Union Bankshares, In
2012 ANNUAL REPORT
Union Bankshares, Inc.
Market for Union Bankshares' Comnnon Stock
On March 18, 2013, there were 4,455,406 shares
of common stock outstanding held by 616 stock
holders of record. The number of stockholders
does not reflect the number of beneficial owners,
including persons or entities who may hold the
stock in nominee or "street name."
Union Bankshares' common stock is listed on the
NASDAQ Global Market trading under the symbol
UNB.
On January 16, 2013, the Company declared a
regular dividend of $0.25 per share to stockholders
of record as of January 26, 2013 payable February
7, 2013.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$20.00
$19.90
$21.00
$20.09
2012
Low
$18.56
$18.75
$18.80
$19.26
Dividends
High
$ 0.25
$ 0.25
$ 0.25
$ 0.25
$22.39
$20.00
$19.99
$19.80
2011
Low
$17.95
$18.80
$18.75
$18.11
Dividends
$ 0.25
$ 0.25
$ 0.25
$ 0.25
Union Bankslnares Awarded Sm-AII Star Status by Sandler O'Neill
In 2012, for the second time, Sandler O'Neill
recognized Union Bankshares as one of the top
performing small-cap banks and thrifts
in the
United States. The first time was in 2009. Ranking
methodology begins with a list of publicly traded
banks and thrifts with market caps between $25
million and $2 billion. Further evaluation focused
on growth, profitability, credit quality and capital
strength. Eight financial variables were evaluated
to determine performance as well as growth trends
that measure momentum. In order to qualify, the
banks and thrifts needed to be at or above the
peer median for these seven metrics: growth in
earnings per share, loans and deposits; and in the
following ratios—return on average equity; non-
performing assets to loans plus OREO (Other Real
Estate Owned) ratio; net charge-off ratio and re
serve to nonperforming assets ratio; plus be Well
Capitalized per the Tier 1 risk-based capital ratio.
Performance Metrics: 2012 Sm-AII Stars vs. Industry Medians
Last Twelve Months
Union Bankshares
Sm-AII Stars
All Banks & Thrifts
EPS Growth
Loan Growth
Deposit Growth
ROAE
NPAs^ / Loans and OREO
NCOs / Avg. Loans
Reserves / NPAs^
19.1%
5.0%
6.1%
14.2%
1.3%
0.07%
81%
37.7%
11.0%
12.5%
11.5%
1.5%
0.24%
89%
16.6%
2.1%
3.6%
6.0%
2.6%
0.66%
61%
1 Accruing TDRs are excluded from NPAs
Source: SNL Financial and Sandler O'Neill
2012 Annual Report
Union Bankshares, Inc.
Letter to Shareholders
March 29, 2013
Dear Shareholder,
We are pleased to report on the activities of your
Company for the year ended December 31, 2012.
Union Bankshares earned net income of $6.8 mil
lion in 2012, a 31% improvement over 2011. Loan
interest income increased $1.4 million compared to
2011 due to increases in the loan portfolio resulting
from the May 2011 New Hampshire acquisition of
branches and organic growth.
Another year of strong residential lending gener
ated fee income and premiums on loans originated
and subsequently sold on the secondary market.
$126 million in loans were sold compared to $80
million in 2011, and there was year-over-year
growth on premiums on the loan sales of $2 mil
lion. These increases in income were partially off
set by a $3 million increase in noninterest expense.
In order to reduce pension plan expense, and the
volatility of capital, on October 5, 2012 we froze
our defined benefit pension plan. The cost of the
pension plan was projected to rise to approximate
ly 17% of salary expense for 2012, up from 11%
in 2011. In addition, because of market conditions,
our Liability forthe defined pension plan increased
to $5.7 million at year end 2011 from $2.5 million
at year end 2010. We have enhanced our existing
401k plan for our staff to assist them in saving for
the future.
We continue to be well capitalized under current
regulatory measures and preliminary indicators
suggest that we will be considered well capitalized
under the proposed Basel III Capital Standards.
We maintain a close watch on the developments of
the Basel III Capital Standards being promulgated
by our regulatory authorities. We believe regula
tors will continue to urge banks to hold more capi
tal than in the past, and we must plan accordingly.
To that end, in 2012 between retained earnings
and the pension freeze, we improved our capital
by $4.7 million, a 12% increase year-over-year.
On May 16, 2012 the management succession plan
that began in 2010 was completed as Ken Gibbons
retired from his CEO role and settled into his new
role as nonexecutive Chairman, and having been
designated as President in April of 2011, David
Silverman added the tide of CEO to his position.
The transition was smooth and seamless, and your
Company continues to benefit from Ken's banking
knowledge as well as the continuity in manage
ment that David provides.
2012 was a strong year for Union and we believe
we are positioned for continued success in 2013.
We are indeed fortunate to have the support, pa
tronage and efforts provided by our shareholders,
customers and staff. The market area in which we
operate continues to value our community bank
ing model, where people meet face-to-face and
together determine the best way to meet each
customer's financial needs. We remain commit
ted to the success ofthe communities in which we
live and work, and to delivering to our owners with
long-term, sound financial returns.
Sincerely,
Kenneth D. Gibbons
Chairman
'i^
David S. Silverman
President & Chief Executive Officer
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. Board of Directors
Cynthia D. Borck
Owner
Consulting Services
Information
Kenneth D. Gibbons
Chairman
Union Bankshares, Inc.
and Union Bank
John H. Steel
Founder
Steel Construction
Schuyler W. Sweet
Owner
Stony River
Properties, LLC
2012 Annual Report
Steven J. Bourgeois
CEO
Strategic Initiatives
for Business LLC
Timothy W. Sargent
Attorney/Owner
Sargent Law Office
David S. Silverman
President & CEO
Union Bankshares, Inc.
and Union Bank
Neil J. Van Dyke
President
Golden Eagle Resort
Union Bankshares, Inc.
Shareholder Assistance & Investor Information
If you need assistance with a change in registra
tion of certificates, combining your certificates
into one, reporting lost certificates, nonreceipt or
loss of dividend checks, assistance regarding di
rect deposit of dividends, information about the
Company, or to receive copies of financial reports,
please contact either:
JoAnn A. Tallman, Assistant Secretary
Union Bankshares, Inc.
PO. Box 667
Morrisville, VT 05661-0667
Phone: 802-888-6600
802-888-4921
Fax:
ubexec@unionbankvt.com
Email:
Registrar 8i Transfer Company
Attn: Stock Transfer Department
10 Commerce Drive
Cranford, NJ 07016
Phone:
Fax:
1-800-368-5948
1-908-497-2318
E-mail:
info@rtco.com
NASDAQ Stock Market Ticker Symbol: UNB
Corporate Name: Union Bankshares, Inc.
To view additional information about the Company
or to receive alerts when public filings are posted,
please view the Investor Relations page at www.
unionbankvt.com.
Union Bankshares, Inc., operates as a one bank
holding company for Union Bank, which provides
commercial, municipal, trust and retail banking
services in northern Vermont and northwestern
New Hampshire. Currendy the Company oper
ates 12 community banking locations in Lamoille,
Caledonia and Franklin counties of Vermont; four
community banking locations in Grafton and Coos
counties of New Hampshire; and one loan center
in South Burlington (Chittenden County), Vermont;
as well as 34 ATMs throughout northern Vermont
and northwestern New Hampshire. Union Bank
was founded in 1891 in Morrisville, Vermont, where
the Bank and holding company headquarters are
located.
Union Bank promotes personal service and bank
ing expertise within the communities it serves,
with a focus on small- to middle-market business
es, local municipalities, non-profits, retail and trust
customers. To leverage its local expertise, Union
Bank continues to enhance its niche capabilities
and focuses on expanding to additional neighbor
ing communities.
Union Bankshares, through Union Bank, is com
mitted to the communities it serves, and encour
ages employee participation in community events
and charitable services. The Company views small
businesses as foundations for thriving local econo
mies; these businesses provide jobs, attract other
businesses and create wealth. Currendy, Union
Bank employs approximately 200 professionals,
many of whom are leaders in community organiza
tions throughout the Bank's service area.
• Union Bankshares' growing asset base of over
$577 million provides the financial strength to
successfully serve its constituents.
• The Company reported a Return on Average
Equity of 16.35% and a Return on Average As
sets of 1.22% for 2012.
• Union Bank has consistently been recognized
for our Community Reinvestment efforts.
• The US Small Business Administration has
designated Union Bank as a Preferred Lender.
• The Department of Housing and Urban
Development has granted Union Bankshares an
unconditional direct endorsement approval.
2012 Annual Report
Union Bankshares, Inc.
Selected Financial Data
At or For The Years Ended December 31,
2012
2011
2010
2009
2008
(Dollars in thousands, except per share data)
$ 577,256 $ 552,751 $ 452,995 $ 447,522 $
440,104
26,126
46,954
24,280
24,649
27,834
455,298
429,384
382,071
358,167
353,310
Balance Sheet Data
Total assets
Investment securities
Loans, net of unearned
income
Allowance for loan losses
(4,657)
(4,226)
(3,755)
(3,493)
(3,556)
Deposits
Borrowed funds
Stockholders' equity (1)
Income Statement Data
509,993
473,439
376,560
368,827
364,370
15,747
45,046
29,015
40,339
28,986
41,725
30,993
41,180
27,416
39,150
Total interest income
$ 25,028 $
23,669 $
22,907 $ 23,217 $
24,721
Total interest expense
(3,351)
(3,908)
(4,117)
(5,294)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Income before provision
for income taxes
21,677
(660)
10,525
(23,035)
19,761
(775)
7,125
18,790
(520)
5,649
17,923
(400)
5,521
(19,773)
(16,630)
(16,397)
(15,412)
8,507
6,338
7,289
6,647
(7,177)
17,544
(335)
4,329
6,126
(1,020)
Provision for income taxes
(1,663)
(1,119)
(1,702)
(1,420)
Net income
$
6,844 $
5,219
$
5,587 $
5,227 $
5,106
Per Common Share Data
Net income (2)
Cash dividends paid
Book value (1)
1.54
1.00
10.11
1.17
1.00
9.05
1.25 $
1.17 $
1.00
9.36
1.00
9.23
1.14
1.12
8.75
Weighted average number of
shares outstanding
. .^-y noq
^,4S/,u/y
4,456,842
4,458,193
4,466,760
4,488,6
Number of shares outstanding
4,456,081
4,457,204
4,455,704
4,461,208
4,474,598
(1) Stockholders' equity includes unrealized gains or losses,
net of applicable income taxes, on investment securities
classified as "available-for-sale" and the unfunded
liability for pension benefits, net of taxes for the defined
benefit pension plan.
(2) Computed using the weighted average number of shares
outstanding forthe period.
2012 Annual Report
Union Bankshares, Inc.
Key Financial Indicators
SNL Bank $500M-$1B Union Bankshares
.^
Return on Average Equity
Source: SNL Financial LC
20%
15%
10%
5%
0%
-5%
V
2007
2008
2009
2010
2011
2012
Year ending December 31,
Return on Average Assets
Source: SNL Financial LC
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
SNL Bank $500M-$1B Union Bankshares
^
^
^^
^
^-
V
X
nx
1
' " '^
1
1
1
•
2007
2008
2009
2010
2011
2012
Year ending December 31,
2012 Annual Report
I 5
Union Bankshares, Inc.
Key Financial Indicators
Net Interest Margin
Source: SNL Financial LC
5.5%
5.0%
4.5%
4.0%
V
m
SNL Bank $500|V|-$1B
Union Bankshares
—•
•
3.5%
1
1
Year ending December 31,
1
1
1
2007
2008
2009
2010
2011
2012
Total Return Performance
Source: SNL Financial LC
145%
130%
115%
100%
85%
70%
55%
40%
•
SNL Bank $500M-$1B
n
NASDAQ Composite
•
Union Bankshares
^
^^
^ ^^
a
X ^ ^ ^ ^ ^ "'
\
/
^
>
~ * - — ' * ^ - ~ ~ ~ ^^
l
l
l
l
ll
Year ending December 3 1,
2007
2008
2009
2010
2011
2012
Source: SNL Financial LC, Chadottesville, VA, www.snl.com, ©2013
2012 Annual Report
Union Bankshares, Inc.
Working Together Builds Strong Communities
It is no coincidence that strong communities
surround strong banks. Banks spur growth by
providing capital to area businesses. They enable
people to own homes by providing mortgages, and
provide investment expertise that helps people re
tire well or leave an estate for their heirs.
At Union Bank our goal is to do all that, and more.
We are very proud to showcase three business
projects that we helped finance—a high-tech ex
pansion at Sterling Technologies, a new fire station
in Cambridge and big changes at Woodstock Inn
Station &. Brewery. But first, we will share with you
some of the educational tools we provide to the
youth in our local communities. We believe that by
providing educational programs to the young and
learning experiences through internships for our
local college students we are further strengthening
our communities.
Save For Success
Our award-winning Save for Success program is
designed to start the next generation on a healthy
financial path, which begins with saving. We be
lieve that by educating young people about finan
ces and saving, they will make better financial de
cisions when they are adults.
The Save for Success program is currently imple
mented in 21 area schools that serve grades K-12.
Participating students receive a statement sav
ings account with an opening balance of one dol
lar. These initial deposits are courtesy of Union
Bank. After that, students make their own deposits
and watch their quarterly statements to see their
savings grow. For the four months of September
through December, 2012, these students made
2,888 deposits.
We welcome our two newest participating schools,
both in New Hampshire: Lin-Wood Public School
in Lincoln and the Mildred C. Lakeway School in
Littleton. And we are very pleased to report that
Lin-Wood Public School has the highest number of
consistent savers and deposits of all our Save for
Success schools.
Internship Program Leads to Jobs
Working with Johnson State College and Lyndon
State College, Union Bank has developed an In
ternship Program that prepares participating col
lege students to work in the world of banking.
Highly structured, the program bridges the gap
between what is taught in the classroom and the
work that takes place at a financial institution. The
bank works with one intern at a time in order to
provide that student with the attention necessary
to make the experience invaluable.
Johnson State College
The students are required to train as a teller
and in this way learn the guidelines and confi
dentiality policies of the bank. After being in
troduced to the "front line" they may choose to
work on either the retail or the lending side of
the bank or in one of the support functions. The
students set goals, maintain a journal and dis
cuss the outcomes in a weekly meeting with
their supervisor. These weekly meetings ensure
that students make the connection between what
they learn in the classroom and the jobs they are
performing at the bank.
A recent intern began as a teller and worked be
side two branch managers focusing on residential
lending. It was arranged for her to follow the same
loans from the initial interview and application in
the branch through the underwriting and loan pro
cessing in the main office. Once her internship was
completed we were able to offer her a permanent
position as loan assistant.
By engaging students in this way, we are giving
back to the community and addressing the prob
lem of youth leaving our state. The interns are
more aware of the earning potential Vermont has
to offer after college and the bank benefits by be
ing able to attract college prospects who may offer
long-term potential.
2012 Annual Report
|7
Union Bankshares, Inc.
Working Together Builds Strong Communities
A New Fire Station in Cambridge
The importance of a fire station to the towns it
serves cannot be understated. Equipment needs
to be in tip-top working order and at the ready.
Emergency responders need fire trucks and ATVs
to start the first time, every time and that means
equipment must be stored under cover.
The Cambridge Fire Department is the primary re-
sponder for the Town of Cambridge, the Villages
of Cambridge and Jeffersonville, Smugglers Notch,
and approximately half of Fletcher. The former
5,500 square foot fire station was under increas
ing pressure to meet the demands of the towns it
serves.
The new fire station is a 12,000 square foot state-
of-the-art facility designed to meet the area's
needs thirty to forty years into the future. The op
erational aspects of the new building are far more
efficient and the responders are still recognizing
the benefits.
The new station houses the department's two
pumpers, tanker, rescue and utility trucks, ATV
rescue sled, HAZMAT decontamination equipment
and air compressor. The station has an elevator, is
ADA accessible and meets code for future bunk-
rooms. There is also space for more trucks and
equipment when the need arises.
One of the most critical pieces of equipment is the
air compressor that produces breathing air. The
compressor is housed in a trailer making it porta
ble, and is one of only three in Vermont. The com
pressor is used to fill air tanks for fire fighters as
well as SCUBA tanks for dive teams. It can be set
up on site and stay for days.
Financing projects that provide communities with
critical services is perhaps the most important
lending we do. We work diligently with local govern
ments to bring their taxpayers reliable solutions.
Progress Abounds in New Hampshire
We are very pleased to now own the Main Street,
Littleton branch facility and property. Upgrades in
cluded the installation of a drive-up ATM, improved
parking and increased overall accessibility. Our
new ATM features both cash delivery and deposit
ability.
2012 Annual Report
Union Bankshares, Inc.
Working Together Builds Strong Communities
Also in Littleton, we've worked with multiple banks
and AHEAD (Affordable Housing, Education and
Development) helping to finance the renovations
to the Opera Block Apartments that resulted in 35
newly remodeled apartments for elderly residents.
We participated in financing phase two construc
tion of Litdeton Town 8t Country Family Housing,
building an additional 25 units for area working
families.
Opera Block Apartments, Littleton, NH
Union Bank also provided the town of Lisbon with in
novative tax anticipation lending enabling the acqui
sition of equipment and completion of projects with
favorable rates and terms.
In Woodstock we have been awarded the town's
deposit relationship. We will continue to bring
best-in-class banking, financing and customer ser
vice to these important Northern New Hampshire
towns in our footprint.
sterling Technologies Continues to Expand
Union Bank is in its sixth year of working with
Sterling Technologies in conjunction with VEDA
(Vermont Economic Development Authority) to
help this innovative Vermont manufacturer keep
up their steady growth. Sterling has set a high
standard for themselves, continually meeting their
responsibilities and enabling them to obtain attrac
tive financing.
The most recent financing is enabling Sterling to
construct a Clean Room and purchase a Coordinate
Measuring Machine forthe new Metrology (Science
of Measurement) Lab allowing for precision mea
surement that will set them apart from many other
manufacturers across the country. This financing
also allows Sterling to purchase a machining cen
ter that permits unattended, "lights-out" manu
facturing, utilizing computerized programming
to run machinery unattended. Around-the-clock
operations can increase profitability by extending
producfion capacity during on-production off-shift
hours.
Founders and owners Jeff Walker and Michael Bou-
dreau are Lamoille County natives and committed
to the area. They have diversified their operations
and capabilities to provide sustainability for their
staff and other future hires from the area. In order
to take advantage of a local labor force they have
simplified and streamlined many of their manufac
turing processes providing more predictable and
therefore consistent results. Recognizing that the
upgrades would elevate their production output,
Jeff and Michael have invested a significant portion
of their own capital to the financing that VEDA and
Union Bank have brought to the table.
(left to right) Joshua Welles, Robert Jones
and Michael Boudreau.
2012 Annual Report
Union Bankshares, Inc.
Working Together Builds Strong Communities
Scott and Peggy Rice in front ofthe newly constructed brewery.
Things are Brewing at Woodstock Station
Scott and Peggy Rice, owners of the Woodstock
Station Brewery, began working with Union Bank
just after the Bank's acquisition of the former
Northway Bank branch in 2011. Seeking to move
their brewing operation from Shipyard Brewery in
Maine back home to New Hampshire meant coor
dinating a number of projects. First, the Deachman
House, a turn-of-the-century residence restored
and added to the Inn in 1995, was moved on site;
next, a very deep cellar hole was excavated to ac
commodate the large brew tanks; and lastly, the
building was constructed with 54 solar panels mak
ing it a fully solar supported business.
The Rice's were impressed with the interest Union
Bank took in them and their project. The financing
was complicated but Union Bank was able to set
up a plan that would work well for everyone—from
financing the project to the streamlined disburse
ment of the funds.
The new expansion is expected to create at least
ten full-time-equivalent jobs. The new building in
cludes a function room that is often used for com
munity events during times when weddings are not
booked.
Aside from accommodating guests and brewing
great beers, the Rice's also focus on giving back
to the community. They sponsor the Black Fly
Golf Tournament to benefit the Lincoln-Woodstock
Community Child Care Center and the Luck of the
Irish race on St. Patrick's Day, a local charity fund
raiser. They also support the Woodstock Senior
Center, Christmas Meals for Seniors with the Boy
Scouts and dozens of other charitable giving op
portunities. Fellowship Ale is brewed and bottled
specifically for the Rotary with half the proceeds
going to the mission of eradicating polio and half
going to local projects in town.
10
2012 Annual Report
Union Bankshares, Inc.
