Loans not
held for sale(1) (0.04) 0.02
===== =====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.05 1.02
===== =====
Ratio of Allowance for Loan
Losses to non-performing
loans (2) 75.83 66.66
===== =====
--------------------
(1) Annualized
(2) Non-performing loans include loans in non-accrual status, loans past due
90 days or more and still accruing, and restructured loans.
Not withstanding the categories shown in the table above, all funds in the
allowance for loan losses are available to absorb loan losses in the portfolio,
regardless of loan category.
27
Management of the Company believes that the allowance for loan losses at
September 30, 2006, is adequate to cover losses inherent in the Company's loan
portfolio as of such date. However there can be no assurance that the Company
will not sustain losses in future periods, which could be greater than the size
of the allowance at September 30, 2006. See CRITICAL ACCOUNTING POLICIES. While
the Company recognizes that an economic slowdown may adversely impact its
borrowers' financial performance and ultimately their ability to repay their
loans, management continues to be cautiously optimistic about the key credit
indicators from the Company's loan portfolio.
Investment Activities. At September 30, 2006, the reported value of investment
securities available-for-sale was $22.3 million or 6.0% of its assets. The
amount in Investment securities available-for-sale decreased from $32.4
million, or 8.6% of assets at December 31, 2005, to $22.3 million, or 6.0% of
assets at September 30, 2006, as loan demand remained strong and securities
maturing, sold or paying down have not been replaced dollar for dollar.
The Company had no securities classified as held-to-maturity or trading. The
reported value of investment securities available-for-sale at September 30,
2006 reflects a negative valuation adjustment of $239 thousand. The offset of
this adjustment, net of income tax effect, was an $158 thousand loss reflected
in the Company's other comprehensive loss component of stockholders' equity at
September 30, 2006.
At December 31, 2005, the Company had twenty-eight debt securities with a fair
value of $10.7 million with an unrealized loss of $324 thousand, or 1% of the
value of the amortized cost of the entire investment portfolio, that had
existed for more than 12 months. The Company sold one security year to date
which had been deemed to be other than temporarily impaired as of December 31,
2005.
At September 30, 2006, thirty-eight securities with a fair value of $15.1
million or 67.7% of the portfolio have been in a loss position for more than
twelve months with unrealized losses totaling $474 thousand. These unrealized
losses are primarily attributed to the interest rate environment. As increases
in interest rates have slowed down, the fair value of the investment portfolio
has improved over the end of the previous quarter. Management continues to
monitor the credit quality of Ford Motor Credit Corporation (FMCC) as they
continue to receive negative outlook ratings from Moody's and S&P. FMCC has
continued to show improvement in pricing since the end of the previous quarter
and the management of their parent company remains dedicated to making positive
improvements in operations. 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.
28
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 September 30, 2006,
and December 31, 2005:
Nine Months Ended September 30, 2006 Year Ended December 31, 2005
------------------------------------ -------------------------------
(Dollars in thousands)
----------------------
Percent Percent
Average Of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------ -------- -------
Non-time deposits:
Demand deposits $ 48,457 15.7 - $ 50,007 16.2 -
NOW accounts 52,258 17.0 0.68% 51,813 16.8 0.51%
Money Market accounts 57,260 18.6 2.44% 59,300 19.2 1.60%
Savings accounts 46,474 15.1 0.57% 50,369 16.4 0.69%
-------- ----- -------- -----
Total non-time deposits: 204,449 66.4 0.99% 211,489 68.6 0.74%
-------- ----- -------- -----
Time deposits:
Less than $100,000 65,629 21.3 3.15% 61,834 20.1 2.23%
$100,000 and over 38,033 12.3 3.95% 35,018 11.3 2.98%
-------- ----- -------- -----
Total time deposits 103,662 33.6 3.44% 96,852 31.4 2.50%
-------- ----- -------- -----
Total deposits $308,111 100.0 1.81% $308,341 100.0 1.29%
======== ===== ======== =====
The Company's customers have been opening certificates of deposit to take
advantage of increasing time deposit rates as evidenced by the $3.0 million or
8.6% increase in average time deposits of $100,000 and over and the $3.8
million or 6.1% increase in time deposits less than $100,000 in 2006 year to
date.
