UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006 Commission file number 001-15985
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
20 LOWER MAIN STREET
MORRISVILLE, VT 05661-0667
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Securities registered pursuant to section 12(b) of the Act:
Common Stock, $2.00 par value American Stock Exchange
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(Title of class) (Exchanges registered on)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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 check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant on June 30, 2006 was $67,515,992 based on the closing price on the
American Stock Exchange on such date of $21.90 per share. For purposes of this
calculation, all directors, executive officers, and named executives of the
Registrant are assumed to be affiliates. Such assumption, however, shall not be
deemed to be an admission of such status as to any such individual.
As of March 14, 2007, there were 4,530,414 shares of the registrant's $2 par
value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically designated portions of the following documents are incorporated by
reference in the indicated Part of this Annual Report on Form 10-K:
Document Part
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Annual Report to Shareholders for the year ended December 31, 2006 I, II
Proxy Statement for the 2007 Annual Meeting of Shareholders III
UNION BANKSHARES, INC.
Table of Contents
Part I
Item 1--Business 3
Item 1A--Risk Factors 11
Item 1B--Unresolved Staff Comments 14
Item 2--Properties (a) 14
Item 3--Legal Proceedings 15
Item 4--Submission of Matters to a Vote of Security Holders 15
Part II
Item 5--Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities (a) 15
Item 6--Selected Financial Data 16
Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations (a) 17
Item 7A--Quantitative and Qualitative Disclosures about Market Risk (a) 17
Item 8--Financial Statements and Supplementary Data (a) 17
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 17
Item 9A--Controls and Procedures (a) 17
Item 9B--Other Information 17
Part III
Item 10--Directors, Executive Officers and Corporate Governance (b) 17
Item 11--Executive Compensation (b) 18
Item 12--Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters (b) 18
Item 13--Certain Relationships and Related Transactions, and
Director Independence (b) 18
Item 14--Principal Accountant Fees and Services (b) 18
Part IV
Item 15--Exhibits, Financial Statement Schedules 19
Signatures 20
Exhibit Index 21
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(a) The information required by Part I, Item 2 and Part II, Items 5, 7, 7A,
and 8 is incorporated herein by reference, in whole or in part, from the
2006 Annual Report to Shareholders.
(b) The information required by Part III Items 10, 11, 12, 13 and 14 is
incorporated herein by reference, in whole or in part, from the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May
16, 2007. The incorporation by reference herein of portions of the Proxy
Statement shall not be deemed to specifically incorporate by reference the
information referred to in Items 407(d)(1)-(3), 201(f) and 407(e)(5) of
Regulation S-K.
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Part I--Item 1 Business
General: Union Bankshares, Inc. ("Company") is a one-bank holding company whose
subsidiary is Union Bank ("Union"). It was incorporated in the State of Vermont
in 1982. Union Bank was organized and chartered as a State bank in 1891 and
became a wholly owned subsidiary of the Company in 1982 upon its formation.
Both Union Bankshares, Inc. and Union Bank are headquartered in Morrisville,
Vermont.
The Company has one definable business segment, Union Bank, which is a
commercial bank operating in northern Vermont and New Hampshire. Union is a
community bank that provides a full range of commercial and retail banking
services. The purpose of Union is to make a profit for the Company while
competitively serving the financial needs of the communities, the businesses,
and the citizens within its service area. The Company's business is that of a
community bank in the financial services industry and no lines of financial
products are beyond its purview as long as the Company is equipped and capable
of delivering the products efficiently and effectively within the regulated
environment in which it operates.
Union has 162 full time equivalent employees and considers its employee
relations to be satisfactory. The Company, itself, does not have any paid
employees.
The Company's income is derived principally from interest on loans and earnings
on other investments. Its primary expenses arise from interest paid on deposits
and borrowings and general overhead expenses. The consolidated assets of the
Company have grown from $337 million to $381 million over the last five years
or 13.1% while consolidated deposits have grown from $286 million to $320
million or 11.9% during that same period. Please refer to the schedule of
"Selected Financial Data", which has been restated for applicable periods for
the 3 for 2 stock split in 2003, at Part II-Item 6 of this annual report for
further details.
Description of Services: The Company offers full retail and commercial banking
services to its customers. The Company primarily emphasizes providing retail
banking services to individuals living within its market area and commercial
banking services to small and medium-sized corporations, partnerships, and sole
proprietorships, as well as nonprofit organizations, local municipalities and
school districts. The Company's lending activities are targeted at increasing
residential mortgage and construction loan originations, and expanding
commercial and municipal lending including the commercial real estate market.
The Company works with customers and its business partners and government
agencies to design financing that best meets our customers' needs, which might
include involvement of the Vermont Housing Finance Agency, the Small Business
Administration, ("SBA") or the Federal Home Loan Bank ("FHLB") of Boston, to
name a few. The Company utilizes its lending activities to develop broader
customer relationships in areas served by its network of branches as a means to
augment deposits. The Company produces loans primarily for its portfolio
although it periodically sells or participates out a portion of the loans
produced to mitigate interest rate or credit risk. See "Discussion of Financial
Condition" in Part II-Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") for information on the composition
of the Company's loan portfolio by type of loan including loans held for sale
and on asset quality.
The Company's retail loan portfolio consists primarily of mortgage loans,
construction (B.U.I.L.D.) loans, home equity loans and lines of credit,
traditional installment loans and personal lines of credit. The Company's
commercial loan portfolio consists of term loans, lines of credit and
commercial real estate loans provided to primarily locally based borrowers. The
municipal loan portfolio consists of term loans and construction financing.
Services offered to our customers include, but are not limited to, the
following:
o Commercial loans for business purposes to business owners and
investors for plant and equipment, lines of credit, working capital,
real estate renovation, and other sound business purposes;
o Commercial real estate loans on income producing properties, including
commercial construction loans;
o SBA guaranteed loans;
o Cash Management services, including account reconciliation, credit
card depository, Automated Clearing House origination, wire transfers
and night depository;
o Municipal term loans and construction financing;
o Merchant credit card services for the deposit and immediate credit of
sales drafts from retail merchants, restaurants, professionals and the
local tourism industry;
o Debit MasterCard and VISA credit cards;
o Business checking accounts;
o Other services based on the individual needs of the customer including
standby letters of credit, travelers or bank checks, and safe deposit
boxes;
o Automated Teller Machine ("ATM") services and cards;
o Telephone and Internet banking services, including bill pay;
o Home improvement loans, home equity lines of credit, and overdraft
checking privileges against preauthorized lines of credit;
o Residential mortgage loans;
o B.U.I.L.D. loans for residential construction;
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o Retail depository services including personal checking accounts, NOW
accounts, savings accounts, money market accounts, certificates of
deposit, and IRA/SEP/KEOGH accounts;
o The deposits of Union are insured by the Deposit Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") up to legal limits
(generally $100,000 per depositor) with higher levels of insurance
coverage available for certain retirement accounts and through Union's
participation in the Certificate of Deposit Account Registry Service
("CDARS") of Promontory Interfinancial Network; and
o Asset Management services to individuals and organizations.
Consistent with the objective of the Company to serve the needs of individuals,
businesses and others within the communities served, the Company seeks to
concentrate its assets in loans. To be consistent with the requirements of
prudent banking practices, adequate assets are invested in high-grade
securities to provide liquidity, diversification of income sources and safety.
See "Discussion of Financial Condition" in Part II-Item 7, "MD&A" for
information on the composition of Union's investment portfolio by type and
maturity as well as other sources of liquidity.
The risk of nonpayment (or deferred payment) of loans is inherent in commercial
banking. The Company's marketing focus on individuals and small- to
medium-sized businesses may result in the assumption by it of certain lending
risks. Management carefully evaluates all loan applications and attempts to
minimize credit risk exposure by use of thorough loan application, approval and
monitoring procedures, however, there can be no assurance that such procedures
will entirely reduce such lending risks. See Part I, Item 1A "Risk Factors" for
additional information about the risks inherent in the Company's business.
Source of Business: Management believes that the market segments targeted,
individuals, small to medium sized businesses, and municipalities in the
Company's market area, demand the convenience and personal service that a
smaller, independent financial institution can offer. It is these themes of
convenience and personal service that form the basis of the Company's business
development strategies. At December 31, 2006, Union maintained 13 branch
offices, a loan production office in St. Albans, Vermont, and 30 ATMs, and also
provided many of its services via the telephone and the Internet.
Management's operational strategy includes continued evaluation of changing
market needs and design and implementation of products and services to meet
those needs, as well as the establishment and maintenance of necessary
infrastructure necessary to deliver those products and services effectively and
efficiently. Measures taken by management in recent years to implement this
approach have included the opening of a new loan production office in St.