Independent Registered Public Accounting Firm Report
1^ BerryDurvi
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Union Bankshares, Inc, and Subsidiary
We have audited the accompanying consolidated balance sheets of Union Bankshares, Inc. and Subsidiary
(the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility ofthe Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards ofthe Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable as
surance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and dis
closures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presenta
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material re
spects, the consolidated financial position of Union Bankshares, Inc. and Subsidiary as of December 31,
2012 and 2011, and the consolidated results of their operations and their consolidated cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Portland, Maine
March 27, 2013
Vermont Registration No. 92-0000278
2012 Annual Report
j 11
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
December 3 1, 2012 and 2011
Assets
Cash and due from banks
Federal funds sold and overnight deposits
Cash and cash equivalents
Interest bearing deposits in banks
Investment securities available-for-sale
Investment securities held-to-maturity (fair value $5.5 r
million at December 31, 2012 and December 31, 2011
Loans held for sale
Loans
Allowance for loan losses
Net deferred loan costs
nillion and $4.0
respectively)
Net loans
Accrued interest receivable
Premises and equipment, net
Core deposit intangible
Goodwill
Investment in real estate limited partnerships
Company-owned life insurance
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing
Interest bearing
Time
Total deposits
Borrowed funds
Liability for defined benefit pension plan
Accrued interest and other liabilities
Total liabilities
Commitments and Contingencies (Notes 8,15,16,17,18 and 21)
Stockholders' Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,923,986 shares
issued at December 31, 2012 and 4,923,286 shares issued at December 31, 2011
Additional-paid-in capital
Retained earnings
Treasury stock at cost; 467,905 shares at December 31
and 466,082 shares at December 31, 2011
Accumulated other comprehensive loss
,2012
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
12
2012 Annual Report
2012
(Dollars in
2011
thousands)
$
$ 5,023
41,487
46,510
21,922
20,630
5,496
11,014
444,145
(4,657)
139
439,627
1,539
10,289
1,438
2,223
3,809
3,267
9,492
5,871
18,510
24,381
24,020
42,954
4,000
4,888
424,319
(4,226)
177
420,270
1,810
9,163
1,608
2,223
4,473
3,676
9,285
$ 577,256
$552,751
$ 83,715
273,505
152,773
509,993
15,747
2,753
3,717
532,210
$ 76,656
239,058
157,725
473,439
29,015
5,579
4,279
512,412
9,848
295
40,772
(3,859)
(2,010)
45,046
9,847
276
38,385
(3,823)
(4,346)
40,339
$ 577,256
$552,751
Union Bankshares, Inc.
2012
2011
(Dollars in thousands)
except per share data)
$23,684
$22,269
633
363
51
27
270
25,028
2,416
20
915
3,351
21,677
660
21,017
615
4,877
673
3,614
746
10,525
8,953
3,908
1,156
1,490
7,528
23,035
8,507
1,663
716
326
15
34
309
23,669
2,825
18
1,065
3,908
19,761
775
18,986
557
4,367
183
1,566
452
7,125
7,743
3,153
1,121
1,220
6,536
19,773
6,338
1,119
$ 6,844
$ 5,219
$ 1.54
$ 1.00
$ 1.17
$ 1.00
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2012 and 2011
Interest and dividend income
Interest and fees on loans
Interest on debt securities:
Taxable
Tax exempt
Dividends
Interest on federal funds sold and overnight deposits
Interest on interest bearing deposits in banks
Total interest and dividend income
Interest expense
Interest on deposits
Interest on short-term borrowed funds
Interest on long-term borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Trust income
Service fees
Net gains on sales of investment securities available-for-sale
Net gains on sales of loans held for sale
Other income
Total noninterest income
Noninterest expenses
Salaries and wages
Pension and other employee benefits
Occupancy expense, net
Equipment expense
Other expenses
Total noninterest expenses
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share
Dividends per common share
See accompanying notes to consolidated financial statements.
2012 Annual Report
13
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2012 and 2011
Net income
Other comprehensive income (loss), net of tax:
Investment securities available-for-sale:
Net unrealized holding gains arising during the period on
investment securities available-for-sale
Reclassification adjustments for net gains on investment
securities available-for-sale realized in net income
Total
Defined benefit pension plan:
Net actuarial gain (loss) arising during period
Reclassification adjustment for amortization of net
actuarial loss realized in net income
Reclassification adjustment for amortization of prior
service cost realized in net income
Total
Total other comprehensive income (loss)
Total comprehensive income
2011
2012
(Dollars in thousands)
$ 6,844
$ 5,219
60
(444)
(384)
839
(121)
718
2,387
(3,027)
326
122
7
2,720
2,336
$ 9,180
4
(2,901)
(2,183)
$ 3,036
See accompanying notes to consolidated financial statements.
14
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2012 and 2011
Common Stock
Shares,
net of
treasury
Additional
paid-in
capital
Amount
Balances, December 31, 2010
4,455,704
$ 9,844
$ 244
Net income
Other comprehensive loss
Cash dividends declared
($1.00 per share)
Stock based compensation
expense
Exercise of stock options
—
—
—
—
1,500
—
—
—
—
3
Balances, December 31, 2011
4,457,204
9,847
Net income
—
—
Other comprehensive income
Cash dividends declared
($1.00 per share)
Stock based compensafion
expense
Exercise of stock options
Purchase of treasury stock
—
—
700
(1,823)
-
—
1
—
—
—
—
9
23
276
—
—
8
11
—
Retained
earnings
Treasury
stocl<
(Dollars in thousands)
$37,623
$ (3,823)
Accumulated
other
comprehensive
loss
Total
stockholders'
equity
$(2,163)
$41,725
5,219
—
(4,457)
—
—
—
—
—
—
—
—
(2,183)
—
—
—
5,219
(2,183)
(4,457)
9
26
38,385
(3,823)
(4,346)
40,339
6,844
(4,457)
—
—
—
—
—
—
—
(36)
—
2,336
—
—
—
—
6,844
2,336
(4,457)
8
12
(36)
Balances, DecemberSl, 2012
4,456,081
$ 9,848
$ 295
$40,772
$ (3,859)
$(2,010)
$ 45,046
See accompanying notes to consolidated financial statements.
2012 Annual Report
I 15
^
Union Bankshares, Inc.
1
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 3 1, 2012 and 2011
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Provision for loan losses
Deferred income tax (benefit) provision
Net amortization of investment securities
Equity in losses of limited partnerships
Stock based compensation expense
Net decrease in unamortized loan costs
Proceeds from sales of loans held for sale
Origination of loans held for sale
Net gains on sales of loans held for sale
Net (gains) losses on disposals of premises and equipment
Net gains on sale of investment securities available-for-sale
Net gains on sales of repossessed property
Write-downs of impaired assets
Net gains on sales of other real estate owned
Decrease (increase) in accrued interest receivable
Amortization of core deposit intangible
Increase in other assets
Contribution to defined benefit pension plan
Increase in other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions
Purchases
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns
Purchases
Investment securities available-for-sale
Proceeds from sales
Proceeds from maturities, calls and paydowns
Purchases
Net increase in loans
Recoveries of loans charged off
Purchases of premises and equipment
Investments in limited partnerships
Purchase of company-owned life insurance
Purchase of nonmarketable equity securities
Proceeds from sales of other real estate owned
Proceeds from sales of premises and equipment
Proceeds from sales of repossessed property
Cash acquired, net of cash paid, in branch acquisitions
Net cash used in investing activities
16 1
2012 Annual Report
2012
(Dollars in
2011
thousands)
$
6,844
$
5,219
887
660
(786)
82
660
8
38
129,867
(132,379)
(3,614)
(14)
(673)
—
408
(138)
271
170
(345)
—
1,526
3,472
10,735
(8,637)
4,000
(5,496)
13,632
17,444
(8,742)
(21,626)
43
(2,018)
(889)
—
—
1,375
19
12
—
(148)
692
775
595
63
515
9
11
81,939
(79,650)
(1,566)
1
(183)
(4)
278
(133)
(53)
100
(150)
(2,000)
900
7,358
7,985
(17,964)
2,000
(5,500)
2,326
11,134
(31,426)
(16,055)
44
(1,497)
(1,752)
(2,000)
(54)
517
—
4
29,607
(22,631)
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2012 and 2011
2012
(Dollars in
2011
thousands)
Cash Flows From Financing Activities
Advances of long-term debt
Repayment of long-term debt
Net (decrease) increase in short-term borrowings outstanding
Net increase in noninterest bearing deposits
Net increase in interest bearing deposits
Net decrease in time deposits
Issuance of common stock
Purchase of treasury stock
Dividends paid
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
Supplemental Disclosures of Cash Flow Information
Interest paid
Income taxes paid
Supplemental Schedule of Noncash Investing and Financing Activities
Other real estate acquired in setiilement of loans
Other assets acquired in settlement of loans
Loans originated to finance the sale of other real estate owned
Investment in limited partnerships acquired by capital contributions payable
Assets acquired and liabilities assumed in branch acquisitions (Note 9):
Loans and other non-cash assets, excluding goodwill
and core deposit intangible
Deposits and other liabilities
2,000
(12,589)
(2,679)
7,059
34,447
(4,952)
12
(36)
(4,457)
18,805
22,129
24,381
$_
46,510
$
$_
3,406
2,225
1,391
—
335
—
$
$
$
$
$
$
—
(4,639)
1,444
8,571
25,160
(743)
26
—
(4,457)
25,362
10,089
14,292
1
24,381
3,942
725
$
1
$
$
$
$_
1,127
40
597
893
—
$
$
33,624
67,162
See accompanying notes to consolidated financial statements.
2012 Annual Report
17
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Basis of financial statement presentation
The accounting and reporting policies of Union Bankshares, Inc. and Subsidiary (the "Company") are in conformity
with U.S. generally accepted accounting principles ("GAAP") and general practices within the banking industry.
The following is a description ofthe more significant policies.
The consolidated financial statements include the accounts of Union Bankshares, Inc., and its wholly owned
subsidiary. Union Bank ("Union") headquartered in Morrisville, Vermont. All significant intercompany transactions
and balances have been eliminated. The Company utilizes the accrual method of accounting for financial reporting
purposes.
The Company meets the qualification requirements under Securities and Exchange Commission rules for
smaller reporting companies and, pursuant to such rules, has elected to present audited statements of income,
comprehensive income, cash flows and changes in stockholders' equity for each of the most recent two, rather
than three, fiscal years.
Certain amounts in the 2011 financial statements have been reclassified to conform to the current year
presentation.
Nature of operations
The Company provides a variety of financial services to individuals, municipalities, commercial and nonprofit
customers through its branches, ATMs, telebanking and internet banking systems in northern Vermont and
northwestern New Hampshire. This market area encompasses primarily retail consumers, small businesses,
municipalities, agricultural producers and the tourism industry. The Company's primary deposit products are
checking, savings, money market accounts, certificates of deposit and individual retirement accounts and its
primary lending products are commercial, real estate, municipal and consumer loans.
Concentration of risk
The Company's operations are affected by various risk factors, including liquidity risk, interest rate risk, credit
risk, and risk from geographic concentration of its deposit taking and lending activities. Management attempts to
manage interest rate risk through various asset/liability management techniques designed to match maturities/
repricing of assets and liabilities. Loan policies and administration are designed to provide assurance that loans
will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective
factors and factors beyond the control ofthe Company. Although national economic conditions have been volatile
during the last four years, local economic conditions have been somewhat more stable. The Company has a
diversified loan portfolio with a substantial portion ofthe Company's loans secured by real estate and/or partially
guaranteed by a U.S. Government agency. Most of its lending activities are conducted within the northern
Vermont and northwestern New Hampshire market area where it is located. As a result, the Company and its
borrowers may be especially vulnerable to the consequences of changes in the local economy and real estate
market conditions. Notes 5 and 6 discuss the types of lending in which the Company engages.
Use of estimates in preparation of financial statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
18 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ materially from those estimates. Material
estimates that are particulady susceptible to significant change in the near term and involve inherent uncertainties
relate to the determination ofthe allowance for losses on loans, the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans, deferred tax assets, judgments regarding valuation and impairment
of investment securities and other assets as well as pension plan accounting. These estimates involve a significant
degree of complexity and subjectivity and the amount of the change that is reasonably possible, should any of
these estimates prove inaccurate, cannot be estimated.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes
cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally
purchased and sold for one day periods) and overnight deposits.
Trust operations
Assets held by the Trust & Asset Management Division of Union in a fiduciary or agency capacity, other than trust
cash on deposit with Union, are not included in these consolidated financial statements because they are not
assets of Union or the Company.
Fair value measurements
The Company utilizes the Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 820, Fair Value Measurements and Disclosures, as guidance for accounting for assets and liabilities
carried at fair value. This standard defines fair value as the price, without adjustment for transaction costs,
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value is a market based measurement based on assumptions that
market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a
three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument's
level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement.
The three levels of the fair value hierarchy are:
•
•
•
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not
active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset
or liability; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market activity).
Investment securities
Investment securities purchased and held primarily for resale in the near future are classified as trading securities
and are reported at fair value with unrealized gains and losses included in earnings. Debt securities the Company
2012 Annual Report
I 19
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized
cost. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-
sale. Investments classified as available-for-sale are reported at fair value.
Accretion of discounts and amortization of premiums arising at acquisition on investment securities are included in
income using the effective interest method over the life ofthe securities to maturity or call date. Unrealized gains
and losses on investment securities available-for-sale are excluded from earnings and reported in Accumulated
other comprehensive income (loss), net of tax and reclassification adjustment, as a separate component of
stockholders' equity. The specific identification method is used to determine realized gains and losses on sales of
available-for-sale or trading securities.
Declines in the fair values of individual equity securities that are deemed to be other-than-temporary are reflected
in noninterest income when identified. An unrealized loss is generally deemed to be other than temporary and
a credit loss on a debt security is deemed to exist if the present value of the expected future cash flows is less
than the amortized cost basis of the security. The credit loss component of an other than temporary write down
of a debt security is reflected in earnings as a realized loss in other income with the remaining portion of the
impairment loss recognized in other comprehensive income (loss), provided the Company does not intend to sell
the underiylng debt security and it is more likely than not that the Company will not have to sell the debt security
prior to recovery.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated
fair value in the aggregate. The estimated fair value of loans held for sale is based on current price quotes
that determine the amount that the loans could be sold for in the secondar/ market. Loans transferred from
held for sale to portfolio are transferred at the lower of cost or fair value in the aggregate. Sales are normally
made without recourse. Gains and losses on the disposition of loans held for sale are determined on the specific
identification basis. Net unrealized losses are recognized through a valuation allowance by charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
payofl" are reported at their unpaid principal balances, adjusted for any charge-off's, the allowance for loan losses,
and any deferred fees or costs on originated loans and unamortiized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to
accrual and nonaccrual loans, apply to all loan segments and classes. The Company considers its loan segments
and loan classes to be the same. The accrual of interest is normally discontinued when a loan is specifically
determined to be impaired and/or management believes, aflier considering collection effortis and other factors,
that the borrowers' financial condition is such that collection of interest is doubtful. Normally, any unpaid interest
previously accrued on those loans is reversed against current period interest income. A loan may be restored to
accrual status when its financial status has significantly improved and there is no principal or interest past due.
A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the
lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual
status or aftier all principal has been collected. Interest income generally is not recognized on impaired loans
unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied
as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all
loan segments and classes.
20 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
Loan origination fees and direct loan origination costs are deferred and amortiized as an adjustment of the
related loan's yield using methods that approximate the interest method. The Company generally amortiizes
these amounts over the estimated average life of the related loans.
The loans purchased in the May 2011 branch acquisition were recorded at the estimated fair value at the time
of purchase. The estimated fair value contains both accretable and nonaccretable components. The accretable
component is amortized as an adjustment to the related loan yield over the average life of the loan. The
nonaccretable component represents probable loss due to credit risk and is reviewed by management periodically
and adjusted as deemed necessary.
Allowance for loan losses
The allowance for loan losses is established for estimated losses in the loan portfolio through a provision for loan
losses charged to earnings. For all loan classes, loan losses are charged against the allowance when management
believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is maintained at a level believed by management to be appropriate to absorb
probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the allowance is
based on management's periodic evaluation ofthe collectability ofthe loan portfolio, including the nature, volume
and risk characteristics ofthe portfolio, credit concentrations, trends in historical loss experience, estimated value
of any underiylng collateral, specific impaired loans and economic conditions. While management uses available
information to recognize losses on loans, future additions to the allowance for loan losses may be necessary
based on changes in economic conditions or other relevant factors.
In addition, various regulator/ agencies, as an integral part of their examination process, regulariy review the
Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses, with a corresponding charge to earnings, based on their judgments about information
available to them at the time of their examination, which may not be currentiy available to management.
The allowance consists of specific, general and unallocated components. The specific component relates to the
loans that are classified as impaired. Loans are also evaluated for impairment and may be classified as impaired
when management believes it is probable that the Company will not collect all the contractual interest and
principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are
restructured. A troubled debt restructuring occurs when the Company, for economic or legal reasons related to
the borrower's financial difflculties, grants a concession to the borrower that would otherwise not be granted.
Troubled debt restructuring may include the transfer of assets to the Company in partiial satisfaction of a troubled
loan, a modification of a loan's terms (such as reduction of stated interest rates below market rates, extension
of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction
of accrued interest, or reduction or deferment of loan payments in the near future), or a combination. A specific
reserve amount is allocated to the allowance for individual loans that have been classified as impaired based on
management's estimate of the fair value of the collateral for collateral dependent loans, an observable market
price, or the present value of anticipated future cash flows. The Company accounts for the change in present
value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual
consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject
to a restructuring agreement or have been identified as impaired as part of a larger customer relationship.
2012 Annual Report
j 21
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
The general component represents the level of allowance allocable to each loan portfolio segment with similar
risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for
each class of loan. Management deems a five year average to be an appropriate time frame on which to base
historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and
market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues.
The qualitative factors are determined based on the various risk characteristics of each portifolio segment. Risk
characteristics relevant to each portfolio segment are as follows:
• Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real
estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage
loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the
economy, including unemployment rates and housing prices, could have an efl'ect on the credit quality ofthis
segment.
• Construction real estate - Loans in this segment include residential and commercial construction properties,
land and land development loans. Repayment is dependent on the credit quality of the individual borrower
and/or the underiylng cash flows generated by the properties being constructed. The overall health of the
economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an
efl'ect on the credit quality of this segment.
• Commercial real estate - Loans in this segment are primarily propertiies occupied by businesses or income-
producing properties. The underiylng cash flows generated by the propertiies may be adversely impacted
by a downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates
which, in turn, could have an efl'ect on the credit quality of this segment. Management requests business
financial statements at least annually and monitors the cash flows of these loans.
• Commercial - Loans in this segment are made to businesses and are generally secured by nonreal estate
assets of the business. Repayment is expected from the cash flows of the business. A weakened economy,
and resultant decreased consumer or business spending, could have an efl'ect on credit quality of this
segment.
• Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile
purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the
individual borrower. The overall health of the economy, including unemployment, could have an effect on
the credit quality of this segment.
• Municipal - Loans in this segment are made to municipalities located within the Company's service area.
Repayment is primarily dependent on taxes or other funds collected annually by the municipalities.
Management considers there to be minimal risk surrounding the credit quality ofthis segment.
An unallocated component is maintained to cover uncertainties that could affect management's estimate of
probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the
underiylng assumptions used in the methodologies for estimating specific and general losses in the portfolio.
All evaluations are inherently subjective as they require estimates that are susceptible to significant revision as
more information becomes available or as changes occur in economic conditions or other relevant factors.
22
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
Other real estate owned
Real estate properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded based
on an independent appraisal or a broker price opinion at the estimated fair value less estimated selling costs
at the date of acquisition, establishing a new carr/ing basis. Thereaflier, valuations are periodically performed
by management, and the real estate is carried in Other assets at the lower of carrying amount or fair value,
less estimated cost to sell. Costs of significant property improvements are capitalized, if deemed recoverable,
whereas revenue and expenses from operations and changes in valuation are charged to Other expenses on the
Company's statement of income.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally
by the straight line method over the estimated useful lives of the assets. The cost of assets sold or otherwise
disposed of and the related accumulated depreciation are eliminated from the accounts and the resulting gains
or losses are reflected in the statement of income. Maintenance and repairs are charged to current expense as
incurred and the costs of major renewals and betterments are capitalized. Construction in progress is stated at
cost, which includes the cost of construction and other direct costs attributable to the construction. No provision
for depreciation is made on construction in progress until such time as the relevant assets are completed and
put into use.
Intangible assets
Intangible assets include goodwill, which represents the excess of the purchase price over the fair value of
net assets acquired in the 2011 acquisition of three New Hampshire branch offices, as well as a core deposit
intangible related to the deposits acquired (see Note 9). The core deposit intangible is amortiized on a straight line
basis over the estimated average life of the acquired core deposit base of 10 years. The Company evaluates the
valuation and amortization of the core deposit intangible if events occur that could result in possible impairment.
With respect to goodwill, in accordance with current authoritative guidance, the Company assesses qualitative
factors to determine whether the existence of events or circumstances leads to a determination that it is more
likely than not that the fair value of the Company is less than its carrying amount, which could result in goodwill
impairment.
Federal Home Loan Bank stock
As a member ofthe Federal Home Loan Bank ("FHLB") of Boston, Union is required to invest in Class B common
stock of the FHLB of Boston. The Class B common stock has a five year notice requirement for redemption and
there is no guarantee of future redemption. Also, there is the possibility of future capital calls by the FHLB of
Boston on member banks to ensure compliance with its capital plan. FHLB of Boston stock is reportied in Other
assets at its par value of $1.9 million at December 31, 2012 and 2011. The stock is nonmarketable, and is
redeemable by the FHLB of Boston at par value.
Company-owned life insurance
Company-owned life insurance ("COLI") represents life insurance on the lives of certiain current or former directors
or employees who have provided positive consent allowing the Company to be the beneficiary of such policies.
The Company utilizes COLI as tax-efficient funding for the benefit obligations to its employees and directors.
2012 Annual Report
| 23
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
including obligations under one of the Company's nonqualified deferred compensation plans. (See Note 15.)
The Company is the primary beneficiary ofthe insurance policies, Increases in the cash value ofthe policies, as
well as any gain on insurance proceeds received, are recorded in Other income, and are not currentiy subject to
income taxes. COLI is recorded at the cash value of the policies, less any applicable cash surrender charges of
which there are currently none. The Company reviews the financial strength ofthe insurance carriers prior to the
purchase of COLI to ensure minimum credit ratings of at least investment grade. The financial strength of the
carriers is reviewed annually and COLI with any individual carrier is limited by Company policy to 10% of capital
plus reserves.