As participant in the Certificate of Deposit Account Registry Service (CDARS)
of Promontory Interfinancial Network, LLC there are $1.8 million of deposits on
the balance sheet at September 30, 2006 which are classified as "broker"
deposits, but those deposits are matched dollar for dollar with our customer
deposits which have been placed in other financial institutions in order to
provide those customers with full FDIC insurance coverage.
The following table sets forth information regarding the Company's time
deposits in amounts of $100,000 or more at September 30, 2006, and December 31,
2005, that mature during the periods indicated:
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars in thousands)
Within 3 months $13,759 $11,545
3 to 6 months 6,845 15,660
6 to 12 months 15,461 6,941
Over 12 months 2,780 1,436
------- -------
$38,845 $35,582
======= =======
Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB) were
$19.1 million at September 30, 2006, at a weighted average rate of 4.88%, and
$16.3 million at December 31, 2005, at a weighted average rate of 4.51%. The
change between year end 2005 and the end of the third quarter 2006 is a net
increase of $2.8 million or 17.3% due partially to the match funding of one
large commercial real estate loan and the remainder due to support for general
loan growth.
29
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the potential of
loss in a financial instrument arising from adverse changes in market prices,
interest rates, foreign currency exchange rates, commodity prices, and equity
prices. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, deposit taking and borrowing activities as
yields on assets change in a different time period or in a different amount
from that of interest costs on liabilities. Many other factors also affect the
Company's exposure to changes in interest rates, such as general and local
economic and financial conditions, competitive pressures, customer preferences,
and historical pricing relationships.
The earnings of the Company and its subsidiary are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System. The monetary
policies of the Federal Reserve System influence to a significant extent the
overall growth of loans, investments, deposits and borrowings; the level of
interest rates earned on assets and paid for liabilities; and interest rates
charged on loans and paid on deposits. The nature and impact of future changes
in monetary policies are often not predictable.
A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as to
the level of risk assumed by the Company in its balance sheet. The Board of
Directors reviews and approves risk management policies, including risk limits
and guidelines and reviews quarterly the current position in relationship to
those limits and guidelines. Daily oversight functions are delegated to the
Asset Liability Management Committee ("ALCO"). The ALCO, consisting of senior
business and finance officers, actively measures, monitors, controls and
manages the interest rate risk exposure that can significantly impact the
Company's financial position and operating results. The Company does not have
any market risk sensitive instruments acquired for trading purposes. The
Company attempts to structure its balance sheet to maximize net interest income
and shareholder value while controlling its exposure to interest rate risk. The
ALCO formulates strategies to manage interest rate risk by evaluating the
impact on earnings and capital of such factors as current interest rate
forecasts and economic indicators, potential changes in such forecasts and
indicators, liquidity, and various business strategies. The ALCO's methods for
evaluating interest rate risk include an analysis of the Company's
interest-rate sensitivity "gap", which provides a static analysis of the
maturity and repricing characteristics of the Company's entire balance sheet,
and a simulation analysis, which calculates projected net interest income based
on alternative balance sheet and interest rate 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 September 30, 2006, the
investment portfolio was all classified as available-for-sale and the modified
duration was relatively short. The Company does not utilize any derivative
products or invest in any "high risk" instruments.
30
The Company's interest rate sensitivity analysis (simulation) as of December
2005 for a 100 basis point increase in the rate environment in 25 basis point
increments (Prime at December 31, 2005, was 7.25% and was 8.25% on September
30, 2006), projected the following for the nine months ended September 30,
2006, compared to the actual results:
September 30, 2006
------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(Dollars in thousands)
Net Interest Income $14,855 $13,830 (6.9)%
Net Income $5,107 $4,669 (8.6)%
Return on Assets 1.81% 1.67% (7.7)%
Return on Equity 16.38% 14.93% (8.9)%
Actual net interest income is lower than projected mainly due to two reasons.
