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: June 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 August 3, 2006:
Common Stock, $2 par value 4,540,740 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Consolidated Financial Statements Union Bankshares, Inc.
and Subsidiary Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 36
Item 4. Controls and Procedures. 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 36
Item 1A. Risk Factors. 36
Item 2. Unregistered Sales of Securities and use of Proceeds. 36
Item 4. Submission of Matters to Vote of Security Holders.
Item 6. Exhibits. 37
Signatures 38
2
Part I Financial Information
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2006 2005
---- ----
ASSETS (Dollars in thousands)
Cash and due from banks $ 12,072 $ 14,019
Federal funds sold and overnight deposits 20 189
-------- --------
Cash and cash equivalents 12,092 14,208
Interest bearing deposits in banks 6,708 8,598
Investment securities available-for-sale 23,861 32,408
Loans held for sale 1,734 6,546
Loans 305,868 300,677
Allowance for loan losses (3,235) (3,071)
Unearned net loan fees (130) (152)
-------- --------
Net loans 302,503 297,454
Accrued interest receivable 1,572 1,972
Premises and equipment, net 6,117 5,898
Other assets 8,189 7,662
-------- --------
Total assets $362,776 $374,746
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 46,627 $ 52,617
Interest bearing 250,107 260,682
-------- --------
Total deposits 296,734 313,299
Borrowed funds 20,340 16,256
Accrued interest and other liabilities 3,764 3,588
-------- --------
Total liabilities 320,838 333,143
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common stock, $2.00 par value; 5,000,000 shares authorized;
4,918,611 shares issued at 6/30/06 and 12/31/05 9,837 9,837
Paid-in capital 145 140
Retained earnings 34,406 33,761
Treasury stock at cost; 377,871 shares at 6/30/06 and 375,948
at 12/31/05 (2,079) (2,037)
Accumulated other comprehensive loss (371) (98)
-------- --------
Total stockholders' equity 41,938 41,603
-------- --------
Total liabilities and stockholders' equity $362,776 $374,746
======== ========
See accompanying notes to the unaudited consolidated financial statements.
3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands except Per Share Data)
Interest income
Interest and fees on loans $ 5,854 $ 4,913 $ 11,305 $ 9,552
Interest on debt securities
Taxable 235 296 533 645
Tax exempt 49 47 98 100
Dividends 22 21 45 40
Interest on federal funds sold and overnight deposits 17 24 43 37
Interest on interest bearing deposits in banks 68 55 147 114
--------- --------- --------- ---------
Total interest income 6,245 5,356 12,171 10,488
--------- --------- --------- ---------
Interest expense
Interest on deposits 1,404 921 2,644 1,686
Interest on borrowed funds 206 101 413 195
--------- --------- --------- ---------
Total interest expense 1,610 1,022 3,057 1,881
--------- --------- --------- ---------
Net interest income 4,635 4,334 9,114 8,607
Provision for loan losses 105 - 150 -
--------- --------- --------- ---------
Net interest income after provision for loan losses 4,530 4,334 8,964 8,607
--------- --------- --------- ---------
Noninterest Income
Trust income 74 64 145 129
Service fees 787 729 1,493 1,403
Net gains on sales of investment securities 14 1 17 1
Net gains on sales of loans held for sale 27 23 119 119
Other income 101 91 175 141
--------- --------- --------- ---------
Total noninterest income 1,003 908 1,949 1,793
--------- --------- --------- ---------
Noninterest expenses
Salaries and wages 1,511 1,408 3,005 2,785
Pension and employee benefits 552 520 1,129 1,035
Occupancy expense, net 198 198 401 402
Equipment expense 261 244 517 512
Other expenses 929 907 1,796 1,724
--------- --------- --------- ---------
Total noninterest expense 3,451 3,277 6,848 6,458
--------- --------- --------- ---------
Income before provision for income taxes 2,082 1,965 4,065 3,942
Provision for income taxes 548 532 1,058 1,114
--------- --------- --------- ---------
Net income $ 1,534 $ 1,433 $ 3,007 $ 2,828
========= ========= ========= =========
Earnings per common share $ 0.34 $ 0.31 $ 0.66 $ 0.62
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,540,828 4,554,663 4,541,166 4,554,663
========= ========= ========= =========
Dividends per common share $ 0.26 $ 0.24 $ 0.52 $ 0.88
========= ========= ========= =========
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 - - - 3,007 - - 3,007
Change in net unrealized loss on
investment securities available-for-sale,
net of reclassification adjustment and
tax effects - - - - - (273) (273)
------
Total comprehensive income - - - - - - 2,734
------
Cash dividends declared
($0.52 per share) - - - (2,362) - - (2,362)
Issuance of stock options - - 5 - - - 5
Purchase of treasury stock (1,923) - - - (42) - (42)
--------- ------ ---- ------- -------- ----- ------
Balances, June 30, 2006 4,540,740 $9,837 $145 $34,406 $(2,079) $(371) $41,938
========= ====== ==== ======= ======= ===== =======
See accompanying notes to the unaudited consolidated financial statements.
5
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
---------------------
June 30, June 30,
2006 2005
---- ----
(Dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 3,007 $ 2,828
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 384 379
Provision for loan losses 150 -
(Credit) provision for deferred income taxes (25) 14
Net amortization on investment securities 34 72
Equity in losses of limited partnerships 165 95
Issuance of stock options 5 -
Decrease in unamortized loan fees (22) (10)
Proceeds from sales of loans held for sale 10,949 9,856
Origination of loans held for sale (6,018) (7,380)
Net gain on sales of investment securities (17) (1)
Net gain on sales of loans held for sale (119) (119)
Net gain on disposals of premises and equipment (6) (1)
Decrease (increase) in accrued interest receivable 400 (118)
(Increase) decrease in other assets (178) 140
Increase (decrease) in income taxes 28 (174)
Decrease in accrued interest payable (37) (1)
Increase in other liabilities 185 613
-------- --------
Net cash provided by operating activities 8,885 6,193
-------- --------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 1,890 1,392
Purchases - (98)
Investment securities available-for-sale
Sales 6,028 1,994
Maturities, calls and paydowns 2,089 7,932
Purchases - (999)
Net purchase of Federal Home Loan Bank stock (248) -
Increase in loans, net (5,328) (14,793)
Recoveries of loans charged off 48 31
Purchases of premises and equipment (605) (637)
Investments in limited partnerships - (142)
6
Six Months Ended
---------------------
June 30, June 30,
2006 2005
---- ----
(Dollars in thousands)
Proceeds from sales of premises and equipment 9 1
Proceeds from sales of repossessed property 1 8
- -
Net cash provided by (used in) investing activities 3,884 (5,311)
-------- --------
Cash Flows From Financing Activities
Increase in borrowings outstanding, net 4,084 5,869
Net decrease in non-interest bearing deposits (5,990) (11,278)
Net (decrease) increase in interest bearing deposits (10,575) 7,362
Purchase of treasury stock (42) -
Dividends paid (2,362) (4,009)
-------- --------
Net cash used in financing activities (14,885) (2,056)
-------- --------
Decrease in cash and cash equivalents (2,116) (1,174)
Cash and cash equivalents
Beginning 14,208 21,117
-------- --------
Ending $ 12,092 $ 19,943
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 3,094 $ 1,882
======== ========
Income taxes paid $ 1,055 $ 55
======== ========
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 $ (413) $ (255)
======== ========
Other real estate acquired in settlement of loans $ 101 $ 244
======== ========
Repossessed property acquired in settlement of loans $ 1 $ 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 June 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 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.