Servicing assets
Servicing assets are recognized as separate assets when servicing rights are acquired through purchase or
sale of loans with servicing rights retained. Capitalized servicing rights are reported in Other assets, are initially
recorded at estimated fair market value and are amortized against noninterest income in proportion to, and
over the period of, the estimated future net ser^/icing income of the underiying loans. The estimated fair value
of capitalized servicing rights represents the present value of the future servicing fees arising from the right to
service loans that have been previously sold. Servicing assets are evaluated regulariy for impairment based
upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights
by predominant characteristics, such as interest rates and terms. Fair value of a stratum is determined using
prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using
market-based assumptions.
Impairment is recognized through a valuation allowance for an individual stratum, to the extent that estimated
fair value is less than the capitalized amount for the stratum.
Investment in real estate limited partnerships
The Company has purchased various limited partnership interests in affordable housing partnerships. These
partnerships were established to acquire, own and rent residential housing for eideriy, low or moderate income
residents in nort:heastern and central Vermont or in nortihwestern New Hampshire. The investments are accounted
for under a method approximating the equity method of accounting. These equity investments are recorded at
cost and adjusted for the Company's proportionate share of the partnerships' undistributed earnings or losses
through the statement of income.
Pension plans
Union sponsors a noncontributory defined benefit pension plan covering all eligible employees employed prior to
October 5, 2012. On that date, the Company closed The Union Bank Pension Plan ("Plan") to new partiicipants
and froze the accrual of retirement benefits for current participants. It is Union's intent to continue to maintain
the frozen Plan and related Trust and to distribute benefits to partiicipants at such time and in such manner as
provided under the terms of the Plan. The costs of this Plan, based on actuarial computations of current benefits
for employees, are charged to Pension and other employee benefits.
Union also has a contributory 401(k) pension plan covering all employees who meet certain service requirements.
The plan is voluntary, and Union, through the discretionary matching component of the plan, contributed fi'fty
cents for every dollar contributed by participants, up to six percent of each partiicipant's salary in 2012 and 2011.
24 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
Additionally, in 2012, a discretionary profit-sharing contribution was made to the plan in an amount equal to three
percent of each employee's salary.
Advertising costs
The Company expenses advert:ising costs as incurred and they are included in Other expenses in the Company's
Consolidated Statement of Income.
Earnings per common share
Earnings per common share for the period are computed based on the weighted average number of shares
of common stock issued, retroactively adjusted for stock splits and stock dividends and reduced for shares
held in treasury. The weighted average shares outstanding were 4,457,029 and 4,456,842 for the years ended
December 31, 2012 and 2011, respectively. There were incentive stock options with respect to 11,800 shares
and 14,000 shares outstanding at December 31, 2012 and December 31, 2011, respectively, excluded from the
computation of diluted earnings per share since dilution resulting from these stock options would be immaterial.
Income taxes
The Company prepares its federal income tax return on a consolidated basis. Federal income taxes are allocated
to members of the consolidated group based on taxable income. The Company recognizes income taxes under
the asset and liability method. This involves estimating the Company's actual current tax exposure as well as
assessing temporary differences resulting from difl'ering treatment of items, such as timing of the deduction
of expenses, for tax and GAAP purposes. These differences result in deferred tax assets and liabilities, which
are netiied and included in Other assets. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary diff'erences are expected
to be recovered or settled. The Company must also assess the likelihood that any deferred tax assets will be
recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must
be established. Significant management judgment is required in determining the provision for income taxes and
deferred tax assets and liabilities. Affordable housing tax credits are recognized as a reduction ofthe Provision for
income taxes in the year they are earned.
Off-balance-sheet financial instruments
In the ordinary course of business, the Company is a part:y to off-balance-sheet financial instruments consisting of
commitments to originate credit, unused lines of credit including commitments under credit card arrangements,
commitments to purchase investment securities, commitments to invest in real estate limited partinerships,
commercial letiiers of credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such
financial instruments are recorded in the financial statements when they become fixed and certain.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and
losses on investment securities available-for-sale that are not other than temporarily impaired and the unfunded
liability for the defined benefit pension plan, are not reflected in the statement of income. The cumulative effect
of such items, net of tax effect, is reported as a separate component of the equity section of the balance sheet
2012 Annual Report
| 25
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
(Accumulated othercomprehensive income or loss). Other comprehensive income or loss, along with net income,
comprises the Company's total comprehensive income or loss.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the
Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and the Company does not maintain efl'ective control over
the transferred assets through an agreement to repurchase them before their maturity.
Incentive stock option plan
The Company recognizes stock-based compensation expense based on the grant date estimated fair value of
stock-based awards over the vesting period of the awards. The stock issuable upon exercise of options granted
consists of authorized but unissued shares of the Company's $2.00 par value common stock and/or shares of
such common stock held in treasury.
Recent accounting pronouncements
In May 2011, FASB issued an Accounting Standards Update ("ASU"), Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to improve the comparability of fair
value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP
and International Financial Reporting Standards ("IFRS"). The amendments in this ASU explain how to measure
fair value. They do not require additional fair value measurements and are not intended to establish valuation
standards or aff'ect valuation practices outside of financial reportiing. The amendments change the wording used
to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about
fair value measurements. The amendments in this ASU are to be applied prospectively and are effective for
interim and annual periods beginning aftier December 15, 2011. Management has adopted the ASU, which did
not have a material effect on the Company's consolidated financial statements. (See Note 19.)
In June 2011, the FASB issued an ASU, Presentation of Comprehensive Income, to improve the comparability,
consistency and transparency of financial report:ing, to increase the prominence of items reported in other
comprehensive income and to facilitate convergence of GAAP and IFRS. The ASU eliminates the option to present
components of other comprehensive income as part: of the statement of changes in stockholders' equity and
requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both formats, an entity is required
to present each component of net income along with total net income, each component of other comprehensive
income along with a total for other comprehensive income, and a total amount for comprehensive income.
The amendments in the ASU are to be applied retrospectively and are eff'ective for annual and interim periods
beginning aflier December 15, 2011, except for the presentation requirements of reclassifications of items out of
accumulated other comprehensive income which have since been addressed in ASU 2013-02, issued in February
2013. Management has adopted the ASU and has opted to present two separate statements. (See Consolidated
Statements of Comprehensive Income and Note 23.)
In December 2011, the FASB issued an ASU, Disclosures about Off'setting Assets and Liabilities, to enhance
disclosures required to facilitate comparison between those entities that prepare their financial statements on the
26 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 1. Significant Accounting Policies (continued)
basis of GAAP and those entities that prepare their financial statements on the basis of IFRS by requiring improved
information about financial instruments and derivative instruments that are either (1) offset in accordance with
either Topic 210-20-45 (Balance Sheet Offsets) or Topic 815-10-45 (Derivatives & Hedging) or (2) subject to
an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in
accordance with either Topic 210-20-45 or Topic 815-10-45. The amendments in the ASU are to be applied
retrospectively for all comparative periods presented and are effective for annual and interim periods beginning
on or after January 1, 2013. Management has reviewed the ASU and does not believe that it will have a material
effect on the Company's consolidated financial statements.
In July 2012, the FASB issued an ASU, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived
Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and
complexity of performing an impairment test for indefinite-lived intangible assets (other than goodwill) by
simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing
guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors
to determine whether it is more likely than not that an indefinite long-lived intangible asset is impaired as a basis
for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic
350-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. The amendments are efl'ective
for annual and interim impairment tests peri'ormed for fiscal years beginning afl:er September 15, 2012. Eariy
adoption is permitted induding for annual and interim impairment tests performed as of a date before July 27,
2012. The Company does not have any indefinite-lived intangible assets other than goodwill and therefore the
ASU did not have any effect on the Company's consolidated financial statements.
In October 2012, the FASB issued an ASU, Technical Corrections and Improvements. The amendments in
this ASU represent changes to clarify the Codification, correct unintended application of guidance, or make
minor improvements to the Codification that are not expected to have a significant eff'ect on current accounting
practice or create a significant administrative cost to most entities. Additionally, the amendments make the
Codification easier to understand and the fair value measurement guidance easier to apply by eliminating
inconsistencies and providing needed clarifications. The ASU contains amendments that afl'ect a wide variety of
Topics in the Codification and apply to all report:ing entities within the scope of the affected accounting guidance.
The amendments in this ASU that do not have transition guidance were effective upon issuance and for public
entities, the amendments that are subject to the transition guidance are effective for fiscal periods beginning after
December 15, 2012. Management is currently reviewing this ASU and does not believe that it will have a material
efl'ect on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Reportiing of Amounts Reclassified Out of Accumulated Other
Comprehensive Income." This update requires entities to provide information about the amounts reclassified out
of accumulated other comprehensive income by component. In addition, entities are required to present, either
on the face ofthe statement where net income is presented or in the notes, significant amounts reclassified out
of accumulated other comprehensive income by the respective line items of net income, but only if the amount
reclassified is required under U.S. GAAP to be reclassified to net income in its entirety is in the same reportiing
period. The Company is required to adopt this update prospectively for periods beginning aflier December 15,
2012. The update may result in revised disclosures or presentation in the Company's financial statements.
2012 Annual Report
| 27
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 2. Restrictions on Cash and Cash Equivalents
The nature of the Company's business requires that it maintain amounts due from correspondent banks which,
at times, may exceed federally insured limits. The balances in these accounts at December 31, were as follows:
Noninterest bearing accounts
Federal Reserve Bank of Boston
FHLB of Boston
2012
2011
(Dollars in thousands)
$
639
41,363
282
$ 1,143
19,368
351
No losses have been experienced in these accounts and the Company believes it is not exposed to any significant
risk with respect to the accounts.
The Company had no requirement to maintain contracted clearing balances at December 31, 2012. A contracted
clearing balance of $1.0 million was required at December 31, 2011, which is included in the Federal Reserve
Bank of Boston balance above. Balances in excess of the contracted clearing amount at the Federal Reserve
Bank of Boston and a portiion ofthe funds at the FHLB of Boston are classified as overnight deposits as they earn
interest. The Company is required to maintain vault cash or noninterest bearing reserve balances with Federal
Reserve Bank of Boston. Total reserve balances required at December 31, 2012 and 2011 were $604 thousand
and $546 thousand, respectively, which were both satisfied by vault cash.
Note 3. Interest Bearing Deposits in Banks
Interest bearing deposits in banks consist of certificates of deposit purchased from various financial institutions.
Deposits at each institution are generally maintained at or below the Federal Deposit Insurance Corporation
("FDIC") insurable limit of $250 thousand. Cert:ificates are held with rates ranging from 0.40% to 5.05% and
mature at various dates through 2017, with $9.0 million scheduled to mature in 2013.
Note 4. Investment Securities
Investment securities as ofthe balance sheet dates consisted ofthe following:
December 31, 2012
Available-for-sale
Debt securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair
Value
U.S. Government-sponsored enterprises
Agency mort:gage-backed
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Mutual funds
Total
Held-to-maturity
$ 4,500
1,343
9,803
3,294
18,940
746
173
$19,859
$
22
36
664
28
750
66
-
816
$_
$ (3)
—
(5)
(22)
(30)
(15)
$(45)
$ 4,519
1,379
10,462
3,300
19,660
797
173
$20,630
U.S. Government-sponsored enterprises
$ 5,496
L
3
$(22)
$ 5,477
28 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (continued)
December 31, 2011
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises
Agency mortigage-backed
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Mutual funds
Total
Held-to-maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in
thousands)
$17,456
3,326
11,813
8,127
40,722
746
135
$
99
61
1,018
179
1,357
39
-
$(18)
(1)
(1)
(13)
(33)
(12)
Fair
Value
$17,537
3,386
12,830
8,293
42,046
773
135
$41,603
$ 1,396
$(45)
$42,954
U.S. Government-sponsored enterprises
$ 4,000
$
1
$ (3)
$ 3,998
Investment securities with a carrying amount of $6.7 million and $11.2 million at December 31, 2012 and 2011,
respectively, were pledged as collateral for public deposits, customer repurchase agreements and for other
purposes as required or permitted by law.
Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates,
aggregated by investment category and length of time that individual securities have been in a continuous loss
position, follows:
December 31, 2012
Debt securities:
U.S. Government-sponsored
enterprises
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Total
Less Than 12 Months 12 Months and over
Total
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Gross
Unrealized
Loss
Fair
Value
Fair
Value
(Dollars in
thousands)
$ 4,472
345
2,266
7,083
91
$ 7,174
$(25)
(5)
(22)
(52)
(7)
$(59)
$
-
—
—
—
42
$ 42
$
-
-
-
—
(8)
$_(8)
$ 4,472
345
2,266
7,083
133
$ 7,216
$(25)
(5)
(22)
(52)
(15)
$(67)
2012 Annual Report
29
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (continued)
December 31, 2011
Debt securities:
U.S. Government-sponsored
enterprises
Agency mort:gage-backed
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Total
Less Than 12 Months 12 Months and over
Total
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Gross
Unrealized
Loss
Fair
Value
Fair
Value
(Dollars in
thousands)
$ 7,389
—
347
3,075
10,811
193
$11,004
$(21)
-
(1)
(13)
(35)
(7)
$(42)
$
-
361
—
—
361
10
$371
$
-
(1)
—
-
(1)
(5)
$ 7,389
361
347
3,075
11,172
203
$(21)
(1)
(1)
(13)
(36)
(12)
$ (6)
$11,375
$(48)
The Company evaluates all investment securities on a quart:erly basis, and more frequently when economic
conditions warrant, to determine if an other-than-temporary impairment exists. A debt security is considered
impaired if the fair value is lower than its amort:ized cost basis at the report: date. If impaired, management then
assesses whether the unrealized loss is other-than-temporary.
Declines in the fair values of individual equity securities that are deemed to be other-than-temporary are reflected
in noninterest income when identified. An unrealized loss on a debt security is generally deemed to be other-than-
temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than
the amortiized cost basis ofthe debt security. The credit loss component of an other-than-temporary impairment
write-down is recorded, net of tax efl'ect, through net income as a component of net other-than-temporary
impairment losses in the consolidated statement of income, while the remaining portiion of the impairment loss is
recognized in other comprehensive income (loss), provided the Company does not intend to sell the underiying
debt security and it is "more likely than not" that the Company will not have to sell the debt security prior to
recovery.
Management considers the following factors in determining whether an other-than-temporary impairment exists
and the period over which the security is expected to recover:
The length of time, and extent to which, the fair value has been less than the amortized cost;
Adverse conditions specifically related to the security, issuer, industry, or geographic area;
The historical and implied volatility ofthe fair value ofthe security;
The payment structure ofthe debt security and the likelihood ofthe issuer being able to make payments that
may increase in the future;
Failure of the issuer of the security to make scheduled interest or principal payments;
Any changes to the rating of the security by a rating agency;
Recoveries or additional declines in fair value subsequent to the balance sheet date; and
The nature of the issuer, including whether it is a private company, public entity or government-sponsored
enterprise, and the existence or likelihood of any government or third party guaranty.
At December 31, 2012, held-to-maturity and available-for-sale securities, consisting of five U.S. Government-
sponsored enterprise securities, one tax exempt municipal security, five corporate bonds and four marketable
30 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 4. Investment Securities (continued)
equity securities had aggregate unrealized losses of $67 thousand. Two marketable equity securities had
unrealized losses greater than twelve months and the Company has the ability to hold such securities for the
foreseeable future. No declines were deemed by management to be other-than-temporary at December 31,
2012.
Proceeds from the sale of securities available-for-sale were $13.6 million and $2.3 million in 2012 and 2011,
respectively. Gross realized gains from the sale of securities available-for-sale were $674 thousand and $183
thousand in 2012 and 2011, respectively. Gross realized losses were $1 thousand in 2012 with no gross realized
losses in 2011. The specific identification method is used to determine realized gains and losses on sales of
available-for-sale securities.
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of
December 31, 2012, were as follows:
Available-for-sale
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Agency mortgage-backed securities
Amortized
Cost
Fair
Value
(Dollars in
thousands)
$
690
3,365
4,966
8,576
17,597
1,343
$
696
3,418
5,154
9,013
18,281
1,379
Total debt securities available-for-sale
$18,940
$19,660
Held-to-maturity
Due from five to ten years
Due afl:er ten years
Total debt securities held-to-maturity
$ 1,500
3,996
$ 5,496
$ 1,501
3,976
$ 5,477
Actual maturities may diff'er for certain debt securities that may be called by the issuer prior to the contractual
maturity. Actual maturities may diff'er from contractual maturities in agency mort:gage-backed securities because
the mortgages underiying the securities may be prepaid, usually without any penalties. Therefore, these agency
mort:gage-backed securities are shown separately and not included in the contractual maturity categories in the
above maturity summary.
Note 5. Loans Held for Sale and Loan Servicing
At December 31, 2012 and 2011, Loans held for sale consisted of conventional residential mortgages originated
for subsequent sale. At December 31, 2012 and 2011, the estimated fair value of these loans was in excess of
their carrying value, and therefore no valuation reserve was necessary for loans held for sale.
Commercial and mortigage loans serviced for others are not included in the accompanying balance sheets. The
unpaid principal balance of commercial and mortgage loans sen/iced for others was $260.5 million and $208.1
million at December 31, 2012 and 2011, respectively. Loans sold during 2012 consisted of $576 thousand in
qualifying small business loans and $125.7 million in residential loans, resulting in total loans sold of $126.3
2012 Annual Report
| 31
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 5. Loans Held for Sale and Loan Servicing (continued)
million. The net gains realized in 2012 on the sale of those loans amounted to $64 thousand and $3.6 million,
respectively. Loans sold in 2011 totaled $80.4 million and consisted of $293 thousand in qualifying small business
loans and $80.1 million in residential loans, resulting in net gains of $21 thousand and $1.5 million, respectively.
There were no obligations to repurchase loans for any amount at December 31, 2012, but there were contractual
risk sharing commitments on certiain sold loans totaling $339 thousand as of such date.
The Company generally retains the servicing rights on loans sold. At December 31, 2012 and 2011, the
unamortized balance of servicing rights on loans sold with servicing retained was $1.1 million and $818 thousand,
respectively, included in Other assets. The estimated fair value of these servicing rights was in excess of their
carrying value at both December 31, 2012 and 2011, and therefore no impairment reserve was necessary.
Loan servicing rights of $740 thousand and $481 thousand were capitalized in 2012 and 2011, respectively.
Amortization of servicing rights was $475 thousand and $312 thousand for 2012 and 2011, respectively. The
capitalization and amortization of mortigage servicing rights is included in Other income.
Note 6.Loans
The composition of Net loans at December 31, was as follows:
Residential real estate
Construction real estate
Commercial real estate
Commercial
Consumer
Municipal
Gross loans
Allowance for loan losses
Net deferred loan costs
Net loans
_ 2012
2011
(Dollars in
thousands)
$ 154,938
36,018
183,900
21,463
6,065
41,761
444,145
(4,657)
139
$439,627
$ 147,426
28,077
189,770
23,018
6,134
29,894
424,319
(4,226)
177
$ 420,270
The loans purchased in the May 2011 acquisition of three New Hampshire branches were recorded at $32.9
million, the estimated fair value at the time of purchase. The estimated fair value contains both accretable and
nonaccretable components. The accretable component is amortized as an adjustment to the related loan yield
over the average life ofthe loan. The nonaccretable component represents probable loss due to credit risk and is
reviewed by management periodically and adjusted as deemed necessary. At the acquisition date, the fair value
ofthe loans acquired resulted in an accretable loan premium component of $545 thousand, less a nonaccretable
credit risk component of $318 thousand. During the year ended December 31, 2012, the nonaccretable credit
risk component balance decreased $22 thousand due to a loss recognized on one acquired commercial loan. The
resulting balance ofthe nonaccretable credit risk component is $296 thousand at December 31, 2012. The net
carrying amounts ofthe acquired loans were $22.9 million and $27.9 million at December 31, 2012 and 2011,
respectively, and are included in the loan balances above.
32 I
2012 Annual Report
r
Union Bankshares, Inc
•
•
•^
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 6. Loans (continued)
'.