Albans, Vermont in January 2005, which represented a further westward expansion
in Franklin County of the Company's service area; the renovation and expansion
of the Portland Street, St. Johnsbury branch; and the redesign of Union's
personal deposit products to become more competitive in the market. The
strategies for 2006 included the expansion to a full service branch location in
Littleton, New Hampshire in March 2006; the introduction of a new, more
competitive small business checking account; the introduction of tiered
variable-rate certificates of deposit which also allow additional deposits and
limited withdrawals; and the addition of another ATM location. Strategies for
2007 include the expansion of the Company's Main Office; the addition of at
least one additional ATM to the network; the exploration of additional branch
locations; the installation of new "platform" software to streamline new
deposit processing, document imaging, Check 21 imaging, remote image capture;
and a new internal computer network. The directors and management of the
Company intend to continue to offer products and services that will allow the
Company to manage responsibly the growth of its assets, while building and
enhancing stockholder value, preserving Union Bank's image as a premier Vermont
community bank and building that reputation in the northern New Hampshire
market.
The Company seeks to capitalize upon the extensive business and personal
contacts and relationships of its Directors, Advisory Board members and
Officers to continue to develop the Company's customer base, as well as relying
on Director and Advisory Board referrals, officer-originated calling programs
and customer and shareholder referrals.
Competition: The Company and Union face substantial competition for loans and
deposits in their market area from local commercial banks, savings banks,
tax-exempt credit unions, mortgage brokers, and financial services affiliates
of bank holding companies, as well as from national financial service providers
such as mutual funds, brokerage houses, insurance companies, consumer finance
companies and internet banks. The Company anticipates continued strong
competition from such financial institutions for the foreseeable future. Within
the Company's market area are branches of several commercial and savings banks
that are substantially larger than the Company. Union focuses on its community
banking niche and on providing convenient locations, hours and modes of
delivery to provide superior customer service. In order to compete with the
larger financial institutions in its service area, Union capitalizes on the
flexibility and local autonomy which is accorded by its independent status.
This includes an emphasis on personal service, timely decision making, local
promotional activity, and personal contacts and community service by Union's
officers, directors and employees.
The Company competes for checking, savings, money market accounts and other
deposits by offering depositors competitive products and rates, personal
service, local area expertise, convenient locations and access, and an array of
financial services and products.
The competition in originating real estate and other loans comes principally
from commercial banks, mortgage banking companies and credit unions. The
Company competes for loan originations primarily through the interest rates and
loan fees it charges, the types of loans it offers, and the efficiency and
quality of services it provides. In addition to residential mortgage lending
and municipal loans, the Company also emphasizes commercial real estate,
construction, and both conventional and SBA guaranteed commercial lending.
Factors that affect the Company's ability to compete for loans include general
and local economic conditions, prevailing interest rates including the "prime"
rate,
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and pricing volatility of the secondary loan markets. The Company attempts to
promote an increased level of personal service and expertise within the
community to position itself as a lender to small to middle market business and
residential customers, which tend to be under-served by larger institutions.
The Company competes for personal and institutional trust business with trust
companies, commercial banks having trust departments, investment advisory
firms, brokerage firms, mutual funds and insurance companies.
The competitive environment for financial institutions has undergone
significant change in recent years and that trend is likely to continue in
light of changes in applicable law (see "Financial Services Modernization"
below) which permit the integration of the historically separate banking,
insurance and securities industries. Tax-exempt credit unions are becoming an
increasingly significant source of competition. Credit union common bond
requirements and the definition of a credit union "member" have been
interpreted liberally by federal and state credit union regulators while at the
same time, the scope of products credit unions are permitted to offer has
steadily expanded, resulting in greater penetration of this tax-advantaged
segment of the financial services industry into traditional banking markets. In
February of 2003, the SBA expanded the eligibility of certain lenders programs
to include all credit unions. In addition, during 2005, Vermont's credit union
statute was comprehensively updated, granting state-chartered credit unions
significantly expanded powers to offer financial products and services beyond
those traditionally offered by credit unions.
Competitive change is also occurring due to rapid technological advances which
increasingly permit the delivery of financial products and services without the
need for a physical presence in the market area served and which also are
likely to diminish the importance of traditional "bricks and mortar" in market
presence and reduce the role of financial intermediaries, such as banks, in the
transfer of funds between parties. As a result, the Company's future success
will depend in part on its ability to address customers' needs by using
technology.
Regulation and Supervision: The following discussion describes certain material
elements of an extensive regulatory framework applicable to bank holding
companies and their subsidiaries and provides certain information specific to
the Company. This regulatory framework is intended primarily for the protection
of depositors, federal deposit insurance funds and the banking system as a
whole, and not for the protection of security holders. To the extent that this
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to those provisions.
As a Vermont-chartered commercial bank, Union is subject to regulation,
examination, and supervision by the Vermont Banking Department and the FDIC.
Regular examinations of Union by the Vermont Banking Department and the FDIC
include examination of the bank's financial condition and operations, including
but not limited to its capital adequacy, loan reserves, loans, investments,
earnings, liquidity, compliance with laws and regulations, record of
performance under the federal Community Reinvestment Act of 1997 ("CRA"), and
the performance of its management.
In addition the Company, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board ("FRB"). The
regulations of these authorities govern certain of the operations of the
Company and its subsidiary. The following discussion summarizes the material
aspects of various federal and state banking laws and regulations that apply to
the Company and Union.
The Company is also under the jurisdiction of the Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of its
securities as well as investor reporting requirements. The Company is subject
to restrictions, reporting requirements and review procedures under federal
securities laws and regulations. The Company's common stock is listed on the
American Stock Exchange ("AMEX") under the trading symbol "UNB" and
accordingly, the Company is subject to the rules of AMEX for listed companies.
Federal Reserve Board Policies and Reserve Requirements. The monetary policies
and regulations of the FRB have had a significant effect on the operating
results of banks in the past and are expected to continue to do so in the
future. FRB policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the
Federal Reserve System's open-market operations in United States government
securities, regulation of the discount rate on bank borrowings from Federal
Reserve Banks and regulation of non-earning reserve requirements. Regulation D
promulgated by the FRB requires all depository institutions to maintain
reserves against their transaction accounts (generally, demand deposits, NOW
accounts and certain other types of accounts that permit payments or transfers
to third parties) and non-personal time deposits (generally, money market
deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a noninterest bearing account at
the Federal Reserve Bank or a pass-through account as defined by the FRB, the
effect of this reserve requirement is to reduce the amount of Union's
interest-earning assets. As of December 31, 2006, Union's reserve requirement
was approximately $2.3 million which was satisfied by vault cash.
Bank Holding Company Acquisitions and Activities. As a bank holding company,
the Company is subject to supervision and regulation by the FRB under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC Act, the
activities of bank holding companies, such as Union Bankshares, and those of
companies that they control, such as Union, or in which they hold more than 5%
of the voting stock, are limited to banking, managing or controlling banks,
furnishing services to or performing services for their subsidiaries, or
certain activities that the FRB has determined to be so closely related to
banking, managing or controlling banks as to be a proper incident
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thereto. As described below, a bank holding company that has elected to become
a "financial holding company" under the federal Gramm-Leach-Bliley Financial
Modernization Act of 1999 ("Gramm-Leach-Bliley Act") may engage in certain
additional activities. Bank holding companies such as Union Bankshares that
have not elected to become financial holding companies, are required to obtain
the prior approval of the FRB to engage in any new activity or to acquire more
than 5% of any class of voting stock of any bank or other company. Satisfactory
capital ratios, CRA ratings and anti-money laundering policies are generally
prerequisites to obtaining Federal regulatory approval to make acquisitions.
The FRB has authority to issue cease and desist orders to prevent or terminate
unsafe or unsound banking practices or violations of law or regulations and to
assess civil money penalties against bank holding companies and their
subsidiaries and other affiliates. The FRB also has the authority to remove
officers, directors and other institution-affiliated parties.
The FRB has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that
holding company.
The FRB has the power to prohibit dividends by bank holding companies if their
actions constitute unsafe or unsound practices. The FRB has issued a policy
statement on the payment of cash dividends by bank holding companies, which
expresses the FRB's view that a bank holding company should pay cash dividends
only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and rate of earnings retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
Financial Services Modernization. The Gramm-Leach-Bliley Act permits eligible
bank holding companies to elect to become financial holding companies and
thereby engage in a broader range of financial and other activities than is
permitted to bank holding companies generally. Under the Gramm-Leach-Bliley
Act, a financial holding company may engage in activities that are not
traditionally encompassed within the business of banking but that are
"financial in nature," including securities underwriting, dealing and market
making, sponsoring mutual funds and investment companies, insurance
underwriting, merchant banking and additional activities that the FRB, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, or incident or complementary to such financial activities, provided
that such activities do not pose a substantial risk to the safety and soundness
of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act effectively permits the integration, under a financial
holding company umbrella, of firms engaged in banking, insurance and securities
activities, and preempts state laws that purport to limit or prohibit such
affiliations. No regulatory approval is required for a financial holding
company to acquire a company, other than a bank or savings association, engaged
in permitted activities.