On March 17, 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
8
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.
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 six months ended June 30, 2005 would have been:
Three Months Ended Six Months Ended
------------------ ----------------
2005 2005
---- ----
(Dollars in thousands)
Net income as reported $1,433 $2,828
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects 0 0
------ ------
Pro forma net income $1,433 $2,828
====== ======
Earnings per common share
As reported $ 0.31 $ 0.62
Pro forma $ 0.31 $ 0.62
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 six months ended June 30,
2006 and 2005 consisted of the following components:
Three Months Ended Six Months Ended
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Service cost $132 $116 $242 $232
Interest cost on projected benefit obligation 144 121 275 242
Expected return on plan assets (118) (107) (242) (214)
Amortization of prior service cost 2 2 3 4
Amortization of net loss 21 15 42 30
---- ---- ---- ----
Net periodic benefit cost $181 $147 $320 $294
==== ==== ==== ====
Note 7. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the three
and six months periods ended June 30, 2006 and 2005 are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Unrealized holding gains (losses) on investment
securities available-for-sale $(293) $152 $(396) $(254)
Reclassification adjustment for gains realized
in income (14) (1) (17) (1)
----- ---- ----- -----
Net unrealized gains (losses) (307) 151 (413) (255)
Tax effect (104) 51 (140) (87)
----- ---- ----- -----
Net of tax amount $(203) $100 $(273) $(168)
===== ==== ===== =====
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis by management focuses on those factors
that had a material effect on Union Bankshares, Inc.'s (the Company's)
financial position as of June 30, 2006, and as of December 31, 2005, and its
results of operations for the three and six months ended June 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 June 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:
* uses of monetary, fiscal, and tax policy by various governments;
* political, legislative, or regulatory developments in Vermont, New
Hampshire, or the United States including changes in laws concerning
accounting, taxes, banking, and other aspects of the financial services
industry;
* developments in general economic or business conditions nationally, in
Vermont, or in northern New Hampshire, including interest rate
fluctuations, market fluctuations and perceptions, job creation and
unemployment rates, ability to attract new business, and inflation and
their effects on the Company or its customers;
* changes in the competitive environment for financial services
organizations, including increased competition from tax-advantaged credit
unions;
* the Company's ability to attract and retain key personnel;
* changes in technology, including demands for greater automation which
could present operational issues or significant capital outlays;
* acts or threats of terrorism or war, and actions taken by the United
States or other governments that might adversely affect business or
economic conditions for the Company or its customers;
* adverse changes in the securities market which could adversely affect the
value of the Company's stock;
* illegal acts of theft or fraud perpetuated against the bank or its
customers;
* unanticipated lower revenues or increased cost of funds, loss of
customers or business, or higher
10
operating expenses;
* the failure of assumptions underlying the establishment of the allowance
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
* the amount invested in new business opportunities and the timing of these
investments
* the failure of actuarial, investment, work force, salary, and other
assumptions underlying the establishment of reserves for future pension
costs or changes in legislative or regulatory requirements;
* future cash requirements might be higher than anticipated due to loan
commitments or unused lines of credit being drawn upon or depositors
withdrawing their funds;
* assumptions made regarding interest rate movement and sensitivity could
vary substantially if actual experience differs from historical
experience which could adversely affect the Company's results of
operations; and
* the creditworthiness of current loan customers is different from
management's understanding or changes dramatically and therefore the
allowance for loan losses becomes inadequate.
When evaluating forward-looking statements to make decisions with respect to
the Company, investors and others are cautioned to consider these and other
risks and uncertainties and are reminded not to place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made
and the Company undertakes no obligation to update them to reflect new or
changed information or events, except as may be required by federal securities
laws.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the Company's financial statements. Certain
accounting policies involve significant judgments and assumptions by management
which have a material impact on the reported amount of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and accompanying related
notes. The SEC has defined a company's critical accounting policies as the ones
that are most important to the portrayal of the company's financial condition
and results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
the Company has identified the accounting policies and judgments most critical
to the Company. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from estimates and have a
material impact on the carrying value of assets, liabilities, or the results of
operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as well as
other factors including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers and changes in delinquent,
nonperforming or impaired loans. Changes in these factors may cause
management's estimate of the allowance for loan losses to increase or decrease
and result in adjustments to the Company's provision for loan losses in future
periods. 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 results 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 reasonable, they are based upon
information presently available. Actual results may differ significantly from
these estimates under different assumptions, judgments or conditions.
11
OVERVIEW
The Company's net income was $1.53 million for the quarter ended June 30, 2006,
compared with net income of $1.43 million for the same period of 2005, or a 7.0%
increase between years. The Company's net income for the six months ended June
30, 2006 was $3.01 million, compared with net income of $2.83 million for the
same period of 2005, or a 6.3% increase between years. The year to date increase
in net interest income of $507 thousand was achieved despite a one-time negative
adjustment of $115 thousand ($76 thousand, after-tax) to reflect the cumulative
effect of inadvertent errors made in prior years on the accrual of interest for
accounting purposes on certain loans. Interest rates have continued to rise
throughout 2006 with two twenty-five basis point increases during both the first
and second quarter. The Company had an increase in its net interest margin from
5.36% for the second quarter of 2005 to 5.46% for the second quarter of 2006.
The net interest margin on a year to date basis grew from 5.36% for 2005 to
5.37% for 2006. The 2006 results also reflect the $150 thousand provision for
loan losses ($105 thousand in the second quarter) compared to none in 2005. The
increase in the provision for loan losses was mainly necessitated by the growth
in commercial and residential real estate loans between years, a change in the
composition of the loans within the portfolio and the down grading of three loan
relationships to substandard. Also contributing to net income for the quarter
was an increase in non-interest income of $95 thousand compared to the second
quarter of 2005. Income earned for the quarter was partially offset by the
increase of $174 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 and April 2006.
The Company's total assets decreased from $374.7 million at December 31, 2005,
to $362.8 million at June 30, 2006, a decrease of 3.2%. Deposits decreased from
$313.3 million at December 31, 2005 to $296.7 million at June 30, 2006, or a
decrease of 5.1%. This is a normal seasonal decrease for the Company as Vermont
municipalities are required by State law to be out of debt, for tax
anticipation borrowings, at least one day per year and the majority redeem
their certificates of deposit and pay down their loans on June 30th each year.
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 half of 2006. Loans and loans held for
sale increased $379 thousand, net of the sale of $10.8 million in residential
real estate loans during the first half of 2006. Average loans for the first
six months of 2006 were $308.4 million compared to the 2005 average of $288.9
million reflecting the continuing high demand for loans despite rising interest
rates. Investment securities available-for-sale decreased $8.5 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 $1.9 million, a decrease in cash and cash equivalents of
$2.1 million, and an increase in Borrowed Funds of $4.1 million.