The following table summarizes activity in the accretable loan premium component for the acquired loan portfolio
Balance at beginning of year
Acquisitions
Loan premium amort:ization
Changes in expected cash flows due to paydowns
Balance at end of year
For The Years Ended
December 3 1,
2012
2011
-
(Dollars in
$491
-
(90)
53
thousands)
$
-
545
(54)
—
$454
$491
Residential real estate loans aggregating $11.4 million and $9.9 million at December 31, 2012 and 2011,
respectively, were pledged as collateral on deposits of municipalities. Qualified first mortigages held by Union
may also be pledged as collateral for borrowings from the FHLB of Boston under a blanket lien.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
December 31, 2012
Current
90 Days
and
over and
30-59 Days 60-89 Days accruing
(Dollars in thousands)
Nonaccrual
Total
Residential real estate
Construction real estate
Commercial real estate
Commercial
Consumer
Municipal
$ 148,479
35,944
179,739
20,541
6,012
41,761
$ 2,573
24
2,943
811
31
—
$ 1,274
6
812
39
10
—
$ 296
-
11
—
$ 2,316
44
406
72
1
—
$ 154,938
36,018
183,900
21,463
6,065
41,761
Total
$ 432,476
$6,382
$2,141
$ 307
$ 2,839
$444,145
December 31, 2011
Current
90 Days
and
over and
30-59 Days 60-89 Days accruing
(Dollars in thousands)
Nonaccrual
Total
Residential real estate
Construction real estate
Commercial real estate
Commercial
Consumer
Municipal
$ 140,330
26,849
182,122
22,519
6,045
29,894
$ 2,685
758
4,694
376
33
—
Total
$ 407,759
$ 8,546
$ 1,134
203
471
-
1
—
$ 1,809
$ 606
175
1,104
12
—
$ 2,671
92
1,379
111
55
—
$ 147,426
28,077
189,770
23,018
6,134
29,894
$ 1,897
$ 4,308
$424,319
Aggregate interest on nonaccrual loans not
December 31, 2012 and 2011, respectively
recognized was $1.0 million and $903 thousand forthe years ended
2012 Annual Report
I 33
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality
Changes in the Allowance for loan losses, by class of loans, for the years ended December 31, were as
follows:
2012
Residential
Real Estate
Construction
Real Estate
Commercial
Real Estate Commercial
Balance, December 31, 2011
Provision (credit) for loan losses
Recoveries of amounts
charged off"
Amounts charged off"
Balance, December 31, 2012
$1,250
152
8
1,410
(119)
$1,291
$367
110
12
489
(33)
$456
(Dollars in thousands)
$2,278
349
2,627
(95)
$2,532
$232
(79)
6
159
$159
Consumer,
Municipal
and
Unallocated
Total
$ 99
128
$4,226
660
17
244
(25)
$219
43
4,929
(272)
$4,657
Consumer,
Municipal
and
Unallocated
Total
2011
Balance, December 31, 2010
Provision (credit) for loan losses
Recoveries of amounts
charged off"
Amounts charged off"
Balance, December 31, 2011
$1,250
Residential
Real Estate
Construction
Real Estate
Commercial
Real Estate Commercial
(Dollars in thousands)
$1,033
242
$240
144
$2,117
430
$250
(31)
$115
(10)
$3,755
775
3
1,278
(28)
384
(17)
$367
2,547
(269)
14
233
(1)
27
132
(33)
44
4,574
(348)
$2,278
$232
$ 99
$4,226
The allocation ofthe Allowance for loan losses, summarized on t
by class of loan, as of the balance sheet dates
was as follows
.he basis ofthe Company's impairment methodology
December 31, 2012
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total allocated
Residential
Real Estate
Construction
Real Estate
Commercial
Real Estate Commercial
(Dollars in thousands)
Consumer,
Municipal
and
Unallocated
Total
$ 49
$ 18
$
53
$
-
$
-
$ 120
1,242
$1,291
438
$456
2,479
$2,532
159
$159
219
4,537
$219
$4,657
34 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality (continued)
December 31, 2011
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total allocated
Residential Construction Commercial
Real Estate
Real Estate
Real Estate Commercial
(Dollars in thousands)
Consumer,
Municipal
and
Unallocated
Total
$ 328
$ 12
$ 293
$ 41
$ 11
$ 685
922
$1,250
355
$367
1,985
$2,278
191
$232
88
3,541
$ 99
$4,226
Despite the allocation shown in the tables above, the Allowance for loan losses is general in nature and is available
to absorb losses from any loan type.
The recorded investment in loans, summarized on the basis ofthe Company's impairment methodology by class
of loan, as ofthe balance sheet dates was as follows:
December 31, 2012
Residential Construction Commercial
Real Estate Real Estate Real Estate Commercial Consumer Municipal
Total
(Dollars in thousands)
Individually evaluated
for impairment
Collectively evaluated
for impairment
Acquired loans
Total
$
703
$
145
$ 3,427
$
127
$
-
$
-
$ 4,402
144,921
145,624
9,314
35,866
36,011
7
168,066
171,493
12,407
20,851
20,978
485
5,846
5,846
219
41,253
416,803
41,253
508
421,205
22,940
$154,938
$36,018
$ 183,900
$21,463
$6,065
$41,761
$444,145
December 31, 2011
Residential
Real Estate
Construction
Real Estate
Commercial
Real Estate
Commercial Consumer
Municipal
Total
(Dollars in thousands)
Individually evaluated
for impairment
Collectively evaluated
for impairment
Acquired loans
Total
$ 2,810
$
92
$ 6,499
$
355
$ 33
$
-
$ 9,789
132,115
134,925
12,501
27,976
28,068
9
169,576
176,075
13,695
21,861
22,216
802
5,724
5,757
377
29,344
386,596
29,344
550
396,385
27,934
$147,426
$28,077
$ 189,770
$23,018
$6,134
$29,894
$424,319
2012 Annual Report
I 35
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality (continued)
Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit
personnel with such ratings updated annually or more frequently if warranted. The following is an overview ofthe
Company's loan rating system:
1-3 Rating - Pass
Risk-rating grades " 1" through "3" comprise those loans ranging from those with lower than average credit risk,
defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry
trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that,
while creditworiihy, exhibit some characteristics requiring special attention by the account officer.
4 /M Rating - Satisfactory/Monitor
Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While
potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned.
When warranted, these credits may be monitored on the watch list.
5-8 Rating - Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderiy liquidation of debt. The loan may be
inadequately protected by the net worth and paying capacity of the obligor and/or the underiying collateral is
inadequate.
The following tables summarize the loan ratings applied to the Company's loans by class as ofthe balance sheet
dates:
December 31, 2012
Residential Construction Commercial
Real Estate Real Estate Real Estate Commercial Consumer Municipal
Total
(Dollars in thousands)
Pass
Satisfactory/Monitor
Substandard
Acquired loans
Total
$134,737
7,749
3,138
145,624
9,314
$30,115
5,751
145
36,011
7
; 117,616
46,174
7,703
171,493
12,407
$18,258
2,476
244
20,978
485
$5,722
102
22
5,846
219
$41,253
$347,701
62,252
11,252
41,253
508
421,205
22,940
$154,938
$36,018
$183,900
$21,463
$6,065 $41,761 $444,145
December 31, 2011
Residential Construction Commercial
Real Estate Real Estate Real Estate Commercial Consumer Municipal
Total
(Dollars in thousands)
Pass
Satisfactory/Monitor
Substandard
Acquired loans
Total
$127,338
4,777
2,810
134,925
12,501
$26,928
1,048
92
28,068
9
i 135,764
33,812
6,499
176,075
13,695
519,069
2,792
355
22,216
802
$5,652
72
33
5,757
377
$29,344
$344,095
42,501
9,789
29,344
550
396,385
27,934
$147,426
$28,077
$189,770
$23,018
$6,134 $29,894 $424,319
36
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality (continued)
Acquired loans are risk rated, as appropriate, according to the Company's loan rating system, but such ratings
are not taken into account in establishing the allowance for loan losses. Rather, in accordance with applicable
accounting principles, acquired loans are initially recorded at fair value, determined based upon an estimate of
the amount and timing of both principal and interest cash flows expected to be collected and discounted using a
market interest rate, which includes an estimate of future credit losses expected to be incurred over the life ofthe
portfolio. The primary credit quality indicator for acquired loans is whether there has been a decrease in expected
cash flows. Monitoring ofthis portfolio is ongoing to determine if there is evidence of deterioration in credit quality
since acquisition. As of December 31, 2012, there was no allowance for loan losses for acquired loans.
The following table provides information with respect to impaired loans by class of loan as of and for the year
ended December 31, 2012:
December 3 1, 2012
Recorded
Investment (1)
Principal
Balance (1)
Related
Allowance
For The Year Ended
December 3 1, 2012
Average
Recorded
Investment
Interest
Income
Recognized
With an allowance recorded:
Residential real estate
Construction real estate
Commercial real estate
With no allowance recorded:
Residential real estate
Commercial real estate
Commercial
Total:
Residential real estate
Construction real estate
Commercial real estate
Commercial
$ 354
145
2,380
2,879
349
1,047
127
1,523
703
145
3,427
127
(Dollars
in thousands)
$ 360
150
2,411
2,921
$ 49
18
53
120
491
1,133
127
1,751
851
150
3,544
127
—
—
—
—
49
18
53
—
Total
$ 4,402
$ 4,672
$ 120
$ 529
46
2,514
51
$ 3,140
$
9
1
115
2
$ 127
(1) Does not reflect government guaranties on impaired loans as of December 31, 2012 totaling $770 thousand.
2012 Annual Report
37
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality (continued)
The following table provides information with respect to impaired loans by class of loan as of and for the year
ended December 31, 2011:
December 3 1, 2011
Recorded
Investment (1)
Principal
Balance (1)
Related
Allowance
For The Year Ended
December 3 1, 2011
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars
in thousands)
With an allowance recorded:
Residential real estate
Commercial real estate
With no allowance recorded:
Residential real estate
Commercial real estate
Total:
Residential real estate
Commercial real estate
Total
$ 241
1,907
2,148
177
318
495
418
2,225
$ 2,643
$ 243
1,930
2,173
252
374
626
495
2,304
$55
21
76
—
—
—
55
21
$ 2,799
$76
$ 375
2,347
$ 2,722
$
5
81
$ 86
(1) Does not reflect government guaranties on impaired loans as of December 31, 2011 totaling $88 thousand.
Troubled debt restructured loans as of December 31, 2012 by class of loan include three commercial real
estate, two construction real estate, and five residential real estate loans totaling $2.9 million that represent
loan modifications in which a concession was provided to the borrower, such as due date extensions, maturity
date extensions, interest rate reductions, protective advances or the forgiveness of accrued interest. One of
the restructured commercial real estate loans and three of the restructured residential real estate loans at
December 31, 2012 were troubled debt restructured loans totaling $2.2 million as of December 31, 2011.
Troubled loans, that are restructured and meet established thresholds, are classified as impaired and a specific
reserve amount is allocated to the allowance on the basis of the fair value of the collateral for collateral dependent
loans, an observable market price, or the present value of anticipated future cash flows.
38
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 7. Allowance for Loan Losses and Credit Quality (continued)
The following table provides new troubled debt restructure activity by loan type for the years ended
December 31, 2012 and 2011:
New Troubled Debt Restructurings During the
Year Ended December 31, 2012
New Troubled Debt Restructurings During the
Year Ended December 31, 2011
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
(Dollars in thousands)
Residential real
estate
Construction real
estate
Commercial real
estate
2
2
2
$ 91
$ 91
1
$238
$246
145
513
145
513
—
—
—
—
During the year ended December 31, 2012, the two residential real estate loans and two construction real estate
loans modified consisted of extensions of the due dates and maturity dates and the two commercial real estate
loans modified consisted of interest rate reductions, with one including a modification of payment terms as well.
The residential real estate loan modified during the year ended December 31, 2011 consisted of an interest rate
reduction, forgiveness of accrued interest, a protective advance for delinquent taxes, and extension of due date.
There were no troubled debt restructured loans modified within the previous twelve months that had subsequently
defaulted during the years ended December 31, 2012 and 2011. Troubled debt restructured loans are considered
defaulted at 90 days past due.
At December 31, 2012 and 2011, the Company was not committed to lend any additional funds to borrowers
whose loans were nonperforming, impaired or restructured.
Note 8. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at December 31, were as follows:
Land and land improvements
Building and improvements
Furniture and equipment
Construction in progress and deposits on equipment
Less accumulated depreciation
2012
(Dollars in
2011
thousands)
$ 2,411
9,699
6,515
202
18,827
(8,538)
$ 2,163
8,513
6,405
245
17,326
(8,163)
$10,289
$ 9,163
Depreciation included in Occupancy and Equipment expenses amounted to $887 thousand and $692 thousand
for the years ended December 31, 2012 and 2011, respectively.
2012 Annual Report
39
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 8. Premises and Equipment (continued)
The Company is obligated under noncaneelable operating leases for premises that expire in various years through
the year 2017. Options to renew for additional periods are available with these leases. Future minimum rental
commitments for these leases with original or remaining terms of one year or more at December 31, 2012 were
as follows:
2013
2014
2015
2016
2017
(Dollars in thousands)
$ 109
66
49
49
10
$ 283
Rent expense for 2012 and 2011 amounted to $154 thousand and $190 thousand, respectively. Occupancy
expense is shown in the consolidated Statements of Income, net of rental income of $166 thousand and $97
thousand in 2012 and 2011, respectively.
Note 9. Goodwill and Other Intangible Assets
As a result of the acquisition of three New Hampshire branches in May 2011, the Company recorded goodwill
amounting to $2.2 million. The goodwill is not amortiizable. Goodwill is evaluated for impairment annually, in
accordance with current authoritative guidance. Management assesses qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the fair
value ofthe Company, in total, is less than its carrying amount. Management is not aware ofany such events or
circumstances that would cause it to conclude that the fair value of the Company is less than its carrying amount.
The Company also recorded $1.7 million of acquired identifi'able intangible assets in connection with the branch
acquisition, representing the core deposit intangible which is subject to straight-line amortiization over the
estimated 10 year average life of the core deposit base, absent any future impairment. Management will evaluate
the core deposit intangible for impairment if conditions warrant.
Amoriiization expense for the core deposit intangible was $170 thousand and $100 thousand for 2012 and
2011, respectively. The amortization expense is included in other noninterest expenses and is deductible for tax
purposes. As of December 31, 2012, the remaining amortiization expense related to the core deposit intangible,
absent any future impairment, is expected to be as follows:
2013
2014
2015
2016
2017
Thereafter
Total
(Dollars in thousands)
$ 171
171
171
171
171
583
$ 1,438
40 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 10. Other Real Estate Owned
There were 12 properties valued in the aggregate at $1.1 million in other real estate owned at December 31,
2012 and 11 propertiies valued in the aggregate at $1.5 million at December 31, 2011, which are included in
Other assets. There was an allowance for losses on other real estate owned of $228 thousand and $91 thousand
which have been netted out ofthe foregoing values at December 31, 2012 and 2011, respectively, and have been
charged to earnings in Other expenses in the applicable period.
Note 11. Investment in Real Estate Limited Partnerships
The Company has purchased from time to time various limited partnership interests established to acquire, own
and rent residential housing for eideriy, low or moderate income individuals in northern Vermont and northwestern
New Hampshire. The carrying values of investments carried at equity were $3.8 million and $4.5 million at
December 31, 2012 and 2011, respectively. There was no capital contribution payable at December 31, 2012.
The capital contribution payable related to these investments was $893 thousand at December 31, 2011 and is
included in Accrued interest and other liabilities. The provision for undistributed net losses of the part:nerships
charged to earnings was $660 thousand for 2012 and $515 thousand for 2011. The federal income tax credits
related to these investments were $597 thousand and $455 thousand for the years ended December 31, 2012
and 2011, respectively, and are recorded as a reduction ofthe Provision for income taxes.
Note 12. Deposits
The following is a summary of interest bearing deposits at December 31:
Interest bearing checking accounts
Savings and money market accounts
Time deposits, $100,000 and over
Other time deposits
2012
(Dollars in
2011
thousands)
$103,422
170,083
74,315
78,458
$426,278
$ 88,332
150,726
74,557
83,168
$396,783
2013
2014
2015
2016
2017
December 31, 2012:
(Dollars in thousands)
$105,910
22,067
16,271
2,979
5,546
$ 152,773
Note 13. Borrowed Funds
Borrowed funds were comprised of option advance borrowings from the FHLB of Boston of $11.8 million and $22.3
million and secured customer repurchase agreement sweeps of $4.0 million and $6.7 million at December 31,
2012 and 2011, respectively.
2012 Annual Report
| 41
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 13. Borrowed Funds (continued)
The FHLB of Boston option advance borrowings are a mix of straight bullets, balloons and amortizers with
maturities through 2027. All of the FHLB of Boston borrowings had fixed interest rates ranging from 0.99% to
5.52% at December 31, 2012 and ranging from 2.25% to 5.61% at December 31, 2011. The weighted average
interest rates on the borrowings were 3.98% and 4.06% at December 31, 2012 and 2011, respectively.
The contractual payments due for FHLB of Boston option advance borrowings as of December 31, 2012 were as
follows:
2013
2014
2015
2016
2017
Thereafter
(Dollars in thousands)
$ 716
750
477
437
3,007
6,371
$11,758
As of December 31, 2012, the Bank's total FHLB of Boston borrowing capacity, based on its holding of FHLB of
Boston stock, was $27.4 million, of which $15.6 million was unused and available for additional borrowings of
either a short-term or long-term nature.
Collateral on FHLB of Boston borrowings consists of FHLB of Boston stock purchased by Union, all funds placed
on deposit with the FHLB of Boston, qualified first mortgages held by Union, and any additional holdings which
may be pledged as security.
Union also maintains lines of credit with correspondent banks for the purchase of overnight federal funds. As of
December 31, 2012, the total available amount on these lines was $12.0 million, with no outstanding borrowings.
Interest on these borrowings is chargeable at the federal funds rate at the time of the borrowing and is payable
daily. Union had no borrowings from the Federal Resen/e discount window or on Company repurchase agreement
lines of credit at December 31, 2012 or 2011.
Secured customer repurchase agreement sweeps amounted to $4.0 million and $6.7 million at December 31,
2012 and 2011, respectively. These agreements are collateralized by U.S. Government-sponsored enterprise
securities with a book value of $4.4 million and fair value of $4.5 million at December 31, 2012 and a book value
and fair value of $7.5 million at December 31, 2011. The average daily balance of these repurchase agreement
sweeps was $3.3 million and $2.7 million during 2012 and 2011 with weighted average interest rates of 0.51%
and 0.59%, respectively. The maximum borrowings outstanding on these agreements during 2012 and 2011
was $6.6 million and $7.4 million, respectively. These repurchase agreements mature the next business day and
carried weighted average interest rates of 0.38% and 0.58% as of December 31, 2012 and 2011, respectively.
42 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Income Taxes
The components of the Provision for income taxes for the years ended December 31, were as follows:
Current tax provision
Deferred tax provision (benefit)
2012
2011
(Dollars in thousands)
$ 2,449
(786)
$ 1,663
$ 524
595
$1,119
The total provision for income taxes differs from the amounts computed at the statutory federal income tax rate
of 34% primarily due to the following for the years ended December 31:
Computed "expected" tax expense
Tax exempt interest
Increase in cash surrender value of life insurance
Tax credits
Other
2011
2012
(Dollars in thousands)
$ 2,892
(510)
(135)
(597)
13
$ 1,663
$ 2,155
(424)
(36)
(557)
(19)
$ 1,119
Listed below are the significant components ofthe net deferred tax asset at December 31:
Components ofthe deferred tax asset
Bad debts
Nonaccrual loan interest
Deferred compensation
Net pension liability
Core deposit intangible
Other
Total deferred tax asset
Components ofthe deferred tax liability
Depreciation
Mori:gage servicing rights
Limited partnership investments
Unrealized gain on investment securities available-for-sale
Goodwill
Total deferred tax liability
Net deferred tax asset
2012
(Dollars in
2011
thousands)
$ 1,405
353
384
923
31
329
3,425
(482)
(368)
(134)
(262)
(80)
(1,326)
$ 2,099
$ 1,239
307
417
1,931
11
110
4,015
(521)
(278)
(211)
(460)
(29)
(1,499)
$ 2,516
Deferred tax assets are recognized subject to management's judgment that it is more likely than not that the
deferred tax asset will be realized. Based on the temporary taxable items, historical taxable income and estimates
of future taxable income, the Company believes that it is more likely than not that the deferred tax assets at
December 31, 2012 will be realized and therefore no valuation allowance is warranted.
2012 Annual Report
I 43
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 14. Income Taxes (continued)
Net deferred income tax assets are included in Other assets in the balance sheet at December 31,2012 and 2011.
Based on management's evaluation, management has concluded that there were no significant uncertiain tax
positions requiring recognition in the Company's financial statements at December 31, 2012 and 2011. Although
the Company is not currently the subject of a tax examination by the Internal Revenue Service ("IRS"), the
Company's tax years ended December 31, 2009 through 2011 are open to examination by the IRS under the
applicable statute of limitations. The 2012 tax return has not yet been filed.
The Company may from time to time be assessed interest and/or penalties by federal or state tax jurisdictions,
although any such assessments historically have been minimal and immaterial to the Company's financial results.
In the event that the Company receives an assessment for interest and/or penalties, it will be classified in the
financial statements as Other expenses.
Note 15. Employee Benefit Plans
Defined Benefit Pension Plan: Union sponsors a noncontributory defined benefit pension plan covering all eligible
employees employed prior to October 5, 2012. On October 5, 2012, the Company closed The Union Bank Pension
Plan ("Plan") to new participants and froze the accrual of retirement benefits for current participants. It is Union's
current intent to maintain the frozen Plan and related Trust and to distribute benefits to partiicipants at such time
and in such manner as provided under the terms of the Plan. The Company will continue to recognize pension
expense and cash funding obligations for the remaining life of the associated liability for the frozen benefits
under the Plan. The Plan provides defined benefi'ts based on years of service and final average salar/ prior to
October 5, 2012.
There was a $1.0 million minimum required contribution under the ERISA guidelines for 2012 and a $576
thousand minimum required contribution for 2011. Union elected to utilize a port:ion ofthe pre-funding balance to
ofl'set $424 thousand ofthe minimum required contribution for 2012. Union is awaiting the December 31, 2012
actuarial valuation to determine whether to make a final 2012 contribution to the Plan or to utilize an additional
portion of the pre-funding balance to satisfy the remainder of the 2012 minimum required contribution due
September 30, 2013. Union measures defined benefit plan assets and obligations as of December 31, its fiscal
year-end.
Union's policy is to accrue annually an amount equal to the actuarially calculated expense for future benefits.
Union made tax deductible voluntary contributions of $1.4 million to the Plan in 2011 over and above the minimum
required, which is included in 2011 employer contributions below. Information pertaining to the activity in the
Plan is as follows:
44 I
2012 Annual Report
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Union Bankshares, Inc.