The first is that interest-earning assets in total did not grow as much as
anticipated during the first nine months of 2006 as non-time deposit generation
was slower than anticipated resulting in a reduction in the investment
portfolio from what had been projected in order to fund loan demand and provide
liquidity. Second, was the rapid rise during 2006 of rates paid on deposits in
order to remain competitive.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements. The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
interest rate caps and floors written on adjustable rate loans, commitments to
participate in or sell loans, and commitments to buy or sell securities. Such
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of these instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable rate
loans, the contract or notional amounts do not represent 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.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of September 30, 2006 and December
31, 2005, the contract or notional amount of financial instruments whose
contract or notional amount represents credit risk was as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars in thousands)
Commitments to originate loans $17,261 $ 9,722
Unused lines of credit 35,911 35,349
Standby letters of credit 2,006 918
Credit Card arrangements 2,339 2,236
------- -------
Total $57,517 $48,225
======= =======
The increase in commitments to originate loans reflects a broadening of the
Company's customer base in its market area, which was influenced in part by
strong local loan demand and increased lending activity in the Franklin and
Chittenden county areas resulting in large part from its St. Albans, Vermont
loan production office, which opened in January 2005. The opening of the full
service branch in Littleton, New Hampshire in March 2006 has also augmented the
loan demand in the New Hampshire market.
31
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 September 30, 2006, and December 31, 2005, were as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars in thousands)
Operating lease commitments $ 340 $ 232
Maturities on borrowed funds 19,075 16,256
Deposits without stated maturity (1) 200,898 216,273
Certificates of deposit (1) 108,034 97,026
Pension plan contributions (2) 366 498
Deferred compensation payouts (4) 550 730
Equity investment commitments in housing limited partnerships 356 704
Construction contract (3) - 318
Commitment to purchase office space(5) 223 -
-------- --------
Total $329,842 $332,037
======== ========
--------------------
While Union has a contractual obligation to depositors should they wish
to withdraw all or some of the funds on deposit, management believes,
based on historical analysis, that the majority of these deposits will
remain on deposit for the foreseeable future. The amounts exclude
interest accrued.
Funding requirements for pension benefits after 2006 are excluded due to
the significant variability in the assumptions required to project the
amount and timing of future cash contributions.
Contract to construct a new branch in Littleton, New Hampshire, which was
completed March 2006.
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.
Commitment to purchase building in Morrisville, Vermont to expand the
Main branch and corporate office space.
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 average total reserve for the 14-day maintenance period
including September 30, 2006 was $410 thousand and for December 31, 2005 was
$330 thousand, both of which were satisfied by vault cash. The Company has also
committed to maintain a noninterest bearing contracted clearing balance of $1.0
million at September 30, 2006 with the Federal Reserve Bank of Boston.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling
interest-earning assets and interest-bearing liabilities into periods based
upon the next date on which such assets and liabilities
32
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 non-mortgage 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.
33
The following table shows the Company's rate sensitivity analysis as of
September 30, 2006:
September 30, 2006
Cumulative repriced within
--------------------------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------- ------- ------ ------ ------ -----
(Dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 5,304 $ - $ - $ - $ - $ 5,304
Interest bearing deposits in banks 1,183 1,087 3,345 492 - 6,107
Investment securities available-for-sale (1)(3) 975 2,774 10,310 4,005 3,722 21,786
FHLB Stock - - - - 1,683 1,683
Loans and loans held for sale (2)(3) 111,532 72,454 69,933 49,286 14,683 317,888
-------- ------- -------- -------- --------- --------
Total interest sensitive assets $118,994 $76,315 $ 83,588 $ 53,783 $ 20,088 $352,768
Interest sensitive liabilities:
Time deposits $ 36,791 $50,542 $ 18,933 $ 1,768 $ - $108,034
Money markets 9,055 - - - 43,534 52,589
Regular savings 4,927 - - - 40,266 45,193
NOW accounts 13,582 - - - 39,043 52,625
Borrowed funds 4,479 $ 1,725 1,454 2,915 8,502 19,075
-------- ------- -------- -------- --------- --------
Total interest sensitive liabilities $ 68,834 $52,267 $ 20,387 $ 4,683 $ 131,345 $277,516
Net interest rate sensitivity gap $ 50,160 $24,048 $ 63,201 $ 49,100 $(111,257) $ 75,252
Cumulative net interest rate
sensitivity gap $ 50,160 74,208 137,409 $186,509 $ 75,252
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 13.4% 19.8% 36.6% 49.7% 20.1%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive assets 14.2% 21.0% 38.9% 52.9% 21.3%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive liabilities 18.1% 26.7% 49.5% 67.2% 27.1%
Investment securities available-for-sale exclude marketable equity
securities with a fair value of $537 thousand that may be sold by the
Company at any time.