12
The following unaudited per share information and key ratios depict several
measurements of performance or financial condition for or at the quarters and
six months ended June 30, 2006 and 2005, respectively:
Quarter Ended, June 30, Year to Date, June 30,
----------------------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----
Return on average assets (ROA) (1) 1.65% 1.61% 1.62% 1.60%
Return on average equity (ROE) (1) 14.79% 14.13% 14.49% 13.89%
Net interest margin (1)(2) 5.46% 5.36% 5.37% 5.36%
Efficiency ratio (3) 60.43% 62.53% 61.07% 62.10%
Net interest spread (4) 5.00% 5.05% 4.93% 5.06%
Loan to deposit ratio 103.66% 96.58% 103.66% 96.58%
Net loan charge-offs (recoveries) to average loans
not held for sale 0.02% 0.06% (0.01)% 0.03%
Allowance for loan losses to loans not
held for sale 1.06% 1.10% 1.06% 1.10%
Non-performing assets to total assets 1.02% 1.52% 1.02% 1.52%
Equity to assets 11.56% 11.36% 11.56% 11.36%
Total capital to risk weighted assets 17.67% 17.71% 17.67% 17.71%
Book value per share $9.24 $9.01 $9.24 $9.01
Earnings per share $0.34 $0.31 $0.66 $0.62
Dividends paid per share (5) $0.26 $0.24 $0.52 $0.88
Dividend payout ratio (6) 76.47% 77.42% 78.79% 141.94%
--------------------
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 half of 2006, and
eight times during 2005, by 25 basis points each time, to stand at 8.25% as of
June 30, 2006 from its 5.25% level as of December 31, 2004. This is the highest
the prime rate had been since March 20, 2001. The Company's net interest margin
increased 1 basis point and net interest spread declined 13 basis points during
the first half of 2006 compared to the first half of 2005. This decline in the
net interest spread was primarily the result of the average interest rates paid
on shorter-term deposits and borrowings rising more than the average interest
rate earned on longer term loans in response to the increases in the prime
rate. In addition traditional and nontraditional financial institutions in the
Company's market are competing aggressively for core deposit dollars, resulting
in pricing pressures.
RESULTS OF OPERATIONS
Net Interest Income. The largest component of the Company's operating income is
net interest income, which is the difference between interest and dividend
income received from interest-earning assets and the interest expense paid on
interest-bearing liabilities. The Company's net interest income increased $301
thousand, or 6.9%, to $4.64 million for the three months ended June 30, 2006,
from $4.33 million for the three months ended June 30, 2005. The Company's net
interest income increased $507 thousand or 5.9% to $9.11 million for the six
months ended June 30, 2006 from $8.61 million for the same period in 2005
despite the one-time $115 thousand negative accounting adjustment to loan
interest accruals from prior years. The net interest spread decreased 5 basis
points to 5.00% for the three months ended June 30, 2006, from 5.05% for the
three months ended June 30, 2005, and 13 basis points to 4.93% for the six
months ended June 30, 2006 from 5.06% for the 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, but as the yield curve continued to flatten,
the interest rates on short term and nonmaturity deposits moved up more
quickly. The net interest margin for the second quarter of 2006 increased 10
13
basis points to 5.46% from the 2005 period at 5.36% reflecting a rising rate
environment and helping to alleviate some of the downward pressure on the
declining net interest spread. The net interest margin increased 1 basis point
to 5.37% for the first six months of 2006 compared to 5.36% 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.
14
Three Months Ended June 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 $ 1,445 $ 17 4.78% $ 3,329 $ 24 2.79%
Interest bearing deposits in banks 7,060 68 3.84% 6,545 55 3.33%
Investment securities (1), (2) 26,380 288 4.70% 34,525 352 4.35%
Loans, net (1), (3) 310,807 5,854 7.64% 284,639 4,913 7.00%
FHLB of Boston stock 1,487 18 4.81% 1,241 12 3.90%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 347,179 6,245 7.31% 330,279 5,356 6.60%
Cash and due from banks 9,778 12,760
Premises and equipment 6,173 5,378
Other assets 7,729 7,605
-------- --------
Total assets $370,859 $356,022
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 51,653 $ 91 0.71% $ 50,604 $ 63 0.50%
Savings/money market accounts 104,035 431 1.66% 109,342 294 1.08%
Time deposits 104,912 882 3.37% 96,431 564 2.35%
Borrowed funds 17,645 206 4.63% 8,842 101 4.52%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 278,245 1,610 2.31% 265,219 1,022 1.55%
Non-interest bearing deposits 46,851 46,296
Other liabilities 4,278 3,955
-------- --------
Total liabilities 329,374 315,470
Stockholders' equity 41,485 40,552
-------- --------
Total liabilities and
stockholders' equity $370,859 $356,022
======== ========
Net interest income $4,635 $4,334
====== ======
Net interest spread (1) 5.00% 5.05%
==== ====
Net interest margin (1) 5.46% 5.36%
==== ====
--------------------
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.
15
Six Months Ended June 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 $ 1,879 $ 43 4.57% $ 2,746 $ 37 2.67%
Interest bearing deposits in banks 7,612 147 3.88% 6,969 114 3.29%
Investment securities (1), (2) 28,945 643 4.75% 37,020 762 4.37%
Loans, net (1), (3) 308,358 11,305 7.47% 280,549 9,552 6.93%
FHLB of Boston stock 1,442 33 4.58% 1,241 23 3.71%
-------- ------- ---- -------- ------- ----
Total interest-earning assets (1) 348,236 12,171 7.14% 328,525 10,488 6.51%
Cash and due from banks 10,064 13,186
Premises and equipment 6,116 5,297
Other assets 7,912 7,461
-------- --------
Total assets $372,328 $354,469
======== ========
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 51,957 $ 173 0.67% $ 47,906 $ 114 0.48%
Savings/money market accounts 105,697 822 1.57% 109,856 535 0.98%
Time deposits 103,166 1,649 3.22% 93,395 1,037 2.24%
Borrowed funds 17,934 413 4.58% 8,991 195 4.32%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 278,754 3,057 2.21% 260,148 1,881 1.45%
Non-interest bearing deposits 47,928 50,050
Other liabilities 4,131 3,558
-------- --------
Total liabilities 330,813 313,756
Stockholders' equity 41,515 40,713
-------- --------
Total liabilities and
stockholders' equity $372,328 $354,469
======== ========
Net interest income $ 9,114 $ 8,607
======= =======
Net interest spread (1) 4.93% 5.06%
==== ====
Net interest margin (1) 5.37% 5.36%
==== ====
--------------------
Average yields reported on a tax-equivalent basis.
Average balances of investment securities are calculated on the amortized
cost basis.
Includes loans held for sale and is net of unearned income and allowance
for loan losses.
Rate/Volume Analysis. The following tables describe the extent to which changes
in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume); and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
16
Three Months Ended June 30, 2006
Compared to
Three Months Ended June 30, 2005
Increase/(decrease) Due to Change in
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 15 $ (22) $ (7)
Interest bearing deposits in banks 4 9 13
Investment securities (98) 34 (64)
Loans, net 472 469 941
FHLB of Boston stock 2 4 6
- - -
Total interest-earning assets 395 494 889
Interest-bearing liabilities:
NOW accounts 1 27 28
Savings/money market accounts (13) 150 137
Time deposits 54 264 318
Borrowed funds 102 3 105
---- ----- -----
Total interest-bearing liabilities 144 444 588
---- ----- -----
Net change in net interest income $251 $ 50 $ 301
==== ===== =====
Six Months Ended June 30, 2006
Compared to
Six Months Ended June 30, 2005
Increase/(decrease) Due to Change in
------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (5) $ 11 $ 6
Interest bearing deposits in banks 11 22 33
Investment securities (198) 79 (119)
Loans, net 981 772 1,753
FHLB of Boston stock 4 6 10
- - --
Total interest-earning assets 793 890 1,683
Interest-bearing liabilities:
NOW accounts 11 48 59
Savings/money market accounts (19) 306 287
Time deposits 118 494 612
Borrowed funds 204 14 218
---- ----- ------
Total interest-bearing liabilities 314 862 1,176
---- ----- ------
Net change in net interest income $479 $ 28 $ 507
==== ===== ======
Quarter Ended June 30, 2006, compared to Quarter Ended June 30, 2005.