Note 15. Employee Benefit Plans (continued)
Obligations and funded status at December 31:
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefi'ts paid
Projected benefit obligation at end of year
Change in fair value of plan assets
Fair value of plan assets at beginning of year
Actuarial gain (loss) on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Net liability for pension benefits
Accumulated benefit obligation at December 31
2012
(Dollars ir
2011
thousands)
$19,823
818
838
(3,009)
(459)
18,011
14,144
1,573
—
(459)
15,258
$15,230
680
838
3,400
(325)
19,823
12,779
(310)
2,000
(325)
14,144
$ (2,753)
$ (5,679)
2012
2011
(Dollars in
thousands)
$18,011
$15,556
The impact ofthe Plan activity for 2012 and 2011 on other comprehensive income (loss) is detailed in Note 23.
The Company uses the alternate amortization method for prior service costs, as provided in FASB ASC Topic 715,
Employers' Accounting for Pensions.
Net periodic pension benefit cost for 2012 and 2011 consisted ofthe following components:
Service cost
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss
Net periodic pension benefit cost
2012
2011
(Dollars in thousands)
$ 818
838
(965)
10
494
$ 1,195
$ 680
838
(876)
6
185
$ 833
It is estimated that the net periodic pension benefit cost for 2013 will include approximately $190 thousand of
amort:ization of net accumulated other comprehensive loss.
Weighted average assumptions used to determine pension benefi't obligation were a discount rate of 3.95%
and 4.41% for December 31, 2012 and December 31, 2011, respectively. A rate of compensation increase of
2012 Annual Report
45
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 15. Employee Benefit Plans (continued)
4.25% was utilized for 2011. No rate of compensation increase was utilized for 2012 due to the freeze on benefi't
accruals.
Weighted average assumptions used to determine net periodic pension benefit cost for the years ended
December 31, 2012 and 2011 were a discount rate of 3.85% and 5.56%, respectively, a rate of compensation
increase of 4.50% for 2011 and actual wages paid to the freeze date of October 5, 2012 for 2012, and an
expected long-term rate of return on plan assets of 6.75% for both years.
The overall expected long-term rate of return on assets is consistent with future expected long-term rate of
inflation assumptions as well as consideration of historical asset returns and the current financial marketplace.
The return is more conservative than the Plan's long-term actual results and is at a level that management
believes is sustainable. The 2012 pension benefit obligation discount rate is based on the Plan's expected benefi't
payment stream utilizing December 2012 benchmark pension liability index yield curve spot rates and a review
of published high quality bond indices.
Union's Plan asset allocations at December 31, 2012 and 2011, by asset category based on their fair values were
as follows:
Asset Category
Cash and cash equivalents
Interest bearing deposits in banks
Debt securities
Equity securities
Mutual and exchange traded funds
Total
2012
2.7%
6.0%
19.8%
18.1%
53.4%
100.0%
2011
5.2%
8.6%
19.1%
17.8%
49.3%
100.0%
The investment philosophy for the Plan is to prudently invest the assets of the plan and future contributions
received in a diversified manner that will ensure the future pension benefits due to partiicipants and beneficiaries
over a long-term horizon as well as provide liquidity to pay current benefits. The Trustees of the Plan seek to
protect the Plan assets through prudent asset allocation, FDIC insurance on a portion of plan assets, utilization of
professional asset management and periodic reviews. Investments in stocks and fixed income investments are
diversified in a way which is consistent with risk tolerance, investment objectives and current financial market
risks.
In order to achieve this goal the investment objective is to maintain a mix of growth and income investments
allocated as follows, with no more than 20% ofthe equity port:ion ofthe portfolio invested in foreign equities:
Equity securities and international mutual funds
Debt securities
Cash and cash equivalents
55-70%
30-45%
0-5%
There are no securities of the Company or Union held by the Plan. The assets of the Plan are managed by the
Trust & Asset Management Division of Union with the advice of its registered investment adviser, under the
guidance ofthe Plan's Trustees. There are no estimated employer contributions for 2013.
46 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 15. Employee Benefit Plans (continued)
The fair values of the Company's Plan investments at December 31, 2012 and 2011, segregated by fair value
hierarchy level, are summarized below:
Fair Value Measurements
December 3 1, 2012
Significant
Unobservable
Inputs
(Level 3)
$
Significant
Unobservable
Inputs
(Level 3)
$
Interest bearing deposits in banks
U.S. Government
U.S. Government-sponsored enterprises
Corporate bonds
Marketable equity securities:
Information technology
Financial
Industrials
Healthcare
Consumer
Energy
Other
Mutual and exchange traded funds
Total
Interest bearing deposits in banks
U.S. Government
U.S. Government-sponsored enterprises
Agency mortigage-backed
Corporate bonds
Marketable equity securities:
Information technology
Financial
Industrials
Healthcare
Consumer
Energy
Other
Mutual and exchange traded funds
Total
Fair Value
$
922
541
203
2,272
554
301
288
361
695
397
168
8,112
$14,814
Fair Value
$ 1,219
739
211
100
1,645
407
294
279
432
637
288
182
6,935
$13,368
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
$ 922
481
203
1,911
-
60
-
361
$
554
301
288
361
695
397
168
8,112
$11,297
-
-
-
-
$ 3,517
Fair Value Measurements
December 31, 2011
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
$ 672
547
739
-
211
-
100
-
1,541
104
407
294
279
432
637
288
182
6,935
$10,105
-
-
-
-
-
-
-
$ 3,263
2012 Annual Report
147
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 15. Employee Benefit Plans (continued)
The fair values of the Plan assets are determined by an independent pricing service which, given the nature of
the assets within the portfolio, is able to utilize quoted prices in an active market to value the majority of the
assets held. The market inputs sought for assets without a specific quote listed, in approximate order of priority,
include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids, ofl'ers and reference data including market research publications that vary by asset class. For
certain security types, additional inputs may be used, or some standard inputs may not be applicable, There were
no significant transfers in or out of Levels 1 and 2 for the year ended December 31, 2012.
The following table summarizes the estimated future benefit payments expected to be paid under the Plan:
2013
2014
2015
2016
2017
Years 2018 to 2022
(Dollars in thousands)
$ 534
601
615
625
656
3,892
Nonqualified Deferred Compensation Plans: The Company and Union have two nonqualified deferred compensation
plans for directors and certain key ofiicers. The 2008 Amended and Restated Nonqualified Deferred Compensation
Plan of Union Bankshares, Inc. ("2008 Plan") replaced a 1990 Plan that was not compliant with section 409A of
the Internal Revenue Code. The Company accrued an expense of $10 thousand in 2012 and $8 thousand in 2011
underthe 2008 Plan. The benefit obligations underthe 2008 Plan represent general unsecured obligations ofthe
Company and no assets are segregated for such payments. However, the Company and Union have purchased
life insurance contracts on the lives of each part:icipant in orderto fund these benefits. The benefits accrued under
the 2008 Plan aggregated $972 thousand and $1.1 million at December 31, 2012 and 2011, respectively, and are
included in Accrued interest and other liabilities. The cash surrender value of the life insurance policies purchased
to fund the 2008 Plan aggregated $1.2 million and $1.6 million at December 31, 2012 and 2011, respectively,
and is included in Company-owned life insurance in the Company's consolidated Balance Sheets. A death benefi't
receivable of $806 thousand is included in Other assets as of December 31, 2012.
An Executive Nonqualified Excess Plan was adopted in 2006 for directors and cert:ain key offlcers. The 2006
Plan is a defined contribution plan which provides a means by which participants may elect to defer receipt of
current compensation from the Company or its subsidiary in order to provide retirement or other benefi'ts as
selected in the individual adoption agreements. Participants may select among designated reference investments
consisting of investment funds, with the performance ofthe part:icipant's account mirroring the selected reference
investment. Distributions are made only upon a qualifying distribution event, which may include a separation
from service, death, disability or unforeseeable emergency, or upon a date specified in the partiicipant's deferral
election form. The 2006 Plan is intended to comply with the provisions of Section 409A ofthe Internal Revenue
Code. The 2006 Plan is unfunded, representing a general unsecured obligation ofthe Company of $158 and $128
thousand as of December 31, 2012 and 2011, respectively.
401(k) Plan: Union maintains a defined contribution 401(k) plan under which employees may elect to make
tax deferred contributions of up to the IRS maximum from their annual salary. All employees meeting service
requirements are eligible to partiicipate in the plan. Union may make employer matching and profit-sharing
contributions to the 401(k) plan at the discretion of the Board of Directors. Company contributions are fully
vested after three years of service. Employer contributions to the plan were $433 and $168 thousand for 2012
and 2011, respectively. The 2012 employer contribution includes a profit-sharing component in the amount of
$242 thousand.
48 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 16. Stock Option Plan
Under the 2008 Incentive Stock Option Plan ("Plan"), the Company's Board of Directors may grant certiain key
employees incentive stock options to purchase shares of the Company's common stock. As of December 31,
2012, ofthe 50,000 shares authorized for option grants underthe Plan, 31,000 shares remain available for future
option grants. The Company's 1998 Incentive Stock Option Plan expired in 2008. As of December 31, 2012,
there were no remaining options granted under the 1998 Plan outstanding as the last of these options expired
December 18, 2012.
The exercise price of the options under the Plan is equal to the market price of the stock at the date of grant;
therefore, the intrinsic value of the options at the date of the grant is $0. All options have a one year requisite
service period and vest after one year. Options granted prior to 2012 have a five year contractual term, options
issued in 2012 have a seven year contractual term. There were 6,000 options granted in 2012 and 3,000 options
granted in 2011. The compensation cost charged against income for the 2008 Plan was $8 thousand for 2012
and $9 thousand for 2011, respectively.
The fair value of each option award is estimated on the date of grant using a Black-Scholes based option valuation
model. The estimated weighted average grant date fair values for options granted during 2012 and 2011 and the
weighted average assumptions used are presented in the following table:
Fair value per share
Expected volatility
Expected dividends
Risk free interest rate
Expected term (in years)
Vesting periods (in years)
2012
$ 2.06
26,05%
5.10%
0.33%
2.63
1.00
2011
$ 5.20
52.18%
5.10%
0.97%
3.00
1.00
Expected volatilities are based on historical volatilities ofthe market value ofthe Company's stock, and, possibly,
other factors. The Company uses historical data to estimate option exercise and employee termination within the
valuation model. The expected term of options granted is estimated from past exercise activity, and represents
the period of time that granted options are expected to be outstanding. The risk free interest rate for periods
within the contractual life of the option is based on the U.S, Treasury yield curve at the time of grant. The
expected dividend rate is estimated by annualizing the last dividend paid divided by the closing price of the
Company's stock on the grant date of the option.
The following summarizes the option activity under the 2008 Plan and prior plan for the year ended December 31,
2012:
Outstanding at January 1, 2012
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2012
Exercisable at December 31, 2012
Weighted
Average
Exercise
Price
$ 18.84
19.60
17.15
18.78
19,36
19.12
Shares
14,000
6,000
(700)
(7,500)
11,800
5,800
Weighted
Average
Remaining
Contractual
Term
Period
End
Aggregate
Intrinsic
Value
4.65
2.38
2012 Annual Report
49
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 16. Stock Option Plan (continued)
Proceeds of $12 thousand were received from the exercise of options for 700 shares at $17.15 per share during
2012. Proceeds of $26 thousand were received from the exercise of options for 1,500 shares at $17,15 per share
during 2011. The total intrinsic value ofthe options exercised was $1 thousand and $3 thousand for 2012 and
2011, respectively.
As of December 31, 2012, there was $10 thousand of unrecognized compensation cost related to unvested stock
options granted underthe Plan which will be recognized in 2013,
Note 17. Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with ofl'-balance-sheet risk in the normal course of business
to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps
and floors writi:en on adjustable-rate loans, commitments to partiicipate in or sell loans, commitments to buy or
sell securities, guarantees on certiain sold loans and risk-sharing commitments on certain sold loans under the
Mortigage Partnership Finance ("MPF") program with the FHLB of Boston. At December 31, 2012 and 2011, the
Company had binding loan commitments to sell residential mortgages at fixed rates totaling $1.9 million and
$4,4 million, respectively. The fair market value of these commitments is not material to the Company's financial
statements.
Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in part:icular classes of financial instruments and the potential impact on the
Company's future financial position, financial performance and cash flow.
The Company's exposure to credit loss in the event of nonperi'ormance by the other partly to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors embedded in
adjustable-rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company
controls the risk of interest rate cap agreements through credit approvals, limits and monitoring procedures.
Interest rate caps and floors on adjustable rate loans permit the Company to manage its interest rate risk and
cash flow risk on these loans within parameters established by Company policy.
The Company generally requires collateral or other security to support; financial instruments with credit risk.
The following table shows financial instruments outstanding whose contract amount represents credit risk at
December 31:
Commitments to originate loans
Unused lines of credit
Standby and commercial letters of credit
Credit card arrangement
MPF credit enhancement obligation, net (See Note 18)
Commitment to purchase investment securities
Total
50
2012 Annual Report
Contract or
Notional Amount
2012
(Dollars in
$ 7,320
60,228
1,886
1,008
307
1,021
$71,770
2011
thousands)
$10,176
59,650
1,811
933
86
504
$73,160
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 17. Financial Instruments With Off-Balance-Sheet Risk (continued)
Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate
as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates within 90 days ofthe commitment. Unused lines of credit are generally renewable at least annually
except for home equity lines which usually have a specified draw period followed by a specified repayment period.
Unused lines may have other termination clauses and may require payment of a fee.
Since many ofthe commitments and lines are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit
wortihiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company,
upon issuance of a commitment to extend credit is based on management's credit evaluation of the customer.
Collateral held varies but may indude real estate, accounts receivable, inventory, propert:y, plant and equipment
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third partly. Those guarantees are issued to support the customer's private borrowing arrangements
or guarantee the customer's contractual peri'ormance on behalf of a third partly. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to customers and the Company
evaluates each customer's creditworthiness on a case-by-case basis. The fair value of standby letters of credit has
not been included in the Company's balance sheets for either year as the fair value is immaterial.
The Company did not hold or issue derivative instruments or hedging instruments during the years ended
December 31, 2012 and 2011. The commitment to purchase investment securities reflects management's
strategy to redeploy funds that were in overnight deposit accounts at December 31, 2012 into higher earning
assets.
Note 18. Commitments and Contingencies
Contingent Liabilities: The Company sells 1-4 family residential loans underthe MPF program with FHLB of Boston.
Under this program the Company shares in the credit risk of each mortigage, while receiving fee income in return.
The Company is responsible for a Credit Enhancement Obligation ("CEO") based on the credit quality of these
loans. FHLB of Boston funds a First Loss Account ("FLA") based on the Company's outstanding MPF mortgage
balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity
and private moriigage insurance, if any, are the first sources of repayment; the FHLB of Boston's FLA funds
are then utilized, followed by the member's CEO, with the balance the responsibility of FHLB of Boston. These
loans meet specific underwriting standards of the FHLB of Boston. As of December 31, 2012, the Company had
sold $28,5 million in loans through the MPF program since inception of its partiicipation in the program, with an
outstanding balance of $19.1 million as of such date.
The volume of loans sold to the MPF program and the corresponding credit obligation are closely monitored by
management. As of December 31, 2012 and 2011, the notional amount ofthe maximum contingent contractual
liability related to this program was $339 thousand and $92 thousand, respectively, ofwhich $32 thousand and
$6 thousand had been recorded as a reserve through Accrued interest and other liabilities at December 31, 2012
and 2011, respectively.
Legal Contingencies: In the normal course of business, the Company is involved in various legal and other
proceedings. In the opinion of management, after consulting with the Company's legal counsel, any liability
resulting from such proceedings is not expected to have a material adverse efl'ect on the Company's financial
statements.
2012 Annual Report
j 51
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Fair Value Measurements and Disclosures
The following is a description of the valuation methodologies used for the Company's financial assets that are
measured on a recurring basis at estimated fair value:
Investment securities available-for-sale: Certiain corporate debt securities, marketable equity securities and
mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been
classified as level 1. However, the majority ofthe Company's investment securities available-for-sale have been
valued utilizing level 2 inputs. For these securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may include market
maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest
rates, spreads and actual and projected cash flows.
Assets measured at fair value on a recurring basis at December 31, 2012 and 2011, segregated by fair value
hierarchy level, are summarized below:
Fair Value Measurements
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
December 31, 2012:
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises
Agency mortgage-backed
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Mutual funds
Total
December 31, 2011:
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises
Agency moriigage-backed
State and political subdivisions
Corporate
Total debt securities
Marketable equity securities
Mutual funds
Total
$ 4,519
1,379
10,462
3,300
19,660
797
173
$20,630
$17,537
3,386
12,830
8,293
42,046
773
135
$42,954
$
-
—
—
2,529
2,529
797
173
$ 3,499
$
-
—
—
6,229
6,229
773
135
$7,137
$ 4,519
1,379
10,462
771
17,131
—
—
$17,131
$17,537
3,386
12,830
2,064
35,817
—
—
$35,817
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
-
—
—
-
52
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Fair Value Measurements and Disclosures (continued)
There were no significant transfers in or out of Levels 1 and 2 for the year ended December 31, 2012. Certiain
other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in ceriiain circumstances (for
example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring
basis in periods aflier initial recognition, such as impaired loans, investment securities held-to-maturity and other
real estate owned, were not significant at December 31, 2012 or 2011. The Company has not elected to apply
the fair value method to any financial assets or liabilities other than those situations where other accounting
pronouncements require fair value measurements.
FASB ASC Topic 825, Financial Instruments, requires disclosure ofthe estimated fair value of financial instruments.
Fairvalue is best determined based upon quoted market prices. However, in many instances, there are no quoted
market prices for the Company's various financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other valuation techniques. Those techniques
are significantly afl'ected by the assumptions used, including the discount rate and estimates of future cash
flows. Management's estimates and assumptions are inherently subjective involving uncertainties and matters of
significant judgment. Changes in assumptions could dramatically afl'ect the estimated fair values.
Accordingly, the fair value estimates may not be realized in an immediate setiilement of the instrument. Certiain
financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the
aggregate fair value amounts presented may not necessarily represent the actual underiying fair value of all such
instruments of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its significant
financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values and are classified as Level 1.
Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted
present values of cash flows and are classified as Level 2.
Investment securities: Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair value measurements consider observable data
which may include market maker bids, quotes and pricing models. Inputs to the pricing models include
recent trades, benchmark interest rates, spreads and actual and projected cash flows. Investment securities
are classified as Level 1 or Level 2 depending on availability of recent trade information.
Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party
vendors, resulting in a Level 2 classification.
Loans: Fair values of loans are estimated for portfolios of loans with similar financial characteristics and
segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The
fair values for other loans (for example, fixed-rate residential, commercial real estate, rental property
mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected
2012 Annual Report
53
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Fair Value Measurements and Disclosures (continued)
loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash
flow analysis or underiying collateral values, where applicable. The fair value methods and assumptions
that provide observable assumptions as defined by current accounting standards are classified as Level 2.
Those methods that do not provide observable assumptions are classified as Level 3.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their
fair values and are classified as Level 1 or 2 in accordance with the classification of the related principal's
valuation,
Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable
securities, such as FHLB of Boston stock, due to restrictions placed on their transferability.
Deposits: The fair values disclosed for noninterest bearing deposits are, by definition, equal to the amount
payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time
deposits and other interest bearing nontime deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being ofl'ered on similar deposits to a schedule of aggregated expected
maturities on such deposits, resulting in a Level 2 classification.
Borrowed funds: The fair values of the Company's long-term debt are estimated using discounted cash flow
analysis based on interest rates currently being ofl'ered on similar debt instruments, resulting in a Level
2 classification. The fair values of the Company's shorti-term debt is the carrying amounts reportied in the
balance sheet, also resulting in a Level 1 classification.
Off-balance-sheet financial instruments: Fair values for ofl'-balance-sheet, credit-related financial
instruments are based on fees currently charged to enter into similar agreements, taking into account
the remaining terms ofthe agreements and the counterpartiies' credit standing. The only commitments to
extend credit that are normally longer than one year in duration are the home equity lines whose interest
rates are variable quarteriy. The only fees collected for commitments are an annual fee on commercial
credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit.
The fair value of ofl'-balance-sheet financial instruments as of the balance sheet dates was not significant.
54
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 19. Fair Value Measurements and Disclosures (continued)
As ofthe balance sheet dates, the estimated fair values and related carrying amounts ofthe Company's significant
financial instruments were as follows:
December 3 1, 2012
Fair
Value Measurements
Carrying
Amount
Estimated
Fair
Vaiue
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
|
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Interest bearing deposits in banks
Investment securities
Loans held for sale
Loans, net
Residential real estate
Construction real estate
Commercial real estate
Commercial
Consumer
Tax exempt
Accrued interest receivable
Nonmarketable equity securities
Financial liabilities
Deposits
$ 46,510
21,922
26,126
11,014
$ 46,510
22,158
26,107
11,313
$46,510
—
3,499
—
153,696
35,573
181,290
21,297
6,027
41,744
1,539
1,976
146,216
41,364
178,880
20,676
6,192
49,188
1,539
N/A
—
—
—
-
—
—
15
N/A
Noninterest bearing
Interest bearing
Time
Borrowed funds
Shorti-term
Long-term
Accrued interest payable
83,715
273,505
152,773
83,715
273,509
153,565
3,989
11,758
300
3,989
14,272
300
83,715
—
—
3,989
—
—
Financial assets
Cash and cash equivalents
Interest bearing deposits in banks
Investment securities
Loans and loans held for sale, net
Accrued interest receivable
Nonmarketable equity securities
Financial liabilities
Deposits
Borrowed funds
Accrued interest payable
$
$
22,158
22,608
11,313
146,216
41,364
178,880
20,676
6,192
49,188
1,524
N/A
—
273,509
153,565
—
14,272
300
—
—
—
—
—
—
—
—
—
—
N/A
—
—
—
—
—
—
December 3 1, 2011
Carrying
Amount
Estimated
Fair Value
(Dollars in thousands)
$ 24,381
24,020
46,954
425,158
1,810
1,976
473,439
29,015
356
$ 24,381
24,324
46,952
415,823
1,810
1,976
474,509
33,696
356
The carrying amounts in the preceding tables are included in the balance sheet under the applicable captions.