Balances shown net of unearned income of $127 thousand.
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.
34
The following chart reflects the cumulative results of the latest simulation
analysis for the next twelve months on Net Interest Income, Net Income, Return
on Assets, Return on Equity and Net Fair Value Ratio. The projection utilizes a
rate shock, applied proportionately, of up and down 300 basis points from the
September 30, 2006 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 Return
on on Net Fair
12 Months Prime Net Interest Change Net Assets Equity Value
Ending Rate Income % Income % % Ratio
--------- ----- ------------ ------ ------ ------ ------ --------
September-07 11.25% $21,036 13.5 $7,613 2.07 17.44 9.98%
8.25% $18,536 0.00 $5,875 1.56 13.42 11.44%
5.25% $15,858 (14.4) $4,013 1.01 8.88 12.78%
The resulting projected cumulative effect of these estimates on Net Interest
Income and the Net Fair Value Ratio for the twelve month period ending
September 30, 2007, are within approved ALCO guidelines for interest rate risk.
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, September 30, 2006, the Company's ratio of average loans to
average deposits was 102.9% compared to the prior year of 94.3%. The increase
in the loan to deposit ratio between years was mainly funded by the decrease in
investment securities available-for-sale, interest bearing deposits in banks
and cash and due from banks as well as Federal Home Loan Bank (FHLB) of Boston
advances.
In addition, as Union Bank is a member of the FHLB of Boston, it has access to
unused line of credit up to $35.2 million at September 30, 2006 over and above
the term advances already drawn on the line based on FHLB estimate as of that
date with the purchase of required capital stock. 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 September 30, 2006.
Union is a member of the Certificate of Deposit Account Registry Service
("CDARS") of Promontory Interfinancial Network which allows Union to provide
higher FDIC deposit insurance to customers by exchanging deposits with other
members and allows Union to purchase deposits from other members as another
source of funding. There were no purchased deposits at either September 30,
2006 or December 31, 2005 although Union had exchanged $1.8 million and $1.7
million, respectively, with other CDARS members as of those dates.
35
While scheduled loan and securities payments and FHLB advances are relatively
predictable sources of funds, deposit flows and prepayments on loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions, and competition. The Company's liquidity is actively
managed on a daily basis, monitored by the ALCO, and reviewed periodically with
the subsidiary's Board of Directors. The Company's ALCO sets liquidity targets
based on the Company's financial condition and existing and projected economic
and market conditions. The ALCO measures the Company's marketable assets and
credit available to fund liquidity requirements and compares the adequacy of
that aggregate amount against the aggregate amount of the Company's interest
sensitive or volatile liabilities, such as core deposits and time deposits in
excess of $100,000, borrowings and term deposits with short maturities, and
credit commitments outstanding. The primary objective is to manage the
Company's liquidity position and funding sources in order to ensure that it has
the ability to meet its ongoing commitment to its depositors, to fund loan
commitments and unused lines of credit, and to maintain a portfolio of
investment securities.
The Company's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 79% of the Company's time deposits will mature within twelve
months, management believes, based upon past experience, (percentage of time
deposits to mature within twelve months has ranged from 72% to 84% over the
preceding six years) the relationships developed with local municipalities, and
the introduction of new deposit products in 2005, that Union Bank will retain a
substantial portion of these deposits. Management will continue to offer a
competitive but prudent pricing strategy to facilitate retention of such
deposits. A reduction in total deposits could be offset by purchases of federal
funds, purchases of deposits, short-or-long-term FHLB borrowings, utilization
of the repurchase agreement line, or liquidation of investment securities,
purchased brokerage certificates of deposit or loans held for sale. Such steps
could result in an increase in the Company's cost of funds and adversely impact
the net interest spread and margin. Management believes the Company has
sufficient liquidity to meet all reasonable borrower, depositor, and creditor
needs in the present economic environment. However, any projections of future
cash needs and flows are subject to substantial uncertainty. Management
continually evaluates opportunities to buy/sell securities and loans
available-for-sale, obtain credit facilities from lenders, or restructure debt
for strategic reasons or to further strengthen the Company's financial
position.