Interest and Dividend Income. The Company's interest and dividend income
increased $889 thousand, or 16.6%, to $6.25 million for the three months ended
June 30, 2006, from $5.36 million for the three months ended June 30, 2005,
with average earning assets increasing $16.9 million, or 5.1%, to $347.2
million for the three months ended June 30, 2006, from $330.3 million for the
three months ended June 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 7.64% for the three months
ended June 30, 2006, up $26.2 million from $284.6 million at an average yield
of 7.00% for the three months ended June 30, 2005, or a 9.2% increase in volume
and a 64 basis point increase in yield. Quarterly average loans
17
secured by real estate increased $26.1 million, or 11.0%, to $263.0 million for
the second quarter of 2006, from $236.9 million for the second quarter of 2005.
This increase was the result of strong demand for residential and commercial
real estate in the Company's market including the Company's increased presence
in Franklin County in Vermont resulting from the opening of a loan production
office in St. Albans, Vermont, during the first quarter of 2005. This demand
was influenced in part by low long-term interest rates, and high demand and
prices in the Chittenden County, Vermont market, which is contiguous to the
Company's markets, and is fueling growth in the Company's market. Municipal
loans decreased $2.1 million, or 10.0%, to an average of $18.8 million in 2006
from an average of $20.9 million in 2005. Average commercial loans increased
$2.9 million, or 13.4%, to $24.4 million for 2006 compared to $21.5 million for
2005.
The average balance of investments (including mortgage-backed securities)
decreased $8.1 million or 23.6%, to $26.4 million for the three months ended
June 30, 2006, from $34.5 million for the three months ended June 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 $1.9 million, or 56.6%, to
$1.4 million for the three months ended June 30, 2006, from $3.3 million for
the three months ended June 30, 2005. The average level of interest bearing
deposits in banks for the quarter was $7.1 million up $515 thousand or 7.9%
from the 2005 average level of $6.5 million. Interest income from non-loan
instruments was $391 thousand for the second quarter of 2006 and $443 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 $588 thousand, or
57.5%, to $1.6 million for the three months ended June 30, 2006, from $1.0
million for the three months ended June 30, 2005, of which $144 thousand was a
result of the increase in volume while the remaining $444 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 through June 30, 2006.
Average interest-bearing liabilities increased $13.0 million, or 4.9%, to
$278.2 million for the three months ended June 30, 2006, from $265.2 million
for the three months ended June 30, 2005, and the average rate paid increased
76 basis points to 2.31% from 1.55% for the three months ended June 30, 2006
and 2005, respectively. Average time deposits were $104.9 million for the three
months ended June 30, 2006, and $96.4 million for the three months ended June
30, 2005, or an increase of 8.8%. The average rate paid on time deposits
increased 102 basis points, to 3.37% from 2.35% for the three months ended June
30, 2006 and 2005, respectively. The average balances for money market and
savings accounts decreased $5.3 million, or 4.9%, to $104.0 million for the
three months ended June 30, 2006, from $109.3 million for the three months
ended June 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 $1.0 million, or 2.1% increase in NOW accounts brought the
average balance up to $51.6 million from $50.6 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 funds borrowed increased from $8.8 million for the three
months ended June 30, 2005, to $17.6 million for the three months ended June
30, 2006, while the average rate paid on those funds rose from 4.52% to 4.63%
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 quarter ended June
30, 2006 was $105 thousand compared to $0 for the same period in 2005. An
increase in the growth of loans, a change in the composition of the loans
within the portfolio and the internal down grading of three loan relationships
to substandard account for the increase. For further details see, FINANCIAL
CONDITION -"Allowance for Loan Losses" below.
18
Noninterest income. The following table sets forth changes from the second
quarter of 2005 to the second quarter of 2006 for components of noninterest
income:
For The Quarter Ended June 30,
(Dollars in Thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 74 $ 64 $10 15.6
Service fees 787 729 58 8.0
Net gains on sales of investment securities 14 1 13 1300.0
Net gains on sales of loans held for sale 27 23 4 17.4
Other 101 91 10 11.0
------ ---- ---
Total noninterest income $1,003 $908 $95 10.5
====== ==== ===
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 $52 thousand, or 20.1%, increase in loan servicing fee income of $14
thousand or 16.0% and ATM usage fees of $14 thousand, or 9.4%, partially offset
by a decline in deposit service charges of $19 thousand, or 26.6%, 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 is primarily due to the increase in net mortgage servicing
rights income.
Noninterest expense. The following table sets forth changes from the second
quarter of 2005 to the second quarter of 2006 for components of noninterest
expense:
For the Quarter Ended June 30,
(Dollars in Thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $1,511 $1,408 $103 7.3
Pension and employee benefits 552 520 32 6.2
Occupancy expense, net 198 198 - -
Equipment expense 261 244 17 7.0
Equity in losses of affordable
housing investments 56 55 1 1.8
Other 873 852 21 2.5
------ ------ ----
Total noninterest expense $3,451 $3,277 $174 5.3
====== ====== ====
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 5% increase in the Company's medical insurance
costs account for the majority of the increase in pension and employee
benefits.
Equipment expense. The majority of the increase is due to increased
depreciation expense due as a result of the expansion of the Littleton, NH
office to a full service branch and the upgrade of ATM's, computer equipment,
and software.
Other. The majority of the increase was due to the loss, on the last day of June
2006, from the robbery at our Jeffersonville, Vermont branch, which was under
our insurance deductible.
Year to Date June 30, 2006, compared to Year to Date June 30, 2005.
Interest and Dividend Income. The Company's interest and dividend income
increased $1.7 million, or 16.01%, to $12.2 million for the six months ended
June 30, 2006, from $10.5 million for the six months ended June 30, 2005, with
average earning assets increasing $19.7 million, or 6.0%, to $348.2 million for
the six months ended June 30, 2006, from $328.5 million for the six months
ended June 30, 2005. The
19
increase in interest income resulting from the rise in average earning assets
was augmented by the higher rates earned on all categories of earning assets in
2006 versus 2005. The 16.0% increase in interest income for year to date 2006
compared to year to date 2005 was also achieved despite the one-time negative
accounting adjustment of $115 thousand to loan interest accruals from prior
years. Average loans approximated $308.4 million at an average yield of 7.47%
for the six months ended June 30, 2006, up $27.8 million from $280.5 million at
an average yield of 6.93% for the six months ended June 30, 2005, or a 9.9%
increase in volume and a 54 basis point increase in yield. The majority of the
increase was in loans secured by real estate.