2012 Annual Report
155
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 20. Transactions with Related Parties
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of
business with principal stockholders, directors, principal offlcers, their immediate families and afliliated companies
in which they are principal stockholders (commonly referred to as related partiies), all of which have been, in the
opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated parties and which do not represent more than the normal risk of
collectability or present other unfavorable features.
Aggregate loan transactions with related partiies for the years ended December 31 were as follows:
Balance, January 1,
New loans and advances on lines
Repayments
Other, net
Balance, December 31,
Balance available on lines of credit or loan commitments
2012
(Dollars in
$ 3,792
2,372
(2,601)
—
2011
thousands)
$ 3,952
2,058
(1,904)
(314)
$ 3,563
$ 1,083
$ 3,792
$ 814
None of these loans are past due, are in nonaccrual status or have been restructured to provide a reduction or
deferral of interest or principal because of deterioration in the financial position of the borrower. There were no
loans to a related party that were considered classified at December 31, 2012 or 2011.
Deposit accounts with related partiies were $1.2 million and $935 thousand at December 31, 2012 and 2011,
respectively.
Note 21. Regulatory Capital Requirements
The Company (on a consolidated basis) and Union are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certiain
mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct
material efl'ect on the Company's and Union's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and Union must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certiain ofi'-balance-sheet items as calculated under
regulatory accounting practices. The Company's and Union's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Union to
maintain minimum amounts and ratios (set fortih in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes that, as of December 31, 2012 and 2011, the Company and Union met all capital adequacy
requirements to which they were subject.
56 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 21. Regulatory Capital Requirements (continued)
As of December 31, 2012 and 2011, the most recent notification from the FDIC categorized Union as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an
insured depository institution must maintain minimum total risk based. Tier I risk based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since the date ofthe most recent notification that
management believes might result in an adverse change to Union's regulatory capital category. Prompt corrective
action provisions are not applicable to bank holding companies.
Union's and the Company's actual capital amounts and ratios are presented in the following tables:
Actual
Amount
Ratio
Minimum
For Capital
Requirement
Amount
(Dollars in
Ratio
thousands)
Asof December 31, 2012
Total capital to risk weighted assets
Union
Company
Tier I capital to risk weighted assets
Union
Company
Tier I capital to average assets
Union
Company
$47,786
48,057
12.9%
13.0%
$29,612
29,688
$43,133
43,392
11,7%
11,7%
$14,810
14,848
$43,133
43,392
7,6%
7,6%
$22,822
22,928
8.0%
8.0%
4.0%
4.0%
4.0%
4,0%
Actual
Amount
Ratio
Minimum
For Capital
Requirement
Amount
(Dollars in
Ratio
thousands)
Minimum
To be Well
Capitalized Under
Prompt Corrective
)visions
Action Pre
Ratio
Amount
$37,015
N/A
10.0%
N/A
$22,214
N/A
$28,527
N/A
6.0%
N/A
5.0%
N/A
Minimum
To be Well
Capitalized Under
Prompt Corrective
Action Pre
)visions
Ratio
Amount
Asof December 31, 2011
Total capital to risk weighted assets
Union
Company
Tier I capital to risk weighted assets
Union
Company
Tier I capital to average assets
Union
Company
$44,910
45,091
12,2%
12,2%
$29,570
29,641
$40,671
40,852
11,0%
11,0%
$14,789
14,828
$40,671
40,852
7.5%
7.5%
$21,634
21,672
8.0%
8.0%
4.0%
4.0%
4.0%
4.0%
$36,963
N/A
10.0%
N/A
$22,184
N/A
$27,042
N/A
6.0%
N/A
5.0%
N/A
Dividends paid by Union are the primary source of funds available to the Company for payment of dividends
to its stockholders. Union is subject to certain requirements imposed by federal banking laws and regulations,
which among other things, establish minimum levels of capital and restrict the amount of dividends that may be
distributed by Union to the Company.
2012 Annual Report
157
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 22. Treasury Stock
The basis for the carrying value of the Company's treasury stock is the purchase price ofthe shares at the time
of purchase. Since May 2010, the Company has maintained a limited stock repurchase plan which authorizes
the repurchase of up to 2,500 shares of its common stock each calendar quartier in open market purchases or
privately negotiated transactions, as management may deem advisable and as market conditions may warrant.
The repurchase authorization for a calendar quartier expires at the end of that quartier to the extent it has not
been exercised, and is not carried forward into future quarters. The quartieriy repurchase program was most
recently reauthorized in December 2012 and will expire on December 31, 2013 unless reauthorized. During 2012,
the Company repurchased 1,823 shares under this program, at a total cost of $36 thousand in 2012, while no
shares were repurchased underthe program during 2011. Since inception, the Company has repurchased 6,827
shares of its common stock at prices ranging from $17.86 to $19.85 per share, at a total of $126 thousand.
Note 23. Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive loss, net of tax, at December 31 are:
Net unrealized gain on investment securities available-for-sale
Defined benefi't pension plan:
Net unrealized actuarial loss
Net unrealized prior service cost
Total
2011
2012
(Dollars in thousands)
$
508
$
892
(2,518)
-
$(2,010)
(5,231)
(Z)
$ (4,346)
The following table discloses the tax effects allocated to each component of other comprehensive income for the
years ended December 31:
Year Ended
December 31, 2012
Tax
(Expense)
Before-
Tax
Net-of- Before-
Tax
Tax
December 31, 2011
Tax
(Expense)
Net-of-
Tax
Investment securities available-for-sale:
Net unrealized holding gains arising during
the period on investment securities
available-for-sale
Reclassification adjustment for net gains on
investment securities available-for-sale
realized in net income
Total
Defined benefit pension plan:
Net unrealized actuarial gain (loss)
Reclassification adjustment for amortization
of net actuarial loss realized in net income
Reclassification adjustment for amortization
of prior service cost realized in net income
Total
Total other comprehensive income (loss)
Amount or Benefit Amount Amount or Benefit Amount
(Dollars in thousands)
$ 91 $ (31) $ 60 $ 1,271 $ (432) $ 839
(673)
(582)
229
198
(444) (183)
(384) 1,088
62
(370)
(121)
718
3,616
(1,229)
2,387 (4,586) 1,559
(3,027)
494
(168)
326
185
(63)
122
10
4,120
(3)
(1,400)
7
(2)
2,720 (4,395) 1,494
6
(2,901)
$3,538 $(1,202) $2,336 $(3,307) $1,124 $(2,183)
4
58 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 24. Subsequent Events
Subsequent events represent events or transactions occurring aflier the balance sheet date but before the
financial statements are issued. Financial statements are considered "issued" when they are widely distributed
to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events
occurring subsequent to December 31, 2012 have been evaluated as to their potential impact to the consolidated
financial statements.
Specifically, there are two types of subsequent events:
•
•
Those comprising events or transactions providing additional evidence about conditions that existed
at the balance sheet date, including estimates inherent in the financial statement preparation process
(referred to as recognized subsequent events).
Those comprising events that provide evidence about conditions not existing at the balance sheet date
but, rather, that arose aftier such date (referred to as nonrecognized subsequent events).
On January 16, 2013, Union Bankshares, Inc. declared a $0.25 per share regular quartieriy cash dividend payable
February 7, 2013 to stockholders of record on January 26, 2013.
In light of Union Board's decision to freeze the Pension Plan efl'ective October 5, 2012, Union amended its 401(k)
plan eff'ective January 1, 2013, to include "Safe Harbor" provisions requiring an annual nondiscretionary minimum
contributions to the plan for all eligible plan participants in an amount equal to 3% of eligible earnings of each
eligible plan partiicipant. Management of Union estimates that the Safe Harbor contribution will be approximately
$240 thousand for the year ended December 31, 2013, which will be charged to pension and other employee
benefits on the consolidated Statement of Income.
2012 Annual Report
59
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 25. Condensed Financial Information (Parent Company Only)
The following condensed financial statements are for Union Bankshares, Inc. (Parent Company Only), and should
be read in conjunction with the consolidated financial statements of Union Bankshares, Inc. and Subsidiary.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 3 1, 2012 and 2011
2012
(Dollars in t
2011
ihousands)
ASSETS
Cash
Investment securities available-for-sale
Investment in subsidiary - Union
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUIPi'
LIABILITIES
Other liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,923,986 shares
issued at December 31, 2012 and 4,923,286 shares issued at December 31, 2011
Additional paid-in capital
Retained earnings
Treasury stock at cost; 467,905 shares at December 31, 2012
and 466,082 shares at December 31, 2011
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
$ 46
125
44,787
884
$45,842
$ 69
121
40,159
788
$41,137
$
$
796
796
798
798
9,848
295
40,772
9,847
276
38,385
(3,859)
(2,010)
45,046
(3,823)
(4,346)
40,339
$45,842
$41,137
The investment in the subsidiary bank is carried under the equity method of accounting. The investment in
subsidiary and cash, which is on deposit with Union, have been eliminated in consolidation.
60
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 25. Condensed Financial Information (Parent Company Only) (continued)
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended December 3 1, 2012 and 2011
Revenues
Dividends - bank subsidiary - Union
Other dividends
Other income
Total revenues
Expenses
Interest
Stock based compensation expense
Administrative and other
Total expenses
Income before applicable income tax benefi't and equity in undistributed
net income of subsidiary
Applicable income tax benefi't
Income before equity in undistributed net income of subsidiary
Equity in undistributed net income - Union
Net income
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 3 1, 2012 and 2011
CASH FLOWS FROM OPERATING AaiVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Union
Stock based compensation expense
Increase in other assets
Decrease in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available-for-sale
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid
Issuance of common stock
Purchase of treasury stock
Net cash used by financing activities
Net decrease in cash
CASH
Beginning of year
End of year
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid
2012
(Dollars in
2011
thousands)
$ 4,700
1
103
4,804
$ 4,650
1
22
4,673
33
8
326
367
26
9
307
342
4,437
(117)
4,554
2,290
$ 6,844
4,331
(111)
4,442
777
5,219
-
i
2012
2011
(Dollars in thousands)
$ 6,844
$ 5,219
(2,290)
8
(95)
(2)
4,465
(777)
9
(55)
(10)
4,386
(7)
(14)
(4,457)
12
(36)
(4,481)
(23)
(4,457)
26
(4,431)
(59)
69
46
33
128
69
26
$
$
$
$
2012 Annual Report
161
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 26. Quarterly Financial Data (Unaudited)
A summary of financial data for each of the four quartiers of 2012 and 2011 is presented below:
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Net income
Earnings per common share
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Net income
Earnings per common share
Quarters in 2012 Ended
March 3 1,
June 30,
Sept. 30,
Dec. 3 1,
(Dollars in thousands, except per share data)
$ 6,196
910
5,286
180
1,903
5,541
1,227
$ 0.28
$ 6,185
853
5,332
180
2,168
5,563
1,438
$ 0.32
$ 6,355
815
5,540
150
2,888
5,745
1,981
$ 0.44
$ 6,292
773
5,519
150
3,566
6,186
2,198
$ 0.50
Quarters in
2011 Ended
March 3 1,
June 30,
Sept. 30,
Dec. 3 1,
(Dollars in thousands, except per share
data)
$ 5,498
961
4,537
150
1,401
4,580
1,028
$ 0.23
$ 5,734
1,002
4,732
150
1,657
5,019
1,031
$ 0.23
$6,118
1,016
5,102
150
2,012
5,145
1,427
$ 0.32
$6,319
929
5,390
325
2,055
5,029
1,733
$ 0.39
52 I
2012 Annual Report
Union Bankshares, Inc.
Union Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Note 27. Noninterest Other Income and Noninterest Other Expenses
The components of noninterest other income and noninterest other expenses which are in excess of one percent
of total revenues for the years ended December 31, 2012 and 2011 are as follows:
2012
(Dollars in
2011
thousands)
Income
Income from life insurance
Other income
Total other income
Expenses
ATM and debit card expense
Supplies and printing
Communications
Advertising and public relations
Vermont franchise tax
FDIC insurance assessment
Professional fees
Expenses of other real estate owned, net
Equity in losses of limited partnerships
Branch acquisition expenses
Prepayment penalties on borrowings
Other expenses
Total other expenses
$ 397
349
$ 746
$ 730
395
323
341
459
351
424
489
660
—
890
2,466
$ 7,528
$
$_
107
345
452
$
613
394
363
466
429
376
417
302
515
407
177
2,077
$ 6,536
2012 Annual Report
163
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The following discussion and analysis by management focuses on those factors that, in management's view, had
a material effect on the consolidated financial position of Union Bankshares, Inc. ("the Company," "our," "we,"
"us") and its subsidiary. Union Bank ("Union"), as of December 31, 2012 and 2011, and its results of operations
for the years ended December 31, 2012 and 2011. This discussion is being presented to provide a narrative
explanation of the consolidated financial statements and should be read in conjunction with the consolidated
financial statements and related notes and with other financial data in the Company's Annual Report on Form
10-K for the year ended December 31, 2012, The purpose of this presentation is to enhance overall financial
disclosures and to provide information about historical financial performance and developing trends as a means
to assess to what extent past performance can be used to evaluate the prospects for future performance. The
Company meets the qualification requirements under Securities and Exchange Commission ("SEC") rules for
smaller reporting companies, and pursuant to such rules, has elected to present audited statements of income,
comprehensive income, cash flows and changes in stockholders' equity for each of the preceding two, rather
than three, fiscal years. Management is not aware of the occurrence of any events after December 31, 2012
which would materially affect the information presented.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral statements that are considered "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may include financial projections, statements of plans and objectives for future operations, estimates
of future economic performance or conditions and assumptions relating thereto. The Company may include
forward-looking statements in its filings with the SEC, in its reports to stockholders, including this Annual
Report, in press releases, other written materials, and in statements made by senior management to analysts,
rating agencies, institutional investors, representatives of the media and others.
Forward-looking statements reflect management's current expectations and are subject to uncertainties, both
general and specific, and risk exists that actual results will differ from those predictions, forecasts, projections
and other estimates contained in forward-looking statements. These risks cannot be readily quantified. When
management uses any of the words "believes," "expects," "anticipates," "intends," "projects," "potential,"
"plans," "seeks," "estimates," "targets," "goals," "may," "could," "would," "should," or similar expressions, they
are making forward-looking statements. Many possible events or factors, including those beyond the control
of management, could affect the future financial results and performance of the Company. This could cause
results or performance to differ materially from those expressed in forward-looking statements. Management
has discussed some of the more likely factors that might affect forward-looking statements in this report on
Form 10-K. The possible events or factors that might affect the forward-looking statements include, but are not
limited to, the following:
Changing bank regulatory conditions, policies or programs in Vermont, New Hampshire or the United
States, that could lead to restrictions on activities of banks or changes in laws concerning accounting, taxes,
financial reporting, consumer protection, banking and other aspects of the financial services industry,
and in particular, increases in deposit insurance premiums, assessments or taxes, healthcare and other
entitiement program reforms, price controls on services provided, regulation or prohibition of certain
income producing activities, changes in the secondary market for bank loan and other products, changes
in lien enforcement, or expansion of fair value accounting;
Regulatory changes to risk based capital calculations requiring changes to the mix of balance sheet assets
in order to attain the desired capital ratios, might result in greater capital volatility due to the inclusion in
64 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
regulatory capital of changes in other comprehensive income/loss. This might restrict dividends payable
to shareholders, expansion of the Company or its products offered or compensation paid to executives if
desired capital ratios are not achieved;
General economic conditions including uses of monetary, fiscal or tax policy to stimulate the economy,
changes in business conditions or economic instability globally, nationally, or in our market area, including
interest rate fluctuations, market fluctuations and perceptions, job creation and unemployment rates,
ability to attract or retain customers, real estate market conditions including the valuation of collateral, and
inflation or deflation and their effects on the Company or its customers;
Competitive factors, including competition with community, regional and national financial institutions
or tax-advantaged credit unions, that may lead to pricing pressures that reduce yields earned on loans
or increase rates paid to depositors, loss of valued customers, key employees, increased technology
expenditures, increased or decreased liquidity, or other losses;
Increasing or decreasing interest rate environments, including changes in the slope and level of the yield
curve that could lead to decreases in net interest margin, lower net interest and fee income, including lower
gains on sales of loans, and changes in the value of our investment securities and pension plan assets,
especially if those changes vary from assumptions made by management;
Continuing economic and financiai instability, resulting from elevated unemployment rates, higher taxation
and/or regulatory burden, governmental budget issues, reform of entitlement and healthcare programs
and/or natural disasters; and
Acts or threats of terrorism, war, theft, fraud or natural disasters that could affect the Company's reputation,
adverse weather conditions that could negatively impact our customers, and the business or economic
conditions for the Company or its customers, including cyber security breaches and computer viruses.
When evaluating forward-looking statements to make decisions with respect to the Company, investors and
others are cautioned to consider these and other risks and uncertainties, including the events and circumstances
discussed under"Recent Developments" below, and are reminded not to place undue reliance on such statements
and should not consider any such list of factors to be a complete list of risks or uncertainties. Forward-looking
statements speak only as ofthe date they are made and the Company undertakes no obligation to update them
to reflect new or changed information or events, except as may be required by federal securities laws.
RECENT DEVELOPMENTS
Nationally, economic activity which had been expanding at a moderate pace, has paused in recent months in
large part because of weather related disruptions. As discussed in the January 30, 2013 Federal Open Market
Committee ("FOMC") press release, growth in employment has continued to expand at a moderate pace but
the unemployment rate remains elevated. Household spending and business fixed investment has advanced.
The housing sector has also shown modest improvement. Fluctuating energy prices continue to cause variations
in inflation. Strains in the global financial markets have eased somewhat, but downside risks to the economic
outlook still remain.
It appears that interest rates will continue at historic lows as the FOMC is likely to keep the target range for
federal funds rate at 0-25 basis points in order to promote the ongoing economic recovery. The FOMC currently
anticipates that economic conditions are likely to warrant exceptionally low levels for the target federal funds
rate at least through mid-2015. The Federal Reserve, which intends to continue applying downward pressure on
2012 Annual Report
65
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
longer-term interest rates, is extending the duration of its treasury securities portfolio and continues to reinvest
principal payments from its holdings of agency debt and agency mortgage-backed securities into purchases of
agency mortgage-backed securities.
Economic data continues to suggest a slow but positive trend towards economic recovery in our market as
well as nationally. Total nonagricultural employment in both Vermont and New Hampshire has improved 1,4%
since a year ago and in Vermont both the number and percentage of unemployed have decreased. In Vermont
the statewide unemployment rate was 5.1% at December 2012 and 5.2% at December 2011, while in New
Hampshire the unemployment rate has increased to 5,7% from 5,1% over the same period. The Vermont
percentage is the lowest the unemployment rate has been since October of 2008. Rates for both states compare
favorably with the national rate of 7,8%. The number of business and consumer bankruptcy filings in 2012 have
decreased 9.6% in Vermont from the prior year to the lowest rate since 2007 and New Hampshire's filings have
decreased 18.1% in the same time frame. New Hampshire has seen a modest increase in housing permits
during 2012 while Vermont had a slight decline in permits during 2012. The home price index for December 2012
shows a slight reduction for l\Jew Hampshire and a slight increase for Vermont.
Vermont and New Hampshire continue to have lower residential foreclosure and delinquency rates than the
national average. Union, the Company's subsidiary, has earned a favorable reputation for residential lending
programs and has been granted an Unconditional Direct Endorsement Approval from the Department of Housing
and Urban Development ("HUD") for the origination of Federal Housing Administration ("FHA") loans. This
direct endorsement provides Union the ability to more quickly and efficiently serve FHA-eligible home buyers.
Demand for construction and purchase mortgage loans remained strong throughout 2012 while competition for
commercial loans was very challenging.
Interest rates remain near historic lows, which has allowed many consumers and commercial customers to reduce
their monthly debt payments by refinancing their loans. Inflation appears controlled, however unpredictable
world events could cause commodity prices to increase dramatically, potentially causing an inflationary spiral.
Most financial institutions that accepted government support have repaid those funds and the U.S, financial
markets appear to be operating more independently now. The recent positive growth in stock market values has
also provided a boost in consumer confidence.
There have been numerous new laws, regulations, and actions proposed or enacted during 2012, or that are still
pending that may be problematic for the Company in terms of future earnings and/or operating efficiency. The
following are the most relevant:
Among the new regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 ("Dodd-Frank Act") are new residential mortgage provisions that mandate more extensive
disclosures, require lenders to offer terms that reasonably reflect the consumers' ability to repay a loan,
prohibit mandatory arbitration provisions, regulate mortgage broker compensation practices, add new
customer protections for high-cost mortgages and set escrow account and appraisal standards. The
relevant regulations promulgated to date regarding these provisions have been implemented by Union, but
there are still additional regulations to be written.
As required by SEC regulations, the Company now files its financial statements both in EDGAR format and
in extensible Business Reporting Language ("XBRL"), and posts such XBRL information on its website.
With the 2nd quarter 2013 SEC filings, the limited liability allowed under SEC Rule 406T during the initial
24 month period XBRL documents were required will expire, and the controls over the preparation of the
XBRL documents will be deemed incorporated into the certifications ofthe Chief Executive Officer and Chief
Financial Officer included as exhibits to the Company's quarteriy and annual reports filed with the SEC.