Capital Resources. Capital management is designed to maintain an optimum level
of capital in a cost-effective structure that meets target regulatory ratios;
supports management's internal assessment of economic capital; funds the
Company's business strategies; and builds long-term stockholder value.
Dividends are generally increased in line with long-term trends in earnings per
share growth and conservative earnings projections, while sufficient profits
are retained to support anticipated business growth, fund strategic investments
and provide continued support for deposits.
The total dollar value of the Company's stockholders' equity was $42.6 million
at September 30, 2006, reflecting net income of $4.7 million for the first nine
months of 2006, less cash dividends paid of $3.5 million, the purchase of 1,923
shares of Treasury stock totaling $42 thousand, and an increase of $60 thousand
in accumulated other comprehensive loss, compared to stockholders' equity of
$41.6 million at year end 2005.
Union Bankshares, Inc. has 5 million shares of $2.00 par value common stock
authorized. As of September 30, 2006, the Company had 4,918,611 shares issued,
of which 4,540,740 were outstanding and 377,871 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 September 30, 2006 the
Company had repurchased 1,923 shares under this program, for a total cost of
$42 thousand, year to date and 16,923 shares at a total cost of $357 thousand
since the inception of the program.
36
As of September 30, 2006, there were outstanding employee incentive stock
options with respect to shares of the Company's common stock, granted pursuant
to Union Bankshare's 1998 Incentive Stock Option Plan. As of such date, 9,575
options were currently exercisable but only 3,325 of those options were "in the
money". Of the 75,000 shares authorized for issuance under the 1998 Plan,
48,700 shares remain available for future option grants. During the third
quarter of 2006, no incentive stock options granted pursuant to the 1998 plan
were exercised and none were granted.
Union Bankshares, Inc. and Union Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Management believes,
as of September 30, 2006, that both companies meet all capital adequacy
requirements to which they are subject. As of September 30, 2006, the most
recent calculation categorizes Union Bank as well capitalized under the
regulatory framework for prompt corrective action. The prompt corrective action
capital category framework applies to FDIC insured depository institutions such
as Union but does not apply directly to bank holding companies such as the
Company. To be categorized as well capitalized, Union Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since September 30,
2006, that management believes have changed either company's category.
Union Bank's and the Company's actual capital amounts and ratios as of
September 30, 2006, are presented in the table:
Minimums
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions
------------------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total capital to risk weighted assets
Union Bank $45,701 17.4% $21,036 8.0% $26,295 10.0%
Company $46,204 17.5% $21,074 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $42,290 16.1% $10,520 4.0% $15,780 6.0%
Company $42,793 16.3% $10,534 4.0% N/A N/A
Tier I capital to average assets
Union Bank $42,290 11.3% $15,036 4.0% $18,796 5.0%
Company $42,793 11.4% $15,041 4.0% N/A N/A
Regulatory Matters. The Company and Union are subject to periodic examinations
by the various regulatory agencies. These examinations include, but are not
limited to, procedures designed to review lending practices, risk management,
credit quality, liquidity, compliance and capital adequacy. During 2005 the
Vermont State Department of Banking, the Federal Deposit Insurance Corporation,
and the Federal Reserve Bank of Boston performed various examinations of the
Company and Union pursuant to their regular, periodic regulatory reviews. No
comments were received from these various bodies that would have a material
adverse effect on either Company's liquidity, capital resources, or operations.
37
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 30
through 37 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 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, 2005.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
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 September 30, 2006 the Company had repurchased 1,923
shares under this program for a total cost of $42 thousand during 2006. There
were no issuer purchases of equity securities during the third quarter of 2006.
38
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.
November 14, 2006 Union Bankshares, Inc.
/s/ Kenneth D. Gibbons
----------------------------------------------
Kenneth D. Gibbons
Director, President and Chief Executive Officer
/s/ Marsha A. Mongeon
----------------------------------------------
Marsha A. Mongeon
Chief Financial Officer and Treasurer
(Principal Financial Officer)
39
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.
40