In order to become a financial holding company, all of the bank holding
company's bank subsidiaries must be well-capitalized and well-managed under
applicable regulatory guidelines, and each of such banks must have been rated
"Satisfactory" or better in its most recent evaluation under the federal CRA.
Once a bank holding company has elected to be treated as a financial holding
company, it may face significant consequences if it subsequently fails to meet
one or more of the criteria for eligibility. For example, it may be required to
enter into an agreement with the FRB imposing limitations on its operations and
requiring divestitures. In addition, the need to maintain eligibility could
hamper a financial holding company's ability to expand or to acquire financial
institutions that do not meet the required criteria.
As of the date of this report, the Company had not elected to become a
financial holding company.
Source of Strength. Under FRB policy, bank holding companies, such as Union
Bankshares Inc., are expected to act as a source of financial and management
strength to their subsidiary banks, such as Union, and to commit resources to
support them. This support may be called for at times when a bank holding
company may not have the required resources to do so.
Interstate Banking. Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 an adequately capitalized and managed bank holding
company is permitted to acquire banks based outside its home state, generally
without regard to whether the state's law would permit the acquisition. This
Act also authorizes banks to merge across state lines thereby creating
interstate branches. In addition, this Act permits banks to acquire existing
interstate branches (short of merger) or to establish new interstate branches.
States were given the right, exercisable before June 1, 1997, to prohibit
altogether or impose certain limitations on interstate mergers and the
acquisition or establishment of interstate branches. None of the states
contiguous to Vermont (New Hampshire, New York and Massachusetts) has in effect
any statute which would substantially impede the ability of a Vermont bank to
acquire or create interstate branches directly or through an interstate merger.
Similarly, Vermont law does not limit the ability of out-of-state banks to
acquire or create branches in Vermont. Although interstate banking and
branching may result in increased competitive pressures in the markets in which
the Company operates, interstate branching may also present competitive
opportunities for locally-owned and managed banks, such as Union, that are
familiar with the local markets and that emphasize personal service and prompt,
local decision-making. The ability to branch interstate has also benefited
Union, as it has permitted the expansion of its banking operations into New
Hampshire, with the opening of a branch in Littleton in March of 2006.
Affiliate Restrictions. Bank holding companies and their affiliates are subject
to certain restrictions under the Federal Reserve Act in their dealings with
each other, such as in connection with extensions of credit, transfers of
assets, and purchase of services among affiliated parties. Generally, loans or
extensions of credit, investments or purchases of assets by a subsidiary bank
from a bank holding company or its affiliates are limited to 10% of the bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate
for all affiliates, and
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borrowings are also subject to certain collateral requirements. These
transactions, as well as other transactions between a subsidiary bank and its
holding company or other affiliates must generally be on arms-length terms,
that is, on terms comparable to those involving nonaffiliated companies.
Further, under the Federal Reserve Act and FRB regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain
tie-in-arrangements in connection with extensions of credit or furnishing of
property or services to third parties. The Company and Union are subject to
these restrictions in their intercompany transactions.
Bank. The various laws and regulations applicable to Union that are
administered by the FDIC and the Vermont Banking Commissioner affect Union's
corporate practices, such as payment of dividends, incurring of debt and
acquisition of financial institutions and other companies. These laws also
affect its business practices, such as payment of interest on deposits,
guidelines on concentrations in commercial real estate lending, limitations on
loans to one borrower, the charging of interest on loans, privacy issues and
the location of offices. There are no outstanding regulatory orders resulting
from regulatory examinations of the Company or Union.
Dividend Limitations. As a holding company, the Company's ability to pay
dividends to its stockholders is largely dependent on the ability of its
subsidiary to pay dividends to it. Payment of dividends by Vermont-chartered
banks, such as Union, is subject to applicable state and federal laws. Under
Vermont banking laws, a Vermont-chartered bank may not authorize dividends or
other distributions which would reduce the bank's capital below the amount of
capital required in the bank's Certificate of General Good or under any capital
or surplus standards established by the Vermont Banking Commissioner. Union
does not have any capital restrictions in its Certificate of General Good and,
to date, the Vermont Banking Commissioner has not adopted capital or surplus
standards. Nevertheless, the capital standards established by the FDIC,
described below under "Capital Requirements," apply to Union, and the capital
standards of the FRB apply to the Company on a consolidated basis. In addition,
the FRB, the FDIC and the Vermont Banking Commissioner are authorized under
applicable federal and state laws to prohibit payment of dividends that they
determine would be an unsafe or unsound practice. Payment of dividends that
deplete the capital of a bank or a bank holding company, or render it illiquid,
could be found to be an unsafe or unsound practice.
Loans to Related Parties. The Company's and Union's authority to extend credit
to their directors, executive officers and 10 percent stockholders, as well as
to entities controlled by such persons, is currently governed by the
requirements of the Federal Reserve Act and Regulation O of the FRB thereunder.
Among other things, these provisions require that extensions of credit to
insiders (i) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do
not involve more than the normal risk of repayment or present other unfavorable
features and (ii) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits are
based in part, on the amount of the bank's capital. Under AMEX guidelines, any
related party transaction including loans must be reviewed by the Company's
Audit Committee. In addition, under the federal Sarbanes-Oxley Act of 2002
(discussed below), the Company, itself, may not extend or arrange for any
personal loans to its directors and executive officers. The Company has a
Related Persons Transactions Approval Policy which incorporates applicable
regulatory guidelines and requirements and is administered by the Company's
Board of Directors.
Capital Adequacy Guidelines. The FRB, the FDIC and other federal banking
regulators have issued substantially similar risk based and leverage capital
guidelines for United States banking organizations. Those regulatory agencies
are also authorized to require that a banking organization maintain capital
above the minimum levels, whether because of its financial condition or actual
or anticipated growth. The FRB's risk based capital guidelines define a
three-tier capital framework and specify three relevant capital ratios: Tier 1
Capital Ratio, a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital
consists of common and qualifying preferred shareholders' equity, plus or minus
certain intangibles and other adjustments. The remainder (Tier 2 and Tier 3
Capital) consists of subordinate and other qualifying debt, preferred stock
that does not qualify as Tier 1 Capital, and the allowance of credit losses up
to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 Capital, less investments in
unconsolidated subsidiaries, represents qualifying "Total Capital," at least
50% of which must consist of Tier 1 Capital. Risk-based capital ratios are
calculated by dividing Tier 1 Capital and Total Capital by risk-weighted
assets. Assets and off-balance sheet exposures are assigned to one of four
categories or risk weights, based primarily on relative credit risk. The
minimum Tier 1 Capital Ratio is 4% and the minimum Total Capital Ratio is 8%.
The Leverage Ratio is determined by dividing Tier 1 Capital by adjusted average
total assets. Although the minimum Leverage Ratio is 3%, most banking
organizations are required to maintain Leverage Ratios of at least 1 to 2
percentage points above 3%.
Federal bank regulatory agencies require banking organizations that engage in
significant trading activity to calculate a capital charge for market risk.
Significant trading activity means trading activity of at least 10% of total
assets or $1 billion, whichever is smaller, calculated on a consolidated basis
for bank holding companies. Federal bank regulators may apply the market risk
measure to other bank holding companies, as the agency deems necessary or
appropriate for safe and sound banking practices. Each agency may exclude
organizations that it supervises that otherwise meet the criteria under certain
circumstances. The market risk charge will be included in the calculation of an
organization's risk-based capital ratio. Neither the Company nor Union is
currently subject to this special capital charge.
FRB policy provides that banking organizations generally, and, in particular,
those that are experiencing rapid internal growth or actively making
acquisitions, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets, such as goodwill. Furthermore, the capital
guidelines indicate that the FRB will continue to consider a "Tangible Tier 1
Leverage Ratio" in evaluating proposals for expansion or new activities. The
Tangible Tier 1 Leverage Ratio is calculated
7
by dividing a banking organization's Tier 1 Capital less all intangible assets
by its total consolidated quarterly average assets less all intangible assets.
The FRB's capital adequacy guidelines generally provide that bank holding
companies with a ratio of intangible assets to tangible Tier 1 Capital in
excess of 25% will be subject to close scrutiny for certain purposes, including
the FRB's evaluation of acquisition proposals. The Company does not have a
material amount of intangibles in its capital base.