The average balance of investments (including mortgage-backed securities)
decreased $8.1 million or 27.9%, to $28.9 million for the six months ended June
30, 2006, from $37.0 million for the six months ended June 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 $867 thousand, or 31.6%, to
$1.9 million for the six months ended June 30, 2006, from $2.7 million for the
six months ended June 30, 2005. The average level of interest bearing deposits
in banks for the first half of 2006 was $7.6 million up $643 thousand or 9.2%
from the 2005 average level of $7.0 million. Interest income from non-loan
instruments was $866 thousand year to date for 2006 and $936 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 $1.2 million, or
62.5%, to $3.1 million for the six months ended June 30, 2006, from $1.9
million for the six months ended June 30, 2005, of which $314 thousand was a
result of the increase in volume and $862 thousand 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 30, 2006. Average interest-bearing
liabilities increased $18.6 million, or 7.2%, to $278.8 million for the six
months ended June 30, 2006, from $260.1 million for the six months ended June
30, 2005, and the average rate paid increased 76 basis points to 2.21% from
1.45% for the six months ended June 30, 2006 and 2005, respectively. Average
time deposits were $103.2 million for the six months ended June 30, 2006, and
$93.4 million for the six months ended June 30, 2005, or an increase of 10.5%.
The average rate paid on time deposits increased 98 basis points, to 3.22% from
2.24% for the six months ended June 30, 2006 and 2005, respectively. The
average balances for money market and savings accounts decreased $4.2 million,
or 3.8%, to $105.7 million for the six months ended June 30, 2006, from $109.9
million for the six months ended June 30, 2005. A $4.1 million, or 8.5%
increase in NOW accounts brought the average balance up to $52.0 million from
$47.9 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 funds borrowed increased from $9.0 million for the six
months ended June 30, 2005, to $17.9 million for the three months ended June
30, 2006, while the average rate paid on those funds rose from 4.32% to 4.58%
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 June 30,
2006 was $150 thousand compared to $0 for the same period in 2005. A change in
the composition of the loans within the portfolio and the internal down grading
of three loan relationships to substandard account for the increase. For
further details see, FINANCIAL CONDITION - "Allowance for Loan Losses" below.
20
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 June 30,
(Dollars in Thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Trust income $ 145 $ 129 $ 16 12.4
Service fees 1,493 1,403 90 6.4
Net gains on sales of investment securities 17 1 16 1600.0
Net gains on sales of loans held for sale 119 119 - -
Other 175 141 34 24.1
------ ------ ----
Total noninterest income $1,949 $1,793 $156 8.7
====== ====== ====
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 $90 thousand, or 19.6%, increase in loan servicing fee income of $21
thousand or 13.4% and ATM usage fees of $27 thousand, or 9.3%, partially offset
by a decline in deposit service charges of $55 thousand, or 32.5%, 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 $20 thousand increase in mortgage
servicing rights between years and an increase of $7 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 June 30,
(Dollars in Thousands) 2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Salaries and wages $3,005 $2,785 $220 7.9
Pension and employee benefits 1,129 1,035 94 9.1
Occupancy expense, net 401 402 (1) (0.2)
Equipment expense 517 512 5 1.0
Equity in losses of affordable
housing investments 165 95 70 73.7
Other 1,631 1,629 2 0.1
----- ----- ----
Total noninterest expense $6,848 $6,458 $390 6.0
====== ====== ====
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 insurance costs.
Amortization of investments in affordable housing projects. These expenses
increased due primarily to amortization of new investments in affordable
housing projects. The Company invested in two affordable housing projects
during 2005 which resulted in the increase in 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 decreased $56 thousand, or 5.0%, to $1.06 million
for the six months ended June 30, 2006, from $1.11 million for the same period
in 2005, despite an increase in net income compared to the 2005 comparison
period. The Company's effective tax rate decreased to 26.0% for the six months
ended June 30, 2006, from 28.3% for the same period in 2005. This is the result
of the increase in low income housing tax credits related to the Company's
limited partnership investments in two new affordable housing projects in its
market area
21
during 2005 and an increase in non-taxable municipal income which were
partially offset by the increase in federal income taxes resulting from
increased taxable income.
FINANCIAL CONDITION
At June 30, 2006, the Company had total consolidated assets of $362.8 million,
including gross loans and loans held for sale ("total loans") of $307.6
million, deposits of $296.7 million and stockholders' equity of $41.9 million.
The Company's total assets experienced a seasonal decrease of $12.0 million or
3.2% to $362.8 million at June 30, 2006, from $374.7 million at December 31,
2005. This decrease is primarily due to the payoff of $10.8 million in tax
anticipation municipal loans on June 30, 2006 in order for municipalities to
comply with Vermont law. Municipal loans increased $9.3 million on July 3rd,
the first business day of the next quarter as anticipated reflecting seasonal
fluctuations in these loans. Net loans and loans held for sale were $304.2
million, or 83.9% of total assets at June 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, decreased
$2.1 million, or 14.9%, to $12.1 million at June 30, 2006, from $14.2 million
at December 31, 2005. Interest bearing deposits in banks decreased $1.9 million
or 22.0% from $8.6 million at December 31, 2005 to $6.7 million at June 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 $23.9 million at June 30, 2006, an $8.5 million, or
26.4%, decrease. Securities maturing were not replaced and $6.0 million was
sold during the first half of the year at a gain of $17 thousand in order to
fund loan demand.
Deposits decreased $16.6 million, or 5.3%, to $296.7 million at June 30, 2006,
from $313.3 million at December 31, 2005. The decrease in deposits is a normal
seasonal occurrence for the Company, as municipalities redeem their
certificates of deposits on June 30th to payoff their tax anticipation loans.
Noninterest bearing accounts decreased $6.0 million, or 11.4%, from $52.6
million at December 31, 2005, to $46.6 million at June 30, 2006 and interest
bearing deposits decreased $10.6 million, or 4.1%, from $260.7 million at
December 31, 2005 to $250.1 million at June 30, 2006. (See average balances and
rates in the Yields Earned and Rates Paid table on Page 16). Total borrowings
increased $4.1 million or 25.1% to $20.3 million at June 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 did not increase sufficiently to
cover all of the Company's funding requirements.
Total capital increased from $41.6 million at December 31, 2005 to $41.9
million at June 30, 2006, reflecting net income of $3.0 million for the first
half of 2006, less the regular cash dividend paid of $2.4 million, the purchase
of Treasury stock totaling $42 thousand and an increase of $273 thousand in
accumulated other comprehensive loss. (See Capital Resources section on Page
34)
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 June 30,
2006, the Company's total loan portfolio was $307.6 million, or 84.8% of
assets, up from $307.2 million, or 82.0% of assets as of December 31, 2005, and
from $292.3 million or 80.9 % of assets as of June 30, 2005. Total loans have
only increased $0.4 million since December 31, 2005 because of the one day
aberration with municipal loans while average loans (including loans held for
sale) were $288.9 million for 2005 and have grown to $308.4 million or 6.7% for
the first half of 2006. The Company sold $10.9 million of loans held for sale
during the first half of 2006 resulting in a gain on sale of loans of $119
thousand, compared with loan sales of $9.9 million and related gain on sale of
loans of $119 thousand for the first half of 2005.