66
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Basel III Capital Framework, if adopted as proposed, will increase minimum capital levels and add
a new capital conservation buffer in the coming years. The Company's regulatory capital ratios continue
to be over the proposed minimums. The Basel III proposal would also implement on a phased basis,
a leverage ratio, a liquidity coverage ratio, a net stable funding ratio, and increased risk percentages
on certain asset categories which will negatively impact the Company's risk based capital ratios. The
Basel III proposal would also increase volatility in regulatory capital calculations by requiring that changes in
othercomprehensive income/loss be reflected in the calculation. Underthe current proposal, the Company
would be subject to most, but not all of the regulations proposed as some are only applicable to "large"
or "complex" financial institutions. On November 9, 2012, the Federal Reserve and other federal banking
regulators announced that in light of the volume of comments received and concerns expressed by many
banks, including many community banks such as Union, the proposed January 1, 2013 effective date for
final rules would be delayed. No final implementation date has yet been established.
On December 31, 2012, the temporary unlimited insurance coverage for noninterest bearing transaction
and lOLTA accounts by the FDIC expired.
On April 5, 2012, the Jumpstart Our Business Startups Act ("Jobs Act") was signed into law by the President.
The general provisions of the Jobs Act were aimed at increasing small businesses' ability to raise capital and
this may be a benefit to the Company in the future.
Recentiy the Consumer Financial Protection Bureau outiined new rules that the Bureau intends to adopt
that will impact mortgage servicing. These rules will implement revisions to the Truth in Lending Act
and the Real Estate Settlement Procedures Act adopted as part of the Dodd-Frank Act. The rules were
published in January 2013, and become effective in January 2014. There are additional regulations still to
be promulgated.
Continued implementation of new national and Vermont health care laws will impact individuals and
businesses in the coming years and the effect of that impact on the Company and its customers cannot
yet be quantifi'ed.
The impact of the U.S. Government's sequester effective March 1, 2013 is unknown.
Nonbranch methods for customers to access their financial accounts continue to grow in importance and
therefore Union will offer a mobile banking option to all customers starting in 2013. Other electronic alternatives
will continue to be explored.
A decision was reached in late 2012 to close the Green Mountain Mall branch in St. Johnsbury, Vermont.
Customers will continue to be served at one of the other three branches located in proximity to the Green
Mountain Mall location. The branch staff will be reassigned to another local office when the branch closes
April 5, 2013 and the lease on the office will terminate June 30, 2013.
As previously reported, effective October 5, 2012, Union Bank's Pension Plan was closed to new participants
and benefit accrual for participants was frozen. In light of that decision. Union amended its 401(k) plan effective
January 1, 2013, to include "Safe Harbor" provisions requiring an annual nondiscretionary minimum contribution
to the plan for all eligible plan participants in an amount equal to 3% of eligible earnings of each eligible plan
participant. Management of Union estimates that the Safe Harbor contribution will be approximately $240
thousand for the year ending December 31, 2013, which will be charged to pension and other employee benefits
on the consolidated Statement of Income.
2012 Annual Report
| 67
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The cost of doing business has continued to increase dramatically in this regulatory environment as the number
and extent of new regulations and the speed with which they must be implemented require additional bank
software purchases, greater reliance on service providers and additional staff. Also, the cost of mitigating long
term interest rate risk by selling loans to the secondary market continued to increase during 2012 and it is
anticipated that this cost will continue to grow as the government sponsored entities continue to work through
their own financial problems.
It is not completely clear at this time what impact current or future government sponsored programs, regulations
or legislation will have on the Company, its customers or the U.S, and global financial markets, but additional
regulatory complexity and allocation of Company resources to deal with it are likely.
RISK FACTORS
The Company, like other financial institutions, is subject to a number of risks, many of which are outside of the
Company's direct control, though efforts are made to manage those risks while optimizing returns. Managing
those risks is an essential part of successfully managing a financial institution. Risk identifi'cation and monitoring
are key elements in overall risk management. Among the risks inherent in the Company's business operations
are: (1) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their
contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely
affect the Company's financial condition or results of operation, (3) liquidity risk, which is the risk that the
Company will have insufficient funds or access to funds to meet operational needs, (4) operational risk, which
is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external
events, and (5) regulatory risk, which is the risk of loss resulting from new or changing regulations which
increases operating costs or restricts business practices.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of U.S. Generally Accepted
Accounting Principles ("GAAP") in the preparation of the Company's financial statements. Certain accounting
policies involve significant judgments and assumptions by management which have a material impact on the
reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent
assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a
company's critical accounting policies as the ones that are most important to the portrayal of the company's
financial condition and results of operations, and which require management to make its most difficult and
subjective judgments, often as a result ofthe need to make estimates on matters that are inherently uncertain.
Based on this definition, the Company has identified the accounting policies and judgments most critical to the
Company, The judgments and assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. Nevertheless, because the nature of the
judgments and assumptions made by management are inherentiy subject to a degree of uncertainty, actual
results could differ from estimates and have a material impact on the carrying value ofassets, liabilities, capital,
or the results of operations of the Company.
Allowance for loan losses
The Company believes the allowance for loan losses is a critical accounting policy that requires the most
significant judgments and estimates used in the preparation of its consolidated financial statements. The
amount of the allowance is based on management's periodic evaluation of the collectability of the loan portfolio,
including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical
loss experience, estimated value of any underiying collateral, specifi'c impaired loans and economic conditions.
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Changes in these qualitative factors may cause management's estimate of the allowance for loan losses to
increase or decrease and result in adjustments to the Company's provision for loan losses in future periods.
For additional information, see FINANCIAL CONDITION - Allowance for Loan Losses and Credit Quality below.
Other than temporary impairment of securities
The other than temporary impairment decision is a critical accounting policy for the Company. Accounting
guidance requires a company to perform periodic reviews of individual securities in their investment portfolio to
determine whether a decline in the value of a security is other than temporary. A review of other than temporary
impairment requires companies to make certain judgments regarding the cause and materiality ofthe decline, its
effect on the financial statements and the probability, extent and timing of a valuation recovery, the company's
intent and ability to continue to hold the security, and, with respect to debt securities, the likelihood that the
company will have to sell the security before its value recovers. Pursuant to these requirements, management
assesses valuation declines to determine the extent to which such changes are attributable to (1) fundamental
factors specific to the issuer, such as the nature of the issuer and its financial condition, business prospects or
other factors or (2) market-related factors, such as interest rates or equity market declines. Declines in the fair
value of securities below their costs that are deemed by management to be other than temporary are (1) if equity
securities, recorded in earnings as realized losses and (2) if debt securities, recorded in earnings as realized
losses to the extent they are deemed credit losses, with noncredit losses recorded in Other comprehensive
income (loss). Once an other than temporary loss on a debt or equity security is realized, subsequent gains in
the value ofthe security may not be recognized in income until the security is sold.
Intangible assets
Intangible assets include goodwill, which represents the excess of the purchase price over the fair value of
net assets acquired in the 2011 acquisition of three New Hampshire branch offices, as well as a core deposit
intangible related to the deposits acquired. The core deposit intangible is amortized on a straight line basis over
the estimated average life ofthe acquired core deposit base of 10 years. The Company evaluates the valuation
and amortization of the core deposit intangible if events occur that could result in possible impairment. In
accordance with current authoritative guidance, the Company assesses qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the fair
value of the Company is less than its carrying amount, which could result in goodwill impairment.
Pension liabilities
On October 5, 2012, the Company closed The Union Bank Pension Plan ("Plan") to new participants and froze
the accrual of retirement benefits for current participants. The cost of the Plan, based on actuarial computations
of current benefits for employees, is charged to Pension and other employee benefits.
The Company's defined benefi't pension obligation and net periodic benefi't cost are actuarially determined based
on the following assumptions: discount rate, current and expected future return on plan assets, anticipated
mortality rates, and Consumer Price Index rate. The determination of the defined benefit pension obligation
and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgments
related to the amount and timing of expected future cash outflows for benefit payments and cash inflows for
maturities and returns on plan assets as well as Company contributions. Changes in estimates, assumptions and
actual results could have a material impact on the Company's financial condition and/or results of operations.
2012 Annual Report
I 69
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
other
The Company also has other key accounting policies, which involve the use of estimates, judgments and
assumptions, that are significant to understanding the Company's financial condition and results of operations,
including the valuation of deferred tax assets, investment securities and other real estate owned ("OREO").
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated
financial statements and in the section below under the caption "FINANCIAL CONDITION" and the subcaptions
"Allowance for Loan Losses and Credit Quality", "Investment Activities" and "Liability for Pension Benefits".
Although management believes that its estimates, assumptions and judgments are reasonable, they are based
upon information presently available and can be impacted by events outside the control ofthe Company. Actual
results may differ significantiy from these estimates under different assumptions, judgments or conditions.
OVERVIEW
Historically, the largest and most variable source of income for the Company is net interest income. The results
of operations for the years ended December 31, 2012 and 2011 reflect the impact of changes in rates as well as
growth in the volume and change in composition of both interest earning assets and interest bearing liabilities
during these periods.
The prime rate remained at 3.25% throughout 2011 and 2012. The discount rate remained at 0.75% and the
target federal funds range remained at the 0.00% to 0.25% range throughout both years as well. This is the
lowest that the prime rate has been since 1955. The continuing low interest rate environment and aggressive
rate competition from in-market and out-of-market financial institutions makes deposit accounts increasingly
difficult to attract and retain and intensifies the competition for loans.
In December 2012, a deleveraging transaction was executed to seek improvement over the long- term in the
Company's Tier 1 Leverage ratio and net interest margin. Improvements may also be seen in the results of
the interest rate sensitivity analysis and economic value of equity calculations. The deleveraging transaction
resulted in the sale of approximately $11.7 million in available-for-sale debt securities, of varying types, with
an estimated yield of 3.10%. The proceeds from these sales were utilized to payoff existing advances from the
FHLB of Boston of $11.0 million with an average rate of 3.48%. Union recognized $627 thousand in gains on
sales of securities which were offset by prepayment penalties assessed by the FHLB of Boston of $875 thousand.
The Company's average assets grew by $57.2 million, or 11.4%, during 2012 to an average of $560.7 million
from $503.6 million in 2011. Net interest income increased from $19.8 million in 2011 to $21.7 million in 2012,
The net $1.9 million increase was due primarily to the increase in interest income of $1,4 million from $23.7
million in 2011 to $25.0 million in 2012 and the decrease in interest expense of $557 thousand from $3.9 million
in 2011 to $3.4 million in 2012. Both years reflected the historically low 3.25% prime rate. Yields dropped as
adjustable rate loans repriced at lower rates, existing loans were refinanced and new loans and investments
originated at lower rates. Rates paid on all interest bearing liabilities dropped as well. See Yields Earned and
Rates Paid and the Rate/Volume Analysis tables on pages 74 through 76, respectively, for further details.
Average earning assets grew from $473.3 million in 2011 to $524.3 million in 2012, or 10.8%. The Company
continued to manage growth and interest rate risk during 2012 through the sale of $125.7 million in long-term
fixed-rate residential loans, the sale of $576 thousand in commercial real estate loans and net participations
out of $4,6 million in commercial real estate loans. The Company realized $3,6 million in net gains on sales of
loans held for sale in 2012 compared to $1.6 million in 2011. The historically low prime rate and low long-term
mortgage rates throughout 2012 continued to drive customer refinancings and also contributed to the 2 basis
point, or 0,5%, decrease in the net interest margin, to 4,27% for 2012 as compared to 4.29% for 2011.
70 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company's asset quality remained strong compared to the banking industry as a whole, when measured
by net charge-offs of 0.05% to average loans not held for sale in 2012, which shows slight improvement from
0.08% in 2011. Net income is up $1.6 million, or 31.1%, to $6.8 million for 2012 from $5.2 million for 2011.
Return on average assets improved to 1.22% for 2012 from 1.04% for 2011.
Earnings per share increased to $1.54 in 2012 from $1.17 in 2011, Dividends per share of $1.00 were paid out
in both 2012 and 2011. The Company remained well capitalized under regulatory guidelines after payment of
dividends. The Company's return on average equity increased in 2012 to 16.35% from 12.47% in 2011. The
improvement in the Company's capital ratios was due primarily to the increase in net income for 2012.
In 2012, the Company recorded a nontaxable benefit payment totaling $806 thousand from a life insurance
policy which is included in other assets. The benefit receivable resulted in a nontaxable gain of $249 thousand
and is included in noninterest income and net income.
Despite the modest improvements in the economy, loan demand remained strong in 2012, with total loan
growth of $26.0 million, or 6,0%, over 2011, net of loan sales of $126.3 million in 2012 compared to loan sales of
$80.4 million for 2011. Residential real estate loans grew $7.5 million, or 5,1%, net of loans sold and held for sale,
construction real estate loans grew $7,9 million, or 28.3%, and municipal loans grew $11.9 million, or 39.70%.
Loans in nonaccrual status decreased between years to $2.8 million at December 31, 2012 versus $4.3 million at
December 31, 2011. Other nonperforming loans decreased to $307 thousand at December 31, 2012 from $1.9
million at December 31, 2011. The Company's ratio of allowance for loan losses to loans not held for sale was
1.05% at December 31, 2012 compared to 1,00% at December 31, 2011. The December 31, 2012 allowance for
loan losses to loans not purchased and not held for sale was 1.11% compared to 1.07% at December 31, 2011.
The ratio of allowance for loan losses to nonperforming loans had increased to 148.03% at December 31, 2012
from 68.11% at December 31, 2011. The decrease in the 2012 provision to $660 thousand from $775 thousand
in 2011 reflects the composition ofthe loan portfolio, net charge offs, the general economy and management's
assessment of credit quality.
Deposits grew $36.6 million, or 7.7%, from $473.4 million at December 31,2011 to $510.0 million at December 31,
2012, Total average deposits grew $56.3 million, or 13.2%, between years with average nontime deposits
growing $48.7 million, or 17.3%, during the same time frame while time deposits only grew $7.6 million, or
5.3%. For the year ended December 31, 2012, the average deposits in the branches acquired in May 2011
amounted to $63.3 million. Interest rates paid on deposits and interest rates earned on loans have dropped
steadily over the last three years and these factors combined to increase the net interest spread 3 basis points
from 4.11% in 2011 to 4.14% in 2012, as the average rate paid on interest bearing liabilities dropped 23 basis
points from 1.00% to 0,77% from 2011 to 2012, while the average rate earned on interest earning assets
dropped 20 basis points from 5.11% to 4.91% over the same time frame. The Company increased the average
volume in all categories of interest earning assets except federal funds sold and overnight deposits. The growth
in deposits was utilized to support overall growth in interest-earning assets, as the growth in deposits exceeded
the growth in loans retained.
As noted above, in October 2012, the Company closed The Union Bank Pension Plan ("Plan"), which is a defined
benefi't pension plan, to new participants and froze the accrual of retirement benefits for current participants.
It is Union's current intent to continue to maintain the frozen Plan and related Trust and to distribute benefits
to participants at such time and in such manner as provided under the terms of the Plan. The Company will
continue to recognize pension expense (actuarially projected to be income of $119 thousand in 2013 versus
expense of $1.2 million in 2012) and funding obligations for the remaining life of the associated liability for the
frozen benefits under the Plan.
2012 Annual Report
j 71
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company's total capital increased $4.7 million, or 11.67%, from $40.3 million at December 31, 2011 to
$45.0 million at December 31, 2012. The increase in total capital is due to net income of $6.8 million and an
increase of $2.7 million in the net other comprehensive income attributable to the unfunded defined benefit
pension liability offset by $4.5 million in dividends paid in 2012. Capital ratios continue to meet the regulatory
guidelines for well capitalized, and increased as of December 31, 2012, The total risk based capital ratio at
December 31, 2011 was 12,17% and had increased to 12.95% at December 31, 2012. The regulatory guideline
for well capitalized is 10.00% and the minimum requirement is 8.00%.
The regulatory environment of the past few years, including the Dodd-Frank Act and the federal Sarbanes-
Oxley Act of 2002 and the changes discussed in Recent Developments, has placed an extensive burden on
small publicly traded companies as there are few significant differences in the requirements because of size,
complexity of operations and products, nor is any relief provided to banking companies despite the significant
regulatory oversight to which the banking industry is already subject from states, the FDIC and the Federal
Reserve. Union also became subject to section 112 ofthe Federal Deposit Insurance Corporation Improvement
Act of 1991 as of December 31, 2012 as total assets exceeded $500 million at January 1, 2012, Most of these
requirements were already met by Union due to SEC and NASDAQ regulation and all additional requirements
have been incorporated. Nevertheless, the additional and overiapping regulatory requirements add to operating
costs and divert management somewhat from the objectives of growing and strengthening the business. Banks
also spend a significant amount of time and dollars complying with the US Patriot Act and the Bank Secrecy
Act to protect the U.S. financial system and their customers against identity theft, anti-money laundering, and
terrorism. The cost of doing business as a community bank continued to increase throughout 2012 and this
trend appears as though it will continue in the future.
72
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following per share information and key ratios depict several measurements of performance or financial
condition for or at the years ended December 31:
Return on average assets ("ROA")
Return on average equity ("ROE")
Net interest margin (1)
Efficiency ratio (2)
Net interest spread (3)
Total loans to deposits ratio
Net loan charge-offs to average loans not held for sale
Allowance for loan losses to loans not held for sale (4)
Nonperforming assets to total assets (5)
Equity to assets
Total capital to risk weighted assets
Book value per common share
Earnings per common share
Dividends paid per common share
Dividend payout ratio (6)
2012
2011
2010
1.22%
16.35%
4.27%
71.51%
4,14%
89.25%
0.05%
1.05%
0.73%
7.80%
12.95%
10.11
1.54
1.00
64,94%
$
$
$
1,04%
12,47%
4.29%
72.61%
4.11%
90.66%
0.08%
1.00%
1.40%
7.30%
12.17%
9.05
1.17
1.00
85.47%
1,26%
13.37%
4,62%
67.32%
4.39%
101.39%
0.07%
1.00%
1.15%
9,19%
15.12%
9.36
1.25
1.00
80.00%
$
$
$
$
$
$
(1) The ratio of tax equivalent net interest income to average earning assets. See page 75 for more information.
(2) The ratio of noninterest expense ($23.0 million in 2012, $19.8 million in 2011 and $16.6 million in 2010) to
tax equivalent net interest income ($22,4 million in 2012, $20,3 million in 2011 and $19,3 million in 2010)
and noninterest income ($10,5 million in 2012, $7.1 million in 2011 and $5.6 million in 2010) excluding
securities gains ($673 thousand in 2012, $183 thousand in 2011 and $98 thousand in 2010).
(3) The difference between the average rate earned on earning assets and the average rate paid on interest
bearing liabilities. See page 75 for more information.
(4) Calculation includes the net carrying amount of loans recorded at fair value from the branch acquisitions
as of December 31, 2012 ($22.9 million) and December 31, 2011 ($27,9 million). Excluding such loans, the
allowance for loan losses to loans not purchased and not held for sale was 1.11% at December 31, 2012
and 1.07% at December 31, 2011,
(5) Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past
due as well as other real estate or assets owned.
(6) Cash dividends declared and paid per common share divided by consolidated net income per share.
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 2012, was $6.8 million compared with net income
of $5,2 million for the year 2011 an increase of 31.1%. Pressure on the net interest margin continued due to the
prevailing low interest rate environment, resulting in a decrease of 2 basis points from 4.29% for 2011 to 4.27%
for 2012. Earnings per share increased to $1.54 in 2012 from $1.17 in 2011, reflecting the combined effect of
the following income and expense items: Net interest income increased $1,9 million, or 9.7%, with a 10,8%
growth in average interest earning assets; the Provision for loan losses decreased $115 thousand, or 14.8%;
noninterest income increased $3.4 million, or 47.7%; noninterest expense increased $3.3 million, or 16.5% and
the provision for income taxes increased $544 thousand, or 48.6%.
Net Interest Income. The largest component of the Company's operating income is net interest income,
which is the difference between interest and dividend income received from interest earning assets and the
2012 Annual Report
73
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
interest expense paid on interest bearing liabilities. The Company's level of net interest income can fluctuate
over time due to changes in the level and mix of interest earning assets and interest bearing liabilities and from
changes in the yields earned and costs of funds. The Company's net interest income increased $1.9 million, or
9.7%, to $21.7 million for the year ended December 31, 2012, from $19.8 million for the year ended December
31, 2011. This increase was due primarily to the combined effect ofthe increase in interest income of $1.4 million
from $23.7 million in 2011 to $25.0 million in 2012 and the decrease in interest expense of $557 thousand from
$3.9 million in 2011 to $3.4 million in 2012. Both years reflected the historically low 3.25% prime rate. Yields
dropped as adjustable rate loans repriced at lower rates, existing loans were refinanced and new ioans and
investments originated at lower rates. However, the effect of this continuing decrease in yields was offset by the
growth in average interest earning assets to $524.3 million in 2012 from $473.3 million in 2011. The Company's
net interest income increased $971 thousand, or 5.2%, to $19.8 million for the year ended December 31, 2011,
from $18,8 million for the year ended December 31, 2010.
On average for the year, 93,5% of assets earned interest in 2012 compared to 94.0% in 2011, The net
interest spread increased to 4.14% for the year ended December 31, 2012, from 4,11% for the year ended
December 31, 2011, as rates dropped more rapidly on interest bearing liabilities than on interest earning assets.
Rates were already near historic lows coming into 2011 and have moved even lower in 2012. The net interest
margin for the 2012 period decreased 2 basis points to 4,27% from 4,29% for the 2011 period, reflecting the
change in the composition of interest earning assets and repricing of such assets at lower rates.