The FRB's capital adequacy guidelines exempt certain "small bank holding
companies" from its risk-based capital requirements. Although the Company meets
the consolidated assets test of under $500 million, it does not qualify for
this regulatory relief because it does not meet the separate requirement that
the small bank holding company not have a material amount of its securities
registered with the Securities and Exchange Commission.
At December 31, 2006, the Company's consolidated Total and Tier I Risk-Based
Capital Ratios were 17.44% and 16.16%, respectively, and its Leverage Capital
Ratio was 11.29%, and it is considered well-capitalized under the above
regulatory guidelines. In addition, Union is considered well-capitalized under
such guidelines.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), among other things, identifies five capital categories
for insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and requires the respective federal banking agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements. FDICIA imposes
progressively more restrictive constraints on operations, management and
capital distributions, depending on the category in which an institution is
classified. Failure to meet the capital guidelines could also subject a banking
institution to capital raising requirements. An "undercapitalized" bank must
develop a capital restoration plan and its parent holding company must
guarantee that bank's compliance with the plan. The liability of the parent
holding company under any such guarantee is limited to the lesser of 5% of the
bank's assets at the time it became undercapitalized or the amount needed to
comply with the plan. Furthermore, in the event of the bankruptcy of the parent
holding company, such guarantee would take priority over the parent's general
unsecured creditors. In addition, FDICIA requires the various federal banking
agencies to prescribe certain noncapital standards for safety and soundness
related generally to operations and management, asset quality and executive
compensation, and permits regulatory action against a financial institution
that does not meet such standards.
The various federal banking agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the Total Capital, Tier 1 Ratio and the Leverage Ratio as the relevant capital
measures. Such regulations establish various degrees of corrective action to be
taken when an institution is considered undercapitalized. Under the
regulations, a "well capitalized" institution must have a Tier 1 capital ratio
of at least 6%, a total capital ratio of at least 10% and a leverage ratio of
at least 5% and not be subject to a capital directive order. An "adequately
capitalized" institution must have a Tier 1 capital ratio of at least 4%, a
total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3%
in some cases.
Safety and Soundness Standard. FDICIA, as amended, directs each Federal banking
agency to prescribe safety and soundness standards for depository institutions
relating to internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset-quality, earnings and stock valuation. The Community
Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing
Federal banking regulators to publish guidelines rather than regulations
concerning safety and soundness.
FDICIA also contains a variety of other provisions that may affect Union's
operations, including reporting requirements, regulatory guidelines for real
estate lending, "truth in savings" provisions, and the requirement that a
depository institution give 90 days prior notice to customers and regulatory
authorities before closing any branch.
Community Reinvestment Act. Union is subject to the federal CRA, which requires
banks to demonstrate their commitment to serving the credit needs of low and
moderate income residents of their communities. Union participates in a variety
of direct and indirect lending programs and other investments for the benefit of
the low and moderate income residents in the local communities. The FDIC
conducts examinations of insured banks' compliance with CRA requirements and
rates institutions as "Outstanding," "Satisfactory," "Needs to Improve," and
"Substantial Non-Compliance." Failure of an institution to receive at least a
"Satisfactory" CRA rating could adversely affect its ability to undertake
certain activities, such as acquisitions of other financial institutions, which
require regulatory approval based, in part, on the institution's record of CRA
compliance. In addition, failure of a bank subsidiary to receive at least a
"Satisfactory" rating would disqualify a bank holding company from eligibility
to become or remain a financial holding company under the Gramm-Leach-Bliley
Act. (See "Financial Modernization" above.) At its last CRA compliance
examination by the FDIC, Union received a rating of "Outstanding."
Deposit Insurance Premium Assessments. The deposits of Union are insured under
the Deposit Insurance Fund ("DIF") maintained by the FDIC. Under applicable
federal laws and regulations, deposit insurance premium assessments to the DIF
are based on a supervisory risk rating system, with the most favorably rated
institutions paying the lowest premiums. The DIF was created by the merger of
the Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF")
provided for in the Federal Deposit Insurance Reform Act of 2005 ("FDIRA"), as
enacted in February 2006. This legislation also increased insurance coverage for
retirement accounts to $250,000 and indexed the insurance levels for inflation,
among other changes. In addition, as a result of the FDIRA, the FDIC has adopted
a revised,
8
risk-based assessment system to determine assessment rates to be paid by member
institutions, such as Union. Under this revised assessment system, risk is
defined and measured using an institution's supervisory ratings, combined with
certain other risk measures, including certain financial ratios and long-term
debt issuer ratings. The annual risk based assessment rates for 2007 range from
$0.05 to $0.43 per $100 of insured deposits. The FDIRA also provided for a
one-time assessment credit, to be allocated among member institutions. The FDIC
one-time assessment credit may be used to offset future deposit insurance
assessments beginning in 2007.
In addition to DIF assessments, beginning in 1997 the FDIC assessed
BIF-assessable and SAIF-assessable deposits to fund the repayment of debt
obligations of the Financing Corporation. The Financing Corporation is a
government-sponsored entity that was formed to borrow the money necessary to
carry out the closing and ultimate disposition of failed thrift institutions by
the Resolution of Trust Corporation. As of January 1, 2007, the annualized rate
of risk-adjusted deposits, established by the FDIC for all DIF-assessable
deposits, was 1.22 basis points (hundredths of 1%). For the year ended December
31, 2006, the Bank's insurance assessment expense was $39 thousand.
Brokered Deposits. FDICIA restricts the ability of an FDIC-insured bank to
accept brokered deposits unless it is a well-capitalized institution under
FDICIA's prompt corrective action guidelines. Union has accepted brokered
deposits through its membership with the Certificate of Deposit Account
Registry Service ("CDARS") of the Promontory Interfinancial Network.
Consumer Protection Laws. In connection with its lending activities, Union is
subject to a variety of federal and state laws designed to protect borrowers
and to promote lending to various sectors of the economy and population. In
addition to the provisions of the CRA (discussed above), Union is subject to,
among other laws, the federal Home Mortgage Disclosure Act, the federal Real
Estate Settlement Procedures Act, the federal Truth-in-Lending Act, the federal
and Vermont Equal Credit Opportunity Acts, the federal Bankruptcy Abuse
Prevention and Consumer Protection Act, and the federal and Vermont Fair Credit
Reporting Acts. The Vermont Banking Department has the authority to enforce
directly certain of these federal statutes.
Union is subject to the provisions of Title V of the Gramm-Leach-Bliley Act,
which requires it to notify consumer customers of its information collection
and sharing practices and restrict those practices in certain respects. In
addition, Union is subject to similar but more restrictive, requirements of the
Vermont Banking Department. Generally those Vermont requirements prohibit the
disclosure of consumer information to nonaffiliated third parties without the
express written consent of the consumer, except for disclosures permitted under
specified regulatory exceptions.
The deposit-taking activities of Union are subject to various federal and state
requirements, including those mandating uniform disclosures to depositors with
respect to rates of interest, fees, electronic fund transfers and other terms
of consumer deposit accounts, and disclosure of its policy on the availability
of deposited funds.
In connection with its new Littleton, New Hampshire branch, Union is subject to
certain consumer protection laws of New Hampshire and to limited oversight by
the New Hampshire Commissioner of Banks.
Bank Secrecy Act. Union is subject to federal laws establishing certain record
keeping, customer identification and reporting requirements pertaining to large
cash transactions, sales of travelers checks and other monetary instruments and
the international transfer of cash or monetary instruments. Provisions,
designed to help combat international terrorism, were added to the Bank Secrecy
Act by the 2001 USA Patriot Act. These provisions require banks to avoid
establishing or maintaining correspondent accounts of foreign off-shore banks
and banks in jurisdictions that have been found to fall significantly below
international anti-money laundering standards. U.S. banks are also prohibited
from opening correspondent accounts for off-shore shell banks, defined as banks
that have no physical presence and that are not part of a regulated and
recognized banking company. The USA Patriot Act requires all financial
institutions to adopt an anti-money laundering program. The act requires banks
to establish due diligence policies, procedures and controls that are
reasonably designed to detect and report instances of money laundering in
United States private banking accounts and correspondent accounts maintained
for non-U.S. persons or their representatives.
The Department of Treasury has issued regulations implementing the due
diligence requirements. These regulations require minimum standards to verify
customer identity and maintain accurate records, encourages information-sharing
cooperation among financial institutions, federal banking agencies and law
enforcement authorities regarding possible money laundering or terrorist
activities, prohibits the anonymous use of "concentration accounts" and
requires all covered financial institutions to have in place an anti-money
laundering compliance program. In addition, the USA Patriot Act amended certain
provisions of the federal Right to Financial Privacy Act to facilitate the
access of law enforcement to bank customer records in connection with
investigating international terrorism.
The Act also amends the Bank Holding Company Act and the Bank Merger Act to
require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering program when reviewing an
application under these acts.