22
The following table shows information on the composition of the Company's total
loan portfolio as of June 30, 2006 and December 31, 2005:
Loan Type June 30, 2006 December 31, 2005
--------- ------------- -----------------
(Dollars in thousands)
Amount Percent Amount Percent
Residential real estate $113,594 36.9 $106,470 34.7
Construction real estate 18,246 5.9 18,066 5.9
Commercial real estate 136,079 44.3 130,483 42.5
Commercial 21,199 6.9 20,650 6.7
Consumer 7,745 2.5 7,999 2.6
Municipal loans 9,005 2.9 17,009 5.5
Loans Held for Sale 1,734 0.6 6,546 2.1
-------- ----- -------- -----
Total loans 307,602 100.0 307,223 100.0
Deduct:
Allowance for loan losses (3,235) (3,071)
Unearned net loan fees (130) (152)
-------- --------
Net loans & Loans Held for Sale $304,237 $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 $202.8 million residential real estate mortgage portfolio,
approximately $85.1 million of which was serviced for unaffiliated third
parties at June 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 $5.1 million
of commercial and commercial real estate loans for unaffiliated third parties
as of June 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 $326 thousand at June 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 June 30, 2006
was $7.6 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 portfolio will not become subject to increasing pressures from
deteriorating borrower credit due to general or local economic conditions.
23
Restructured loans include the Company's troubled debt restructurings that
involved forgiving a portion of interest or principal on any loans, refinancing
loans at a rate materially less than the market rate, rescheduling loan
payments, or granting other concessions to a borrower due to financial or
economic reasons related to the debtor's financial difficulties. Restructured
loans do not include qualifying restructured loans that have complied with the
terms of their restructure agreement for a satisfactory period of time.
Restructured loans in compliance with modified terms totaled $1.3 million at
June 30, 2006 and $21 thousand at December 31, 2005. The total amount that is
restructured and in compliance at June 30, 2006 is guaranteed by the U.S.
Department of Agriculture-Rural Development (USDA-RD). There are two loans
totaling $167 thousand at June 30, 2006 that are not in compliance with their
modified terms, both of these loans are in non-accrual status as of that date.
At June 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 $1.2 million, or 0.38% of
gross loans at June 30, 2006, $1.3 million, or 0.42%, at December 31, 2005, and
$1.2 million, or 0.41%, at June 30, 2005. The aggregate interest income not
recognized on such nonaccrual loans amounted to approximately $274 thousand and
$232 thousand as of June 30, 2006 and 2005, respectively and $268 thousand as
of December 31, 2005.
The Company had $1.1 million in loans past due 90 days or more and still
accruing at June 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 $536 thousand of the
balances in this category were covered by such guarantees at June 30, 2006. At
June 30, 2006, and December 31, 2005, respectively, the Company had internally
classified certain loans totaling $3.0 million and $2.8 million. In
management's view, such loans represent a higher degree of risk and could
become nonperforming loans in the future. While still on a performing status,
in accordance with the Company's credit policy, loans are internally classified
when a review indicates any of the following conditions makes the likelihood of
collection uncertain:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in absolute
terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
On occasion real estate properties are acquired through or in lieu of loan
foreclosure. These properties are to be sold and are initially recorded at the
lesser of the recorded loan or fair value via an appraisal for more significant
properties and management's estimate for minor properties at the date of
acquisition establishing a new carrying basis. The Company had $101 thousand of
residential real estate property classified as OREO at June 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
24
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 June 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 remained relatively unchanged from December 31,
2005, however the composition changed significantly. Municipal loans, which
carry a low required reserve factor, dropped by $8 million while commercial and
residential real estate loans which are assigned a higher reserve factor, grew
by $12.7 million. Therefore, the allowance for loan losses was increased despite
the relatively stable portfolio loan balance. Additionally, from December 31,
2005 to June 30, 2006 three loan relationships were downgraded to an internal
substandard rating which accounted for an increase of about $500 thousand in
loans internally rated as substandard. As a result of these factors, the Company
designated a loan loss provision for the six months ended June 30, 2006 of $150
thousand which brings the reserve to $3.235 million at June 30, 2006. There was
no material change in the lending programs or terms during the quarter.
25
The following table reflects activity in the allowance for loan losses for the
three and six months ended June 30, 2006 and 2005:
Three Months Ended, June 30, Six Months Ended, June 30,
---------------------------- --------------------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $3,147 $3,068 $3,071 $3,067
Charge-offs
Real Estate - 25 - 28
Commercial - 13 - 13
Consumer and other 26 17 35 35
------ ------ ------ ------
Total charge-offs 26 55 35 76
------ ------ ------ ------
Recoveries
Real Estate 3 - 25 12
Commercial - 1 12 1
Consumer and other 6 8 12 18
------ ------ ------ ------
Total recoveries 9 9 49 31
------ ------ ------ ------
Net recoveries (charge-offs) (17) (46) 14 (45)
------ ------ ------
Provision for loan losses 105 - 150 -
------ ------ ------ ------
Balance at end of period $3,235 $3,022 $3,235 $3,022
====== ====== ====== ======
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:
June 30, 2006 December 31, 2005
----------------- -----------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 697 38.5 $ 571 35.4
Commercial 1,853 43.2 1,826 43.4
Construction 183 6.0 181 6.0
Other Loans
Commercial 364 6.9 343 6.9
Consumer installment 123 2.5 123 2.6
Municipal, Other and
Unallocated 15 2.9 27 5.7
------ ----- ------ -----
Total $3,235 100.0 $3,071 100.0
====== ===== ====== =====
Ratio of Net Charge Offs
(Recoveries) to Average Loans not
held for sale (1) (0.01) 0.02
===== ====
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.06 1.02
===== ====
Ratio of Allowance for Loan
Losses to non-performing
loans (2) 89.76 66.66
===== =====
--------------------
Annualized
Non-performing loans include loans in non-accrual status, loans past due
90 days or more and still accruing, and restructured loans.
Not withstanding the categories shown in the table above all funds in the
allowance for loan losses are available to absorb loan losses in the portfolio,
regardless of loan category.
26
Management of the Company believes that the allowance for loan losses at June
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 June 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 June 30, 2006, the reported value of investment
securities available-for-sale was $23.9 million or 6.6% of its assets. The
amount in Investment securities available-for-sale decreased from $32.4 million
at December 31, 2005, to $ 23.9 million at June 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 June 30, 2006
reflects a negative valuation adjustment of $562 thousand. The offset of this
adjustment, net of income tax effect, was an $371 thousand loss reflected in
the Company's other comprehensive loss component of stockholders' equity at
June 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 June 30, 2006, thirty-one securities with a fair value of $11.5 million or
48.3% of the portfolio have been in a loss position for more than twelve months
with unrealized losses totaling $589 thousand. The primary factor causing these
unrealized losses is the change in the interest rate environment over the past
24 months especially in the near-term market. Management deems the unrealized
losses on all these securities to be temporary as the only credit quality issue
is with Ford Motor Credit Corporation which has shown an improvement in pricing
since the end of the previous quarter and its management's actions to improve
the position of the parent company are positive. The Company has the ability to
hold these securities, classified as available-for-sale, for the foreseeable
future.