9
Sarbanes-Oxley Act of 2002. This federal far-reaching legislation was generally
intended to protect investors by strengthening corporate governance and
improving the accuracy and reliability of corporate disclosures made pursuant
to securities law. The Sarbanes-Oxley Act provides for, among other things:
o a prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank
subject to Regulation O);
o independence requirements for audit committee members;
o corporate governance requirements;
o independence requirements for company auditors that restrict non-audit
services that accountants may provide to their audit clients;
o enhanced disclosure requirements pertaining to corporate operations
and internal controls;
o certification of financial statements on Forms 10-K and 10-Q reports
by the chief executive officer and the chief financial officer;
o the forfeiture by the chief executive officer and the chief financial
officer of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by such officers in the twelve
month period following initial publication of any financial statements
that later require restatement due to corporate misconduct;
o disclosure of off-balance sheet transactions;
o two-business day filing requirements for insiders filing reports on
Form 4 of transactions in the issuer's securities;
o accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers;"
o disclosure of a code of ethics for principal financial officers and
filing a Form 8-K for a change in or waiver of such code;
o the reporting of securities violations "up the ladder" by both
in-house and outside attorneys;
o restrictions on the use of non-GAAP financial measures in press
releases and SEC filings;
o the formation of a public accounting oversight board; and
o various increased criminal penalties for violations of securities
laws.
Not all of the final rules under the Act have gone into effect for the Company
since it is not an accelerated filer. In particular, the Company is not subject
for 2006 to Section 404 of Sarbanes-Oxley, relating to certification and
attestation of internal controls. In order to be considered an accelerated
filer under the Sarbanes-Oxley Act, the market value of the Company's
outstanding class of stock registered under the Exchange Act as of June 30
which is held by non-affiliates (so-called "public float") must exceed
$75,000,000.
AMEX. In response to the Sarbanes-Oxley Act, the AMEX, where the Company's
common stock is listed, has implemented new corporate governance listing
standards, including rules strengthening director independence requirements for
boards and committees of the board, the director nomination process and
shareholder communication avenues. These rules require the Company to annually
certify to the AMEX, after each annual meeting, that the Company is in
compliance and will continue to comply with AMEX corporate governance
requirements.
Taxing Authorities. The Company and Union are subject to income taxes at the
Federal level and are individually subject to state taxation based on the laws
of each state in which they operate. The Company and Union file a consolidated
federal tax return with a calendar year-end. The Company and Union have filed
separate tax returns for each state jurisdiction affected for 2005 and will do
the same for 2006. No tax return is currently being examined or audited by any
taxing authority.
Other Proposals. Certain legislative and regulatory proposals that could affect
the Company or Union and the financial services business in general are
periodically introduced before the United States Congress, the Vermont State
Legislature and federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
relationships of financial institutions. Such legislation could subject the
Company and Union to increases in regulation, disclosure and reporting
requirements, competition and the cost of doing business.
In addition to legislative changes, the various federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. Management cannot predict
whether or in what form any such rules or regulations will be enacted or the
effect that such enactment may have on the Company or Union.
Available Information: The Company files annual, quarterly, and current
reports, proxy statements, and other documents with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and
copy any materials that Union Bankshares, Inc. has filed with the SEC at the
SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website
that contains reports, proxy and information statements, and other information
regarding issuers, including Union Bankshares, that file electronically with
the SEC. The public can obtain any documents that the Company has filed with
the SEC at http://www.sec.gov.
10
Part I--Item 1A Risk Factors
Each direct lending activity in which the Company engages carries the risk that
some borrowers will be unable to perform on their obligations. As such, the
monetary and fiscal policies of the Federal Reserve Board and general economic
conditions, nationally, regionally and in the Company's primary market area
have a significant impact on the Company and its results of operations. To the
extent that economic conditions deteriorate, business and individual borrowers
may be less able to meet their obligations to the Company in full, in a timely
manner, resulting in decreased earnings or losses to the Company. To the extent
that loans are secured by real estate, adverse conditions in the real estate
market may reduce the borrower's ability to generate the necessary cash flow
for repayment of the loan, and reduce the Company's ability to collect the full
amount of the loan upon a default. To the extent the Company makes fixed-rate
loans, general increases in interest rates will tend to reduce the Company's
spread as the interest rates it must pay for deposits increase while interest
income is flat. Economic conditions and interest rates may also adversely
affect the value of property pledged as security for loans.
Whenever appropriate and available, the Company seeks federal and state loan
guarantees, such as the SBA "7A" and "504" loan programs to reduce risks. Union
is a preferred SBA lender. The Company generally requires personal guarantees on
all commercial loans. The majority of commercial borrowers are required to
forward annual business and personal financial statements to comply with bank
policy. Interest rate risk to the Company is mitigated by using either variable
interest rates, by fixing rates for a short period of time, or
selling/participating a portion of loans originated.
These are general risk factors affecting Union Bankshares, Inc. that you should
carefully consider:
CREDIT RISK
Credit risk is the risk of loss due to adverse changes in
the borrower's or other counter parties ability to meet its
financial obligations under agreed upon terms.
The Company's exposure to credit risk is increased by its commercial real
estate, commercial business and construction lending. Commercial real estate,
commercial business and construction lending generally involve higher credit
risk than single-family residential lending. Such loans involve larger loan
balances to a single borrower or groups of related borrowers.
Economic events and changes in government regulations, which we and our
borrowers cannot control, could have an adverse impact on the cash flows
generated by properties securing our construction and commercial real estate
loans and on the values of the properties securing those loans. These loans
also involve greater risk because they are not all fully amortizing over the
loan period, but may have a balloon payment due at maturity. A borrower's
ability to make a balloon payment typically will depend on being able to either
refinance the loan or timely sell the underlying property.
Repayment of both secured and unsecured commercial business loans depends
substantially on the borrowers' underlying business, financial condition and
cash flows. Unsecured loans generally involve a higher degree of risk of loss
than do secured loans because, without collateral, repayment is solely
dependent upon the success of the borrowers' business or personal guarantee.
Secured commercial business loans are generally collateralized by equipment,
leases, inventory and accounts receivable. Compared to real estate, that type
of collateral is more difficult to monitor, it may depreciate more rapidly, and
it may be difficult to appraise and liquidate if repossessed.
Risk of loss on a construction loan depends largely upon whether the initial
estimate of the property's value at completion of construction equals or
exceeds the cost of the property construction (including interest) and the
availability of permanent takeout financing. If the estimate of value is
inaccurate, there are delays or if actual construction costs exceed estimates,
the value of the property securing the construction loan may be insufficient to
ensure full repayment when completed through a permanent loan or by seizure of
collateral.
Commercial real estate, commercial business and construction loans are more
susceptible to a risk of loss during a downturn in the business cycle. The
underwriting, review and monitoring performed by our officers and directors
cannot eliminate all of the related risks.
An inadequate allowance for loan losses would reduce earnings. Although our
portfolio composition, with loans primarily secured by real estate, mitigates
loss exposure, volatility and deterioration in regional or local economies may
increase our risk for credit losses. Management and the Board of Directors
assess the adequacy of the allowance for loan losses based upon, but not
limited to, such factors as:
o the risk characteristics of various classifications of loans;
o previous loan loss experience;
o delinquency trends and specific loans that have loss potential;
o current economic conditions including the estimated fair market value
of the collateral; and
o geographic and industry loan concentrations.
If for any reason the quality of the portfolio should weaken, including but not
limited to a cooling housing market, natural disaster or slumping economy, the
allowance for loan losses may not be sufficient to cover actual loan losses,
and future provisions for loan losses could materially and adversely affect
financial results.
11
An increase in loan prepayments or on prepayment of loans underlying
mortgage-backed securities may adversely affect profitability. Prepayment rates
are affected by consumer behavior, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate loans. Changes in prepayment rates are therefore
difficult to predict. We may not be able to reinvest loan and security
prepayments at rates comparable to the prepaid instrument particularly in
periods of declining interest rates.
Negative events in Northern Vermont or New Hampshire could adversely affect the
Company. Negative conditions in Northern Vermont or New Hampshire real estate
markets where the majority of the collateral for the Company's mortgage,
construction, home equity and commercial real estate loans are located could
adversely affect the borrower's ability to repay and the value of the
collateral. Real estate values are affected by various factors, including
changes in general, regional or local economic conditions, tourism/industry
changes, governmental rules or policies and natural disasters. These events
could also have a negative impact on loan demand and deposit growth.
MARKET RISK
Market risk represents the risk of loss due to changes in
the market value of assets and liabilities due to changes
in interest rates, exchange rates, and equity prices.
Changes in the domestic interest rate environment could negatively affect the
Company's net interest income. Net interest income is our largest source of
revenue and is highly dependent on achieving a positive spread between the
interest earned on assets and the interest paid on liabilities. Changes in
interest rates could negatively impact the ability to attract deposits, make
loans, and achieve a positive spread resulting in compression of the net
interest margin. A flat or inverted yield curve over an extended period of time
also could impact our ability to maintain a strong interest margin.
Management believes we have implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest
rates on our results of operations. However, interest rates are highly
sensitive to many factors beyond our control, including general economic
conditions such as inflation, recession, and unemployment. Monetary and fiscal
policies of various governmental and regulatory agencies may also adversely
affect the interest rate environment.
Certain adjustable-rate loans and variable-rate deposits reprice based on
lagging interest rate indices. The effect of this lag may also negatively
affect net interest income when general interest rates change.
Additionally, changes in applicable law, if enacted, including those that would
permit banks to pay interest on demand deposit accounts, could have a
significant negative effect on results of operations as a substantial portion
of our deposits are noninterest bearing demand deposits.
The volume of trading in the Company's common stock has been light. As a
result, shareholders may not be able to quickly and easily sell their common
stock and the stock price may fluctuate significantly. Union Bankshares, Inc.
common stock currently trades on the AMEX and trading volume has been light,
averaging fewer than 1,000 shares per week over the past year, and there can be
no assurance that an active and liquid market for the common stock will
develop. In addition, the absence of an active and liquid trading market could
result in greater volatility in the price of our stock.
The number of shares owned by the Company's directors and executive officers
could make it more difficult, or impossible, to obtain approval for some
matters submitted to shareholder vote, including mergers and acquisitions. Your
interests may not be the same as those of the Board and management. Directors,
executive officers, named executives and their affiliates own approximately
32.2% of the outstanding common stock as of December 31, 2006. By voting
against a proposal submitted to shareholders, our directors and officers, as a
group, may be able to block, or make approval more difficult to obtain, for
proposals requiring the vote of shareholders, such as some mergers, share
exchanges, asset sales and amendments to the Articles of Incorporation.
Changes in accounting standards or in income tax laws or interpretations could
materially affect the Company's financial condition or results of operations.
Our accounting policies and methods are fundamental in how we report our
financial condition and results of operations. Some of these policies require
use of estimates and assumptions that may affect the value of our assets,
liabilities, and financial results. Periodically, new accounting standards are
issued or revisions made to existing standards that may change the methods
governing the preparation of our financial statements. Similarly, new tax
legislation could be enacted or interpretations of existing tax laws could
change causing an adverse effect to our financial condition or results of
operations.
LIQUIDITY RISK
Liquidity risk arises from the possibility that funds may
not be available to satisfy current or future commitments
based on external market issues, investor or depositor
perception of financial strength, and events unrelated to
the Company such as war, terrorism, or local market issues
at a reasonable cost.
The Company maybe unable to attract deposit growth to the same extent as loan
growth. Our primary source of liquidity is through the growth of deposits. If
we are unable to attract enough deposits to fund loan growth, than we may be
forced to borrow through the Federal Home Loan Bank of Boston or in the capital
markets. Nondeposit funds would tend to be more expensive and therefore could
have a negative impact on our results of operations.
12
If the Company is unable to borrow funds through access to capital markets, it
may not be able to meet the cash flow requirements of its depositors and
borrowers or make strategic acquisitions or investments. Our liquidity is used
to make loans and to repay deposit liabilities as they become due or are
demanded by customers. Liquidity polices and limits are established by the
Board of Directors. Our Asset/Liability Committee regularly monitors the
overall liquidity position to ensure that various alternative strategies exist
to cover unanticipated events that could affect liquidity. The Asset/Liability
Committee also establishes policies and monitors guidelines to diversify the
Bank's wholesale funding sources to avoid concentrations in any one market
source. Wholesale funding sources include Federal funds purchased, securities
sold under repurchase agreements, and non-core deposits including deposits
purchased through the Certificate of Deposit Account Registry Service. Union is
also a member of the FHLB of Boston , which provides funding through advances
to members that are collateralized with mortgage-related assets.
There are other sources of liquidity available should they be needed. These
sources include the sale or securitization of loans, the ability to acquire
additional national market, non-core deposits, the issuance of additional
collateralized borrowings such as FHLB advances, the issuance of debt
securities, and the issuance of trust preferred, preferred or common securities
in public or private transactions. Union could also borrow through the Federal
Reserve's discount window.
If we were unable to access funding sources when needed, we might be unable to
meet customers' needs, which could adversely impact our financial condition,
results of operations, cash flows, and level of regulatory-qualifying capital.
For further discussion, see the "Liquidity" section of Part II-Item 7A
"Quantitative and Qualitative Disclosures About Market Risk".
OPERATIONAL RISK
Operational risk arises from the inherent day-to-day
operations of the Company that could result in losses due
to human error, inadequate or failed internal systems and
controls and external events.
The Company relies heavily on the proper functioning of its technology. We rely
on our computer systems, and outside servicers providing technology, for much
of our business, including recording financial transactions. If our computer
systems or outside technology sources fail, are not reliable or there is a
breach of security, our ability to maintain accurate financial records may be
impaired, which could materially affect results of operations and financial
condition.
The Company is dependent upon the services of its management team. The Company
is dependent upon the ability and experience of a number of key management
personnel who have substantial experience with our operations, the financial
services industry and the markets in which we offer services. It is possible
that the loss of the services of one or more of our senior executives or key
managers would have an adverse effect on results of operations. Our success
also depends on our ability to continue to attract, manage and retain other
qualified senior and middle management personnel.
Terrorist activities could cause reductions in investor confidence and
substantial volatility in real estate and securities markets. It is impossible
to predict the extent to which terrorist activities may occur in the United
States or other regions, or their effect on a particular security issue. It is
also uncertain what effects any past or future terrorist activities and/or any
consequent actions on the part of the United States government and others will
have on the United States and world financial markets, local, regional and
national economics, and real estate markets across the United States. Among
other things, reduced investor confidence could result in substantial
volatility in securities markets, a decline in general economic conditions and
real estate related investments and an increase in loan defaults. Such
unexpected losses and events could materially affect our results of operations.
Tourism and the travel industry are important factors to the general economy of
much of our target market, which could be adversely affected by terrorism.
Internal controls and procedures may fail or be circumvented. Management
regularly reviews and updates internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations or financial condition.
Competition with other financial institutions could adversely affect the
Company's profitability. The banking and financial services industry is very
competitive. Legal and regulatory developments have made it easier for new and
sometimes unregulated competitors to compete. Consolidation among financial
service providers has resulted in fewer very large national and regional
banking and financial institutions holding a large accumulation of assets,
having significantly greater resources, and covering a wider geographic
presence. Competition has also grown from the establishment of branches by
other banks and financial service providers in our market area that target our
existing or potential customers, and from tax-advantaged credit unions that
have been permitted to expand their fields of membership significantly and to
offer many traditional commercial banking products and services.
Technological developments have allowed even out-of-market competitors
including some non-depository institutions, to compete very effectively in
local markets and have expanded the range of financial products, services and
capital available to our target customers. If we are unable to implement,
maintain and use such technologies effectively, we may not be able to offer
products or achieve cost-efficiencies necessary to compete.
13
OTHER RISKS
An investment in the Company's common stock is not an insured deposit. The
Company's common stock is not a bank deposit and, therefore, is not insured
against loss by the FDIC, any other deposit insurance fund or by any other
public or private entity. Investment in our common stock is subject to the same
market forces that affect the price of common stock in any company.
Union Bankshares, Inc.'s articles of incorporation as well as certain banking
laws may have an anti-takeover effect. Our articles of incorporation provide
that certain business combinations with a substantial shareholder or its
affiliates require approval by the affirmative vote of the holders of at least
67% of the outstanding common stock. A substantial shareholder is one who
together with its affiliates owns 5% of more of the Company's outstanding
common stock. Our Board of Directors has the right to override the 67% vote
requirement in any particular transaction. These provisions as well as certain
federal banking laws, including regulatory approval requirements for control
acquisitions, could make it more difficult for a third party to acquire the
Company, even if doing so would be perceived to be beneficial to the
shareholders. The combination of these provisions may inhibit a nonnegotiated
merger, tender offer or other business combination, which, in turn, could
adversely affect the market price of our common stock.
The Company is subject to extensive financial services industry regulation that
could restrict its activities and impose financial requirements or limitations
on the conduct of business and limit its ability to receive dividends from
Union. Union is subject to extensive regulation, supervision and examination by
the Vermont Banking Department as its primary regulator, and by the FDIC, which
insures its deposits. As a member of the FHLB of Boston, Union must also comply
with applicable regulations of the Federal Housing Finance Board and the FHLB.