Deposits. The following table shows information concerning the Company's
average deposits by account type and weighted average nominal rates at which
interest was paid on such deposits for the periods ended June 30, 2006, and
December 31, 2005:
Six Months Ended June 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 $ 47,928 15.5 - $ 50,007 16.2 -
NOW accounts 51,957 16.8 0.67% 51,813 16.8 0.51%
Money Market accounts 58,869 19.1 2.36% 59,300 19.2 1.60%
Savings accounts 46,828 15.2 0.57% 50,369 16.4 0.69%
-------- ----- -------- -----
Total non-time deposits: 205,582 66.6 0.98% 211,489 68.6 0.74%
-------- ----- -------- -----
Time deposits:
Less than $100,000 64,529 20.9 2.96% 61,834 20.1 2.23%
$100,000 and over 38,637 12.5 3.66% 35,018 11.3 2.98%
-------- ----- -------- -----
Total time deposits 103,166 33.4 3.22% 96,852 31.4 2.50%
-------- ----- -------- ----
Total deposits $308,748 100.0 1.73% $308,341 100.0 1.29%
======== ===== ======== =====
27
The Company's customers have been opening certificates of deposit to take
advantage of increasing time deposit rates as evidenced by the $3.6 million or
10.3% increase in average time deposits of $100,000 and over and the $2.7
million or 4.4% increase in time deposits less than $100,000 in 2006 year to
date.
The following table sets forth information regarding the Company's time
deposits in amounts of $100,000 or more at June 30, 2006, and December 31,
2005, that mature during the periods indicated:
June 30, 2006 December 31, 2005
------------- -----------------
(Dollars in thousands)
Within 3 months $ 7,896 $11,545
3 to 6 months 7,778 15,660
6 to 12 months 7,469 6,941
Over 12 months 3,259 1,436
------- -------
$26,402 $35,582
======= =======
The largest decrease in total time deposits over $100,000 between December 31,
2005 and June 30, 2006 was in the municipal deposit category as municipalities
in Vermont normally redeem their certificates of deposit on June 30th in order
to pay down tax anticipation debt to remain in compliance with Vermont law.
Certificates of Deposit $100,000 or greater were back up to $35.1 million by
July 5th.
Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB) were
$20.3 million at June 30, 2006, at a weighted average rate of 4.87%, 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 second quarter 2006 is a net increase
of $4.0 million or 24.5% due partially to the match funding of one large
commercial real estate loan and the remainder due to support for general loan
growth.
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,
28
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 June 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.
The Company's interest rate sensitivity analysis (simulation) as of December
2005 for a 75 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 June 30,
2006, but moved up the last 25 basis points to 8.25% on June 29th, therefore it
was not taken into account in the simulation), projected the following for the
six months ended June 30, 2006, compared to the actual results:
June 30, 2006
----------------------------------
Percentage
Projected Actual Difference
--------- ------ ----------
(Dollars in thousands)
Net Interest Income $9,694 $9,114 -6.0%
Net Income $3,279 $3,007 -8.3%
Return on Assets 1.77% 1.62% -8.5%
Return on Equity 16.10% 14.49% -10.0%
Actual net interest income is lower than projected mainly due to three reasons.
The first is that interest-earning assets in total did not grow as much as
anticipated during the first half of 2006 as non-time deposit generation was
slower than anticipated resulting in reduction in the investment portfolio from
what had been projected. The second reason was the $115 thousand adjustment to
loan income in January of 2006 to correct prior years' errors. Lastly 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.
29
As of June 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:
June 30, 2006 December 31, 2005
------------- -----------------
(Dollars in thousands)
Commitments to originate loans $23,366 $ 9,722
Unused lines of credit 30,968 35,349
Standby letters of credit 1,758 918
Credit Card arrangements 2,326 2,236
------- -------
Total $58,418 $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.
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 June 30, 2006, and December 31, 2005, were as follows:
June 30, 2006 December 31, 2005
------------- -----------------
(Dollars in thousands)
Operating lease commitments $ 200 $ 232
Maturities on borrowed funds 20,340 16,256
Deposits without stated maturity (1) 204,158 216,273
Certificates of deposit (1) 92,576 97,026
Pension plan contributions (2) 170 498
Deferred compensation payouts (4) 550 730
Equity investment commitments in
housing limited partnerships 356 704
Construction contract (3) - 318
-------- --------
Total $318,350 $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.
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 June 30, 2006 was $377 thousand and for December 31 2005 was $330
thousand, both of which were satisfied by vault cash. The Company has also
committed to maintain a noninterest bearing contracted clearing balance of $1
million at June 30, 2006 with the Federal Reserve Bank of Boston.
30
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling
interest-earning assets and interest-bearing liabilities into periods based upon
the next date on which such assets and liabilities could mature or reprice. The
amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except that:
* adjustable-rate loans, investment securities, variable rate time deposits,
and FHLB advances are included in the period when they are first scheduled
to adjust and not in the period in which they mature;
* fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker estimates,
the results of a prepayment model utilized by the Company, and empirical
data;
* other non-mortgage related fixed-rate loans reflect scheduled contractual
amortization, with no estimated prepayments; and
* NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by the Company of the sensitivity of each such category
of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and
considers them reasonable. However, the interest rate sensitivity of the
Company's assets and liabilities in the tables could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
31
The following table shows the Company's rate sensitivity analysis as of June 30,
2006:
June 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 $ 20 $ - $ - $ - $ - $ 20
Interest bearing deposits in banks 897 1,480 3,545 786 - 6,708
Investment securities available-for-sale (1)(3) 1,173 3,466 9,419 3,906 5,228 23,192
FHLB Stock - - - - 1,488 1,488
Loans and loans held for sale (2)(3) 115,350 63,433 73,590 44,325 10,744 307,472
-------- ------- -------- -------- --------- --------
Total interest sensitive assets $117,440 $68,379 $ 86,554 $ 49,017 $ 17,490 $338,880
Interest sensitive liabilities:
Time deposits $ 23,776 $47,011 $ 19,834 $ 1,955 $ - $ 92,576
Money markets 6,089 - - - 50,932 57,021
Regular savings 8,755 - - - 37,532 46,287
NOW accounts 19,310 - - - 34,913 54,223
Borrowed funds 4,262 2,966 1,255 1,202 10,655 20,340
-------- ------- -------- -------- --------- --------
Total interest sensitive liabilities $ 62,192 $49,977 $ 21,089 $ 3,157 $ 134,032 $270,447
Net interest rate sensitivity gap $ 55,248 $18,402 $ 65,465 $ 45,860 $(116,542) $ 68,433
Cumulative net interest rate
sensitivity gap $ 55,248 $73,650 $139,115 $184,975 $ 68,433
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 15.3% 20.3% 38.3% 51.0% 18.9%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive assets 16.3% 21.7% 41.1% 54.6% 20.2%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive liabilities 20.4% 27.2% 51.4% 68.4% 25.3%
Investment securities available-for-sale exclude marketable equity
securities with a fair value of $669 thousand that may be sold by the
Company at any time.
Balances shown net of unearned income of $130 thousand.
Estimated repayment assumptions considered in Asset/Liability model.
32
Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and capital
(Net Fair Value) under various interest rate scenarios, balance sheet trends,
and strategies over a relatively short time horizon. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, product pricing, prepayment speeds on mortgage related assets, principal
maturities on other financial instruments, and changes in funding mix. While
such assumptions are inherently uncertain as actual rate changes rarely follow
any given forecast and asset-liability pricing and other model inputs usually do
not remain constant in their historical relationships, management believes that
these assumptions are reasonable. Based on the results of these simulations, the
Company is able to quantify its estimate of interest rate risk and develop and
implement appropriate strategies.