Regulation by these agencies is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of our
stockholders. Union's activities are also regulated under consumer protection
laws applicable to its lending, deposit and other activities. A sufficient
claim against Union under these laws could have a material adverse effect on
our results, by leading to severe penalties or damage to our reputation.
Proposals for further regulation of the financial services industry are
continually being introduced in the United States Congress. The agencies
regulating the financial services industry also periodically adopt changes to
their regulations. Proposals that are now receiving a great deal of attention
include regulation of government sponsored-entities. It is possible that one or
more legislative proposals may be adopted or regulatory changes may be made
that would have an adverse effect on our business or financial results.
Negative public opinion could damage the Company's reputation and adversely
affect its earnings. Reputational risk is the risk to our operations from
negative public opinion. Negative public opinion can result from the actual or
perceived manner in which we conduct business activities, including sales
practices, practices in the loan origination and servicing operations and
retail banking operations, management of actual or potential conflicts of
interest and ethical issues; and the protection of confidential customer
information. Negative public opinion can adversely affect our ability to keep
and attract customers and can expose us to litigation.
The Company's reputation and future growth prospects could be impaired if
events occurred which breached our customers' privacy. We rely heavily on
communications and information systems to conduct our business, and as part of
our business we maintain significant amounts of data about our customers and
the products they use. While we have policies and procedures designed to
prevent or limit the effect of failure, interruption or security breach of our
information systems, there can be no assurances that any such failures,
interruptions or security breaches will not occur, or if they do occur, that
they will be adequately addressed. Should any of these systems become
compromised, our reputation could be damaged, relationships with existing
customers impaired and result in lost business and incur significant expenses
trying to recover. Our customers' privacy might also be breached through an
outside party or government agency over which we have no control.
The risks are further described in Part I-Item 1. "Business", Part II-Item 7
"Management's Discussion and Analysis" and Part II-Item 7a "Quantitative and
Qualitative Disclosures About Market Risk". Additional risks and uncertainties
not currently known to us or that are currently deemed to be immaterial also
may materially and adversely affect our business operations. Any of these risks
could materially and adversely affect our business, financial condition or
results of operations, as well as the value of our common stock. Many of these
risks are outside of the Company's direct control, though efforts are made to
manage those risks while optimizing returns. Potential risk concerns are shared
with our Board of Directors, as appropriate.
Part I--Item 1B Unresolved Staff Comments
None
Part I--Item 2 Properties
As of December 31, 2006, Union operated 12 community-banking locations in
Lamoille, Caledonia and Franklin counties of Vermont, one in Littleton, New
Hampshire and a loan production office in St. Albans, Vermont. Union also
operates 30 ATMs in northern Vermont and one in Littleton, New Hampshire. Union
owns, free of encumbrances, ten of its branch locations and its operations
center and leases three branch locations, the loan production office and
certain ATM premises from third parties under terms and conditions considered
by management to
14
be favorable to Union. On March 20, 2006, a full-service, community banking
location was opened in Littleton, New Hampshire, and the pre-existing Littleton
loan production office opened in 2001 was incorporated into the branch. On
December 18, 2006, Union purchased an office building in Morrisville, Vermont,
which is adjacent to its current main office and operations center.
Additional information relating to the Company's properties as of December 31,
2006, is set forth in Note 8 to the consolidated financial statements contained
in Exhibit 13 to this report, and incorporated herein by reference.
Part I--Item 3 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.
Part I--Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders through a
solicitation of proxies or otherwise during the fourth quarter of 2006.
Part II--Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
For information regarding the market for the Company's stock, trading prices,
dividends and number of record holders, please refer to page 70 of the
Company's 2006 Annual Report to Shareholders, contained in Exhibit 13 to this
report, which information is incorporated herein by reference.
ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of Shares that
Total Number of Average Price Purchased as Part of Publicly May Yet Be Purchased Under the
Period Shares Purchased Paid per Share Announced Plans or Programs (1) Plans or Programs.
October, 2006 2,300 $21.06 2,300 80,777
November, 2006 6,300 $21.14 6,300 74,477
December, 2006 163 $21.85 163 74,314
--------------------
(1) 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 may be repurchased in the open market or in negotiated transactions. The repurchase program is open for
an unspecified period of time. Through December 31, 2006, the total number of shares purchased under the plan is 25,686
at a cost of $542,250.
During the quarter ended December 31, 2006, no incentive stock options
previously granted pursuant to the Company's 1998 Incentive Stock Option Plan
("Plan") were exercised. Participation in the Plan is limited to those senior
officers of the corporation or its subsidiary (currently five active
participants) selected by the Board of Directors in its discretion. The
exercise price of all options granted under the Plan represents the fair market
value of the shares on the date of grant. There were 3,250 options granted
under the Plan during 2006 at an option price of $22.50 per share. The shares
issued to Plan participants upon exercise of incentive stock options have not
been registered with the Securities and Exchange Commission. Such shares are
restricted securities, issued under statutory exemptions available under the
Securities Act of 1933, including Section 4(2) thereof, for offers and sales
not involving a public offering.
15
Part II--Item 6 Selected Financial Data
At or For The Years Ended December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Balance Sheet Data (Dollars in thousands except per share data)
Total assets $381,149 $374,746 $359,529 $356,650 $343,492
Investment securities 23,675 32,408 40,966 44,370 45,824
Loans held for sale 3,750 6,546 8,814 18,524 17,139
Loans, net of unearned income 313,702 300,525 271,255 253,037 238,768
Allowance for loan losses (3,338) (3,071) (3,067) (3,029) (2,908)
Total nonperforming loans 4,751 4,607 5,295 3,305 2,272
Total nonperforming assets 5,150 4,607 5,330 3,315 3,074
Other real estate owned 399 - 35 10 784
Deposits 319,822 313,299 306,598 305,379 293,004
Borrowed funds 14,596 16,256 7,934 7,223 7,536
Stockholders' equity (1) 41,923 41,603 42,403 40,987 39,169
Income Statement Data
Interest income $ 25,197 $ 22,249 $ 20,172 $ 20,368 $ 22,167
Interest expense 6,821 4,499 3,311 4,209 6,364
Net interest and dividend income 18,376 17,750 16,861 16,159 15,803
Provision for loan losses 180 60 30 114 356
Noninterest income 4,058 4,063 3,781 3,607 3,562
Noninterest expenses 13,814 13,056 12,319 12,060 11,761
Net income 6,255 6,237 5,835 5,387 5,180
Per Common Share Data
Net income (2)(3) $ 1.38 $ 1.37 $ 1.28 $ 1.18 $ 1.14
Cash dividends paid(3) 1.06 1.38 0.90 0.82 0.76
Book value (1)(3) 9.25 9.16 9.31 9.01 8.62
Selected Ratios
Return on average assets (ROA) 1.67% 1.71% 1.65% 1.56% 1.52%
Return on average equity (ROE) 14.96% 15.23% 14.17% 13.50% 13.74%
Dividend payout ratio (4)(5) 76.81% 100.73% 70.31% 69.49% 66.67%
Interest rate spread (6) 4.86% 4.99% 4.98% 4.91% 4.72%
Net interest margin (7) 5.35% 5.33% 5.24% 5.20% 5.14%
Operating expenses to average assets 3.68% 3.58% 3.48% 3.49% 3.46%
Efficiency ratio (8) 60.89% 59.42% 59.02% 60.19% 60.73%
Average interest earning assets to
average interest bearing liabilities 125.37% 125.64% 125.73% 121.87% 120.59%
Average stockholders' equity to
average assets 11.14% 11.24% 11.64% 11.56% 11.10%
Tier 1 leverage capital ratio 11.29% 11.10% 11.62% 11.38% 11.03%
Tier 1 risk-based capital ratio 16.16% 15.86% 17.27% 16.70% 16.74%
Total risk-based capital ratio 17.44% 17.08% 18.57% 17.99% 17.99%
Asset Quality Ratios
Nonperforming loans to total loans 1.50% 1.50% 1.89% 1.22% .89%
Nonperforming assets to total assets 1.35% 1.23% 1.48% .93% .89%
Allowance for loan losses to
nonperforming loans 70.26% 66.66% 57.91% 91.65% 127.99%
Allowance for loan losses to
loans not held for sale 1.06% 1.02% 1.13% 1.20% 1.22%
--------------------
(1) Stockholders' equity includes unrealized gains or losses on investment securities classified as
"available-for-sale" and, for 2006 the unfunded liability for the defined benefit pension plan,
both of which are net of applicable income taxes.
(2) Computed using the weighted average number of shares outstanding for the period.
(3) Per common share data for all periods have been restated to reflect the three-for-two stock split
effected in the form of a 50% stock dividend distributed on August 8, 2003 to shareholders of
record on July 26, 2003.
(4) Cash dividend declared and paid per share divided by consolidated net income per share.
(5) Includes a $0.40 per share special cash dividend in 2005.
(6) The difference between the average rate earned on average assets minus the average rate paid on
average liabilities.
(7) The ratio of tax equivalent net interest income to average earning assets.
(8) The ratio of noninterest expense to tax equivalent net interest income and noninterest income
excluding securities gains and losses.
16
Part II--Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Please refer to pages 42 to 68 of the Company's 2006 Annual Report to
Shareholders section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations", contained in Exhibit 13 to this
report, which information is incorporated herein by reference.
Part II--Item 7A Quantitative and Qualitative Disclosures About Market Risk
Please refer to pages 61 to 68 of the Company's 2006 Annual Report to
Shareholders section entitled "Other Financial Considerations", contained in
Exhibit 13 to this report, and to the information under Part I, Item 1A, which
information is incorporated herein by reference.
Part II--Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of Union Bankshares, Inc. as of December 31,
2006 and 2005, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 2006, together with related notes and the report of
UHY LLP independent registered public accounting firm, with respect to the
financial statements for the years ended December 31, 2006, 2005 and 2004, all
as contained on pages 11 to 41 of the Company's 2006 Annual Report to
Shareholders, contained in Exhibit 13 to this report, are incorporated herein
by reference.
Part II - Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
Part II - Item 9A 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 December 31, 2006.
Based on this evaluation they concluded that those disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files with the Commission is accumulated and communicated
to the Company's management, including its principal executive and principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required information.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to the date of the evaluation referred to above. While the Company
believes that its existing disclosure controls and procedures have been
effective to accomplish these objectives, the Company intends to continue to
examine, refine and formalize its disclosure controls and procedures and to
monitor ongoing developments in this area.
Part II - Item 9B Other Information
None
Part III--Item 10 Directors, Executive Officers and Corporate Governance
The following information from the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders is hereby incorporated by reference:
Listing of the names, ages, principal occupations and business experience of
the directors under the caption "PROPOSAL I: TO ELECT DIRECTORS"
Listing of the names, ages, titles and business experience of the executive
officers and named executives under the caption "EXECUTIVE OFFICERS"
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 under the caption "SHARE OWNERSHIP INFORMATION - Section 16(a)
Beneficial Ownership Reporting Compliance"
Information regarding the Company's Audit Committee under the caption "Board
Committees"
The Company has adopted a Code of Ethics for Senior Financial Officers and the
Chief Executive Officer, previously filed as Exhibit 14.1 to the Company's 2005
Form 10-K and incorporated herein by reference. The Company has adopted a Code
of Ethics for all directors, officers and employees, filed as Exhibit 14.2 to
this report.
17
Part III--Item 11 Executive Compensation
The following information from the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding compensation of directors under the caption "PROPOSAL I:
TO ELECT DIRECTORS - Directors' Compensation".
Information regarding executive officer and named executive compensation and
benefit plans under the caption "EXECUTIVE OFFICERS - COMPENSATION DISCUSSION
AND ANALYSIS".
Information regarding management interlocks and certain transactions under the
caption "PROPOSAL I: TO ELECT DIRECTORS - Compensation Committee Interlocks and
Insider Participation".
Information regarding the Compensation Committee under "Board Committees".
Part III--Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following information from the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding the share ownership of management and principal
shareholders under the caption "SHARE OWNERSHIP INFORMATION - Share Ownership
of Management and Principal Holders".
The following table summarizes equity compensation under the Company's
Incentive Stock Option Plan, the only equity compensation plan of the company:
Equity Compensation Plan Information as of December 31, 2006:
Number of securities
remaining available for
Number of securities to be Weighted average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
Column a Column b Column c
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 16,075 $22.60 45,450
Equity compensation plans not
approved by security holders - - -
------ ------ ------
Total 16,075 $22.60 45,450
====== ====== ======
Part III--Item 13 Certain Relationships and Related Party Transactions, and
Director Independence
The following information from the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding transactions with management under the caption "PROPOSAL
I: TO ELECT DIRECTORS - Transactions with Management and Directors"
Part III--Item 14 Principal Accountant Fees and Services
The following information from the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders is hereby incorporated by reference:
Information on fees paid to the Independent Auditors set forth under the
caption "Independent Auditors"
18
Part IV--Item 15 Exhibits, Financial Statement Schedules
Documents Filed as Part of this Report:
(1) The following consolidated financial statements, as included in the
2006 Annual Report to Shareholders, are incorporated herein by
reference (See Exhibit 13.1):
1) Report of Independent Registered Public Accounting Firm
2) Consolidated Balance Sheet at December 31, 2006 and 2005
3) Consolidated Statement of Income for the years ended December
31, 2006, 2005 and 2004
4) Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 2006, 2005 and 2004
5) Consolidated Statement of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
6) Notes to the Consolidated Financial Statements
(2) The following exhibits are either filed herewith as part of this
report, or are incorporated herein by reference.
Item No:
3.1 Amended and Restated Articles of Incorporation of Union Bankshares,
Inc. (as of May 7, 1997), previously filed with the Commission as
Exhibit 3.1 to the Company's Registration Statement on Form S-4
(#333-82709) and incorporated herein by reference.
3.2 Amendment filed May 19, 1998 to Amended and Restated Articles of
Association of Union Bankshares, Inc., adding new sections 8 and 9,
previously filed with the Commission as Exhibit 3.1 to the
Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
3.3 Amendment filed November 24, 1999 to Amended and Restated Articles
of Association of Union Bankshares, Inc. increasing the authorized
common shares to 5,000,000, previously filed with the Commission on
December 10, 1999 as Exhibit 3.3 to the Company's Current Report on
Form 8-K 12g3, and incorporated herein by reference.
3.4 Bylaws of Union Bankshares, Inc., as amended, previously filed with
the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (#333-82709) and incorporated herein by
reference.
10.1 Stock Registration Agreement dated as of February 16, 1999, among
Union Bankshares, Inc., Genevieve L. Hovey, individually and as
Trustee of the Genevieve L. Hovey Trust (U.A. dated 8/22/89), and
Franklin G. Hovey, II, individually, previously filed with the
Commission as Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (#333-82709) and incorporated herein by reference.
10.2 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary, previously filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.*
10.3 Form of Union Bankshares, Inc. Deferred Compensation Plan and
Agreement, previously filed with the Commission as Exhibit 10.3 to
the Company's 2001 Form 10-K and incorporated herein by reference.*
10.4 Union Bankshares, Inc. Executive Nonqualified Excess Plan.*
13 The following specifically designated portions of Union's 2006
Annual Report to Shareholders have been incorporated by reference
in this Report on Form 10-K, is filed herewith: pages 11 to 68.
14.1 Code of Ethics for Senior Financial Officers and the Chief
Executive Officer, previously filed with the Commission as Exhibit
14.1 to the Company's 2005 Form 10-K and incorporated herein by
reference.
14.2 Code of Ethics (for all directors, officers and employees), as
revised, March 21, 2007.
21 Subsidiary of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont.
31.1 Certifications of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of 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.
--------------------
* denotes compensatory plan or agreement
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of March 30, 2007.
Union Bankshares, Inc.
By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon
----------------------------- ----------------------------------
Kenneth D. Gibbons Marsha A. Mongeon
President and Chief Executive Treasurer and Chief
Officer Financial/Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 30, 2007.
Name Title
/s/ Richard C. Sargent Director, Chairman of the Board
---------------------------------
Richard C. Sargent
/s/ Kenneth D. Gibbons Director, President and Chief
--------------------------------- Executive Officer
Kenneth D. Gibbons (Principal Executive Officer)
/s/ Marsha A. Mongeon Treasurer and Chief Financial/
--------------------------------- Accounting Officer
Marsha A. Mongeon (Principal Financial/Accounting Officer)
/s/ Cynthia D. Borck Director and Vice President
---------------------------------
Cynthia D. Borck
/s/ Steven J. Bourgeois Director
---------------------------------
Steven J. Bourgeois
/s/ Franklin G. Hovey II Director
---------------------------------
Franklin G. Hovey II
/s/ Richard C. Marron Director
---------------------------------
Richard C. Marron
/s/ Robert P. Rollins Director
---------------------------------
Robert P. Rollins
/s/ John H. Steele Director
---------------------------------
John H. Steele
20
EXHIBT INDEX **
10.4 Union Bankshares, Inc. Executive Nonqualified Excess Plan.*
13 Union Bankshares, Inc. Annual Report to Shareholders.
14.2 Code of Ethics (for all directors, officers and employees, as revised,
(March 21, 2007).
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certifications of 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.
--------------------
* denotes compensatory plan or arrangement.
** other than exhibits incorporated by reference to prior filings.
21