The following chart reflects the cumulative results of the latest simulation
analysis for the next twelve months on Net Interest Income, Net Income, Return
on Assets, Return on Equity and Net Fair Value Ratio. The projection utilizes a
rate shock, applied proportionately, of up and down 300 basis points from the
June 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
--------- ----- ------------ ------ ------ ------ ------ --------
June-07 11.25% $20,989 15.1 $8,116 2.18 18.40 10.02%
8.25% $18,233 - $6,186 1.60 13.93 11.57%
5.25% $15,275 (16.2) $4,116 0.98 8.77 13.02%
The resulting projected cumulative effect of these estimates on Net Interest
Income and the Net Fair Value Ratio for the twelve month period ending June 30,
2007, are within approved ALCO guidelines. The simulations of earnings do not
incorporate any management actions, which might moderate the negative
consequences of interest rate deviations. Therefore, they do not reflect likely
actual results, but serve as conservative estimates of interest rate risk 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,
June 30, 2006, the Company's ratio of average loans to average deposits was
101.1% compared to the prior year of 94.0%. The increase in the loan to deposit
ratio between years was mainly funded by the decrease in investment securities
available-for-sale and cash and due from banks as well as Federal Home Loan Bank
(FHLB) of Boston advances.
In addition, as Union Bank is a member of the FHLB of Boston, it has access to
unused line of credit up to $33.7 million at June 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
33
an upstream correspondent bank and a repurchase agreement line with a selected
brokerage house. There were no balances outstanding on either line at June 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 June 30, 2006 or
December 31, 2005 although Union had exchanged $42 thousand and $1.7 million,
respectively, with other CDARS members as of those dates.
While scheduled loan and securities payments and FHLB advances are relatively
predictable sources of funds, deposit flows and prepayments on loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions, and competition. The Company's liquidity is actively
managed on a daily basis, monitored by the ALCO, and reviewed periodically with
the subsidiary's Board of Directors. The Company's ALCO sets liquidity targets
based on the Company's financial condition and existing and projected economic
and market conditions. The ALCO measures the Company's marketable assets and
credit available to fund liquidity requirements and compares the adequacy of
that aggregate amount against the aggregate amount of the Company's interest
sensitive or volatile liabilities, such as core deposits and time deposits in
excess of $100,000, borrowings and term deposits with short maturities, and
credit commitments outstanding. The primary objective is to manage the Company's
liquidity position and funding sources in order to ensure that it has the
ability to meet its ongoing commitment to its depositors, to fund loan
commitments and unused lines of credit, and to maintain a portfolio of
investment securities.
The Company's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 76% of the Company's time deposits will mature within twelve
months, management believes, based upon past experience, (percentage of time
deposits to mature within twelve months has ranged from 72% to 84% over the
preceding six years) the relationships developed with local municipalities, and
the introduction of new deposit products in 2005, that Union Bank will retain a
substantial portion of these deposits. Management will continue to offer a
competitive but prudent pricing strategy to facilitate retention of such
deposits. A reduction in total deposits could be offset by purchases of federal
funds, purchases of deposits, short-or-long-term FHLB borrowings, utilization of
the repurchase agreement line, or liquidation of investment securities,
purchased brokerage certificates of deposit or loans held for sale. Such steps
could result in an increase in the Company's cost of funds and adversely impact
the net interest spread and margin. Management believes the Company has
sufficient liquidity to meet all reasonable borrower, depositor, and creditor
needs in the present economic environment. However, any projections of future
cash needs and flows are subject to substantial uncertainty. Management
continually evaluates opportunities to buy/sell securities and loans
available-for-sale, obtain credit facilities from lenders, or restructure debt
for strategic reasons or to further strengthen the Company's financial position.
Capital Resources. Capital management is designed to maintain an optimum level
of capital in a cost-effective structure that meets target regulatory ratios;
supports management's internal assessment of economic capital; funds the
Company's business strategies; and builds long-term stockholder value. Dividends
are generally increased in line with long-term trends in earnings per share
growth and conservative earnings projections, while sufficient profits are
retained to support anticipated business growth, fund strategic investments and
provide continued support for deposits.
The total dollar value of the Company's stockholders' equity was $41.9 million
at June 30, 2006, reflecting net income of $3.0 million for the first six months
of 2006, less cash dividends paid of $2.4 million, the purchase of 1,923 shares
of Treasury stock totaling $42 thousand, and an increase of $273 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 June 30, 2006, the Company had 4,918,611 shares issued, of
which 4,540,740 were outstanding and 377,871 were held in Treasury.
34
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 June 30, 2006 the Company had
repurchased 16,923 shares under this program, for a total cost of $357 thousand.
As of June 30, 2006, there were outstanding employee incentive stock options
with respect to 12,825 shares of the Company's common stock, granted pursuant to
Union Bankshare's 1998 Incentive Stock Option Plan. As of such date, 9,575
options were currently exercisable but only 3,325 of those 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 second 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 June 30, 2006, that both companies meet all capital adequacy requirements
to which they are subject. As of June 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 June 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 June 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 $45,307 17.6% $20,594 8.0% $25,743 10.0%
Company $45,632 17.7% $20,625 8.0% N/A N/A
Tier I capital to risk weighted assets
Union Bank $41,973 16.3% $10,300 4.0% $15,450 6.0%
Company $42,298 16.4% $10,317 4.0% N/A N/A
Tier I capital to average assets
Union Bank $41,973 11.3% $14,858 4.0% $18,572 5.0%
Company $42,298 11.4% $14,841 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.
35
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 28 through 35 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 report date 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 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.
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------------------------------------------------------
Maximum Number of
Total Number of Shares Purchased Shares that May Yet
Total Number of Average Price as Part of Publicly Announced Be Purchased Under
Period Shares Purchased Paid per Share Plans or Programs (1) the Plans or Programs
-------------------------------------------------------------------------------------------------------------
June, 2006 97 $21.22 97 83,077
--------------------
On November 18, 2005, the Company announced a stock repurchase program.
The Board of Directors has authorized the repurchase of up to $2.15
million or 100,000 shares of common stock, or approximately 2.2% of the
Company's outstanding shares. Shares can be repurchased in the open market
or in negotiated transactions. The repurchase program is open for an
unspecified period of time.
36
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 17, 2006. Of
4,540,837 shares outstanding on the record date of the meeting (March 31, 2006),
3,612,602 shares were represented in person or by proxy. The only matter voted
on by the shareholders at the meeting was to fix the number of directors at
eight and to elect the following individuals as directors for the ensuing year.
Votes Votes Votes Broker
Nominees For Withheld Abstained Non-votes
-------- ----- -------- --------- ---------
Cynthia D. Borck 3,595,273 16,779 550 --
Steven J. Bourgeois 3,609,052 3,000 550 --
Kenneth D. Gibbons 3,595,276 16,776 550 --
Franklin G. Hovey, II 3,607,877 4,175 550 --
Richard C. Marron 3,607,926 4,126 550 --
Robert P. Rollins 3,595,402 16,650 550 --
Richard C. Sargent 3,595,876 16,176 550 --
John H. Steel 3,612,052 -- 550 --
37
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.
August 10, 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)
38
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.
39