Yields Earned and Rates Paid. The following table shows for the periods indicated the total amount of
income recorded from average interest earning assets, the related average tax equivalent yields, the interest
expense associated with average interest bearing liabilities, the related average rates paid, and the resulting tax
equivalent net interest spread and margin. Yield and rate information is average information for the year, and
is calculated by dividing the tax equivalent income or expense item for the year by the average balance of the
appropriate balance sheet item for that year. Net interest margin is tax equivalent net interest income divided
by average earning assets. Nonaccrual loans or investments are included in asset balances for the appropriate
periods, but recognition of interest on such loans or investments is discontinued and any remaining accrued
interest receivable is reversed in conformity with federal regulations.
74 I
2012 Annual Report
r
Ul
.
uon B ar ikshare « ¥ . * .^
s, inc.
^
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table presents average balance sheet data and an analysis of net interest
earned and interest expense paid for each major component of interest earning assets and interest bearing
'ncome which illustrates interest income
liabilities:
2012
Interest Average
Earned/ Yield/
Rate
Paid
Average
Balance
Years Ended December 31,
2011
Average
Balance
Interest
Earned/
Paid
(Dollars in thousands)
Average
Yield/
Rate
2010
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Balance
Average Assets:
Federal funds sold and
overnight deposits
Interest bearing deposits
$ 17,789
$
27
0,15%
$ 18,578
$
34
0,18%
$ 13,390
$
22
0.16%
in banks
Investment securities (1), (2)
Loans, net (1), (3)
Nonmarketable equity securities
21,994
37,698
444,836
1,942
270
1,037
23,684
10
1.23%
3.20%
5,44%
0,50%
16,596
34,625
309
1,051
401,625
22,269
1.86%
3.44%
5,64%
1,924
6
0,29%
17,852
24,564
360,261
1,922
411
2,30%
1,012
21,462
-
4.63%
6.06%
-%
Total interest earning
assets (1)
Cash and due from banks
Premises and equipment
Other assets
Total assets
Average Liabilities and
Stockholders' Equity:
Interest bearing checking
accounts
Savings/money market
accounts
Time deposits
Borrowed funds
Total interest bearing
liabilities
Noninterest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
524,259
4,683
10,070
21,725
$560,737
25,028
4.91%
473,348
23,669
5.11%
417,989
22,907
5,60%
5,683
8,513
16,022
$503,566
5,097
7,915
12,637
$443,638
$ 88,007
$
140
0.16%
$ 74,862
$
171
0.23%
$ 62,094
$
139
0,22%
167,846
152,085
27,267
435,205
75,265
8,400
518,870
41,867
414
0,25%
1,862
1.22%
935
3.38%
141,136
144,494
29,621
554
0,39%
2,100
1,083
1.45%
3,61%
120,469
130,384
27,066
624
0.52%
2,214
1.70%
1,140
4.16%
3,351
0.77%
390,113
3,908
1.00%
340,013
4,117
1.21%
66,389
5,195
461,697
41,869
55,829
6,019
401,861
41,777
stockholders'equity
$560,737
$503,566
$443,638
Net Interest income
Net interest spread (1)
Net interest margin (1)
$ 21,677
$ 19,761
$ 18,790
4,14%
4,27%
^ ^ ^ • •^
4.11%
4.29%
4,39%
4,62%
(1) Average yields reported on a tax equivalent basis using a m
arginal tax rate of 34%
.
(2) Average balances of investment securities are calculated or
the amortized cost basis and
nclude nonaccrual securities, if
applicable.
(3)
Includes loans held for sale as well as nonaccrual loans, unamortized costs and u
namortized premiums and is net of the
allowance for loan losses.
2012 Annual Report
75
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Tax exempt interest income amounted to $1.5 million and $1.2 million for the years ended December 31, 2012
and 2011, respectively. The following table presents the effect of tax-exempt income on the calculation of net
interest income, using a marginal tax rate of 34% for 2012 and 2011:
Net interest income as presented
Effect of tax-exempt interest
Investment securities
Loans
Net interest income, tax equivalent
Years Ended December 3 1,
2011
(Dollars in thousands)
$19,761
2012
$21,677
170
512
$22,359
141
390
$20,292
2010
$18,790
126
374
$19,290
Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates (on
a fully tax equivalent basis) and changes in volume of average interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense during the periods indicated. For
each category of interest earning assets and interest bearing liabilities, information is provided on changes
attributable to:
changes in volume (change in volume multiplied by prior rate);
changes in rate (change in rate multiplied by prior volume); and
total change in rate and volume.
Changes attributable to both rate and volume have been allocated proportionately to the change due to volume
and the change due to rate.
Year Ended December 31, 2012
Compared to Year Ended
December 31, 2011
Increase/(Decrease)
Due to Change In
Rate
Volume
Year Ended December 31, 2011
Compared to Year Ended
December 31, 2010
Increase/(Decrease)
Due to Change In
Rate
Net
Net
(Dollars in
Volume
thousands)
Interest earning assets:
Federal funds sold and overnight
deposits
Interest bearing deposits in banks
Investment securities
Loans, net
FHLB of Boston stock
$
(1)
84
89
2,316
-
Total interest earning assets
$ 2,488
(6)
(123)
(103)
(901)
4
(1,129)
$
£
Interest bearing liabilities:
Interest bearing checking accounts
Savings/money market accounts
Time deposits
Borrowed funds
Total interest bearing liabilities
Net change in net interest income
$
28
92
106
(81)
$
145
$ 2,343
(59)
(232)
(344)
(67)
(702)
(427)
$
$
L
$
L
$
$
$_
(7)
(39)
(14)
1,415
4
1,359
(31)
(140)
(238)
(148)
(557)
1,916
$
$_
$
$
$_
10
(27)
390
2,391
—
2,764
28
96
225
100
449
2,315
2
(75)
(351)
(1,584)
6
(2,002)
4
(166)
(339)
(157)
(658)
(1,344)
$
1
$
$
1
12
(102)
39
807
6
762
32
(70)
(114)
(57)
(209)
971
$
L
$
$
L
76 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Interest and Dividend Income. The Company's interest and dividend income increased $1.4 million, or 5.7%,
to $25.0 million for the year ended December 31, 2012, from $23.7 million for the year ended December 31,
2011, mostiy driven by an increase in average earning assets of $50.9 million, or 10,8%, from $473,3 million
at December 31, 2011 to $524.3 million at December 31, 2012, reflecting both the effect of the May 2011
branch acquisition and organic growth ofthe franchise. However, the positive effect on interest income resulting
from the rise in the average volume of earning assets was partially offset by the lower rates earned on all
interest earning assets except nonmarketable equity securities, as the persistent low interest rate environment
resulted in lower yields earned on new earning assets in the year ended December 31, 2012 versus 2011. The
Company's interest and dividend income increased $762 thousand, or 3.3%, to $23.7 million for the year ended
December 31, 2011, from $22.9 million for the year ended December 31, 2010. Despite lower yields, interest
income on loans increased $1.4 million, or 6.4%, to $23.7 million for the year ended December 31, 2012 versus
$22.3 million for 2011, in conjunction with an increase of $43.2 million in average loan volume between years.
Average loans approximated $444.8 million at an average yield of 5.44% for the year ended December 31,
2012, up $43.2 million, or 10.8% from an average volume of $401.6 million at an average yield of 5.64% for the
year ended December 31, 2011. The loans in the branches acquired in May 2011 accounted for approximately
$13.7 million of the increase in average loans for the year ended December 31, 2012 compared to 2011. The
positive impact of the increase in average total loan volume was partially offset by a 20 basis point decrease in
average yield. Interest income on loans increased $800 thousand, or 3,8%, to $22.3 million for the year ended
December 31, 2011 compared to $21.5 million for 2010.
The average balance of investments increased $3.1 million, or 8.9%, from $34.5 million for the year ended
December 31, 2011, to $37.7 million for the year ended December 31, 2012, with a 24 basis point decrease
in the yield on the investment portfolio from 3.44% for 2011 to 3.20% for 2012. The average balance of
FDIC insured interest bearing deposits in banks increased $5.4 million, or 32,5%, to $22,0 million for the year
ended December 31, 2012 from $16.6 million for the year ended December 31, 2011, with a 63 basis point
decrease in the average yield from 1.85% for 2011 to 1,23% for 2012, reflecting the continued low interest rate
environment during the last two years and the shortness of the duration of the portfolio as we anticipate an
eventual rise in interest rates. The average balance of federal funds sold and overnight deposits decreased $789
thousand, or 4.2%, from $18.6 million for the year ended December 31, 2011 to $17.8 million for the year ended
December 31, 2012, with a slight decrease in the average yield from 0.18% for 2011 to 0,15% for 2012, as
the Federal Funds target rate set by the FOMC stayed between 0,00% and 0.25% throughout 2011 and 2012.
Interest income from nonloan instruments decreased $56 thousand, or 4.0%, between years, with $1.3 million
in income for 2012 and $1.4 million for 2011, reflecting the overall decrease in average yields on interest bearing
deposits and investment securities. The average volume of nonloan interest bearing asset categories increased
from $71.7 million for the year ended December 31, 2011 to $79.4 million for the year ended December 31,
2012 but the increased volume was not enough to offset the drop in yields. 2011 interest income from nonloan
instruments decreased $45 thousand, or 3.1%, compared to 2010, with $1.4 million in income for both years.
Interest Expense. The Company's interest expense decreased $557 thousand, or 14.3%, to $3.4 million
for the year ended December 31, 2012, from $3.9 million for the year ended December 31, 2011, despite an
increase of $45.1 million in average volume of interest bearing liabilities between years. The decrease was
primarily attributable to lower rates paid on all interest bearing liabilities, reflecting the persistent low interest
rate environment. The Company's interest expense decreased $209 thousand, or 5.1%, to $3,9 million for the
year ended December 31, 2011, from $4.1 million for the year ended December 31, 2010.
Interest expense on deposits decreased $409 thousand, or 14.5%, from $2.8 million for the year ended
December 31, 2011 to $2.4 million for the year ended December 31, 2012, despite an increase in average
interest bearing deposits between years. Interest rates paid in 2012 decreased for all categories of interest
bearing liabilities. Interest rates dropped significantly during the last two years as it became apparent that
2012 Annual Report
j 77
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
the low interest rate environment was not going to be of a short duration. Average interest bearing deposits
increased $47,4 million, or 13.2%, from $360.5 million for the year ended December 31, 2011 to $407.9 million
for the year ended December 31, 2012. This increase reflects the overall growth in the franchise with the May
2011 acquisition of three New Hampshire branches that had average interest bearing deposits of $58.3 million
for the year ended December 31, 2012, as well as the continuing impact of higher FDIC insurance coverage and
uncertainty surrounding the financial markets as customers retain cash in lieu of other less liquid investments.
Average time deposits increased $7.6 million, or 5.3%, to $152.1 million for 2012 from $144.5 million for 2011.
Average interest bearing checking accounts increased $13.1 million, or 17.6%, from $74.9 million for the year
ended December 31, 2011 to $88.0 million for the year ended December 31, 2012, The average balances of
savings and money market accounts increased $25.7 million, or 18.9%, from $141.1 million for the year ended
December 31, 2011 to $167.8 million for the year ended December 31, 2012. The average rate paid on interest
bearing deposits decreased 19 basis points from 0.78% in 2011 to 0.59% in 2012.
Interest expense on borrowed funds decreased $148 thousand, or 13.7%, to $935 thousand for the year
ended December 31, 2012, from $1,1 million for the year ended December 31, 2011, Average borrowed funds
decreased $2.4 million, or 7,9%, from $29,6 million for 2011, to $27.3 million for 2012 in part reflecting deposit
growth as a preferred funding source. Average customer overnight collateralized repurchase sweeps increased
$517 thousand, or 22.7%, from $2.7 million for 2011 to $3.3 million for 2012, while average borrowings from the
FHLB of Boston decreased $2.9 million, or 11.5% from $25.4 million for 2011 to $22.5 million for 2012 partially
reflecting the prepayment of advances in the deleveraging transaction that occurred in December 2012. The
average rate paid for borrowed funds decreased from 3,61% for the year ended December 31, 2011 to 3.38%
for the year ended December 31, 2012, reflecting the effect of the lower borrowing rates paid on customer
repurchase sweeps and new advances compared to the rates paid on borrowings outstanding at the end of 2011.
Provision for Loan Losses. The provision for loan losses decreased from $775 thousand in 2011 to $660
thousand in 2012. Improvement was reported during 2011 in the local travel and tourism industry, with reduced
snowfall in the winter of 2012 tempering this improvement. However, with the excellent weather in the summer
and a fall 2012 tourism season showing reasonably good results, there was continued improvement in the
industry. Although the impact of the decline in revenue from the recession period (2009 and 2010) is still
evident in the local market, continued signs of improvement indicate the recovery, though shallow, is ongoing.
During 2012, nonperforming loans decreased by $3.1 million and loans rated substandard, net of government
guarantees, that represent a higher degree of risk of loss increased by $1.5 million. The local market area has
seen a gradual but consistent decline in commercial and residential property values over the past few years. As a
result of the qualitative factor reviews during the year ended December 31, 2012, the reserve factor assigned to
the commercial real estate portfolio in total remained unchanged, however, the factor for the value of underlying
collateral component was increased by 0,05% and the factor for the volume and severity of past due, nonaccrual
and classified loans decreased by 0.05%. The qualitative factor review also resulted in decreases in the factor
for the volume and severity of past due, nonaccrual and classified loans of 0.10% and 0.05% for the commercial
and installment portfolios, respectively. The lower provision in 2012 was deemed appropriate by management
in light of the growth in the loan portfolio, the decrease in nonperforming loans, the increase in substandard
and impaired loans, the results of the qualitative factor review, the change in the mix of the portfolio and the
outlook for future economic conditions. Refer to Asset Quality and Allowance for Loan Losses sections below for
a more in depth discussion.
78 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Noninterest Income. The following table sets forth changes from 2011 to 2012 for the components of
noninterest income:
For The Years Ended December 3 1,
$
Variance
%
Variance
Trust income
Service fees
Net gains on sales of loans held for sale
Income from life insurance
Other income
Subtotal
Net gains on sales of investment
securities available-for-sale
Total noninterest income
2012
$
515
4,877
3,614
397
349
9,852
673
$ 10,525
2011
(Dollars in
$ 557
4,367
1,566
107
345
5,942
thousands)
$
58
510
2,048
290
4
2,910
183
$7,125
490
$ 3,400
10.4
11,7
130.8
271.0
1.2
41.9
257,8
47,7
Noninterest income before gains and losses on investment securities available-for-sale was $9,9 million, or
28.2%, of total income net of gains on investment securities available-for-sale for the year ended December 31,
2012, compared to $6.9 million, or 22,7%, for the year ended December 31, 2011. This increase between years
reflects increased income in every category, with material changes described below:
Trust income. Trust income increased $58 thousand, or 10.4%, for 2012 compared to 2011. Fees are normally
charged on asset values which have grown over the prior year, aided by the improvement in the stock market.
Service fees. The $510 thousand increase in service fees for 2012 compared to 2011 was due in large part to
the 17.0% growth in debit card and ATM fees resulting from the growth in the volume of electronic transactions,
which added $276 thousand to fees earned. In addition, merchant program fees increased $75 thousand, or
14.4%, between years. There was also an increase of $82 thousand, or 16.5%, in loan servicing fees between
periods due to the increased volume of residential mortgage loans serviced. Overdraft fee income on deposit
accounts also increased by $75 thousand, or 7.1% between periods.
Net gains on sales of loans held for sale. Net gains increased from 2011 to 2012 by $2.0 million, or 130.8%,
with an increase in total loans sold to $126.3 million in 2012 from $80,4 million in 2011, reflecting the activity
of the South Burlington loan production office, the introduction of new government sponsored loan products,
improved margins on sales of loans and increased activity caused by a more active real estate market and
continuing low interest rates. The Company has continued to manage interest rate risk by selling a major portion
of the low rate qualified residential mortgages originated during 2012 to the secondary market.
Income from life insurance. The $290 thousand increase between 2012 and 2011 primarily represents an
estimated $249 thousand death benefit receivable over and above the accrued cash surrender value of
Company owned life insurance. The remainder of the increase is attributable to earnings on $2 million in policies
purchased in July 2011.
Net gains on sales of investment securities available-for-sale. Available-for-sale debt securities of $13.0 million
were sold in 2012 for a gain of $673 thousand, including sales of $11,7 million as part of the deleveraging
transaction that occurred during December 2012 in which FHLB of Boston borrowings of $11.0 million were
prepaid. This compares to available-for-sale debt securities of $2.1 million sold in 2011 for a net gain of $183
thousand.
2012 Annual Report
I 79
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Noninterest Expense. The following table sets forth changes from 2011 to 2012 for components of noninterest
expense:
For The Years Ended December 3 1,
Salaries and wages
Pension and employee benefits
Occupancy expense, net
Equipment expense
ATM and debit card expense
Communications
Advertising and public relations
Vermont franchise tax
FDIC insurance assessment
Prepayment penalties on borrowings
Equity in losses of limited partnerships
Branch acquisition expenses
Professional fees
Supplies and printing
Expenses of OREO and OAO, net
Director and advisory board fees
Postage and shipping
Amortization of core deposit intangible
Other expenses
Total noninterest expense
2012
$ 8,953
3,908
1,155
1,490
730
323
341
459
351
890
560
—
424
395
489
275
293
170
1,728
$23,035
2011
(Dollars in
$ 7,743
3,153
1,121
1,220
613
363
465
429
376
177
515
407
417
394
302
262
250
100
1,465
$ 19,773
$
Variance
%
Variance
thousands)
$ 1,210
755
35
270
117
(40)
(125)
30
(25)
713
145
(407)
7
1
187
13
43
70
263
$ 3,262
15.5
23.9
3.1
22.1
19.1
(11.0)
(26.8)
7,0
(5,6)
402,8
28.2
(100.0)
1.7
0.3
61.9
5.0
17.2
70.0
18.0
15.5
Salaries and wages. The $1.2 million increase in 2012 over 2011 was due primarily to normal annual salary
increases, additional staff associated with the three branches acquired in May 2011 as well as from the increased
loan demand, increased commissions in the loan production office and accruals for the Short Term Incentive
Performance Plan ("STIPP") adopted in February 2012.
Pension and employee benefits. The defined benefit pension plan expense, which represents the actuarially
computed pension expense for the year determined as of the last day of the previous calendar year and adjusted
to reflect the curtailment date of October 5, 2012, increased $362 thousand, or 43.5%, from $833 thousand for
2011 to $1.2 million for 2012. The increase was due to the lower discount rate utilized to calculate the present
value of future benefits, increase in life expectancies, increased salary levels and number of participants and low
return on investments in 2011, partially offset by the October 5, 2012 freeze on the plan which stopped accrual
of benefi'ts and closed the plan to new participants. The 401K employer contribution expense also increased
$265 thousand, or 158.3%, to $433 thousand for 2012 compared to $158 thousand for 2011, with $242 thousand
of this increase representing a discretionary profit-sharing component for 2012 that was $0 in 2011 and the
remaining increase relates to higher staffing levels. Employer payroll taxes increased $79 thousand, or 11.8%
from $669 thousand for 2011 to $749 thousand for 2012. The majority ofthe increase is due to higher staffing
levels, resulting in increased salaries and wages and the remainder is due to increased maximum wage bases
and rates charged for Vermont and New Hampshire unemployment taxes. While premium levels remained
unchanged from 2011 to 2012, the cost ofthe Company's medical plan increased $39 thousand, or 3.0%, to $1.3
million for both 2011 and 2012 due to higher staffing levels.
80
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Occupancy expense, net. Occupancy expenses, other than rent expense and insurance, increased between
years due to the increased number of banking locations and the higher cost of operation in 2012; however, these
increases were partially offset with an increase in rental income from the purchase ofthe building housing the
newly acquired branch located in Littieton, New Hampshire as of March 31, 2012.
Equipment expense. The increase in equipment expense between years is partially due to the increase of $120
thousand, or 17.0%, in software licenses and maintenance contracts expense, from $705 thousand for 2011 to
$825 thousand for 2012. Equipment depreciation also increased $155 thousand, or 32.7%, from $474 thousand
for 2011 to $629 thousand for 2012, primarily due to the acceleration of depreciation on the document imaging
system being replaced in the fourth quarter of 2012 and the replacement of the ATMs during the fourth quarter
of 2011 and first quarter of 2012 to comply with regulatory requirements under the federal Americans with
Disabilities Act which became effective in March 2012.
ATM and debit card expense. The increase between 2011 and 2012 is mainly due to the increase in ATM and
debit card expenses, reflecting higher utilization and growth in the deposit base.
Communications. The 2012 communication expenses represent typical operating costs and decreased $40
thousand, or 11.0%, compared to 2011, which included an upgrade of data and phone communication lines and
the cost of adding the three acquired branches.
Advertising and public relations. The decrease between years of $125 thousand, or 26.8%, is mainly due to
bringing the majority of services in house during 2012.
FDIC insurance assessment. The decrease in assessment for 2012 was due to a change in the assessment
formula, which had been previously based on total deposits and effective April 1, 2011 was changed to a net
asset base. The benefit from the formula change was partially offset by the increased assessment resulting
from the Company's growing net asset base.
Prepayment penalties on borrowings. The increase between years of $713 thousand mainly relates to penalties
of $875 thousand paid on the prepayment of borrowings from the FHLB of Boston as part of the deleveraging
transaction in December 2012.
Equity in losses of affordable housing investments. New investments in limited partnerships were recorded
during 2011 and 2012 which has increased the expense for equity in losses. The increased expenses are offset
on an after tax basis by the increased tax credits recorded as a reduction of income tax expense.
Branch acquisition expenses. The branch acquisition expenses for 2011 were mainly data conversion, legal,
professional and marketing fees expended to facilitate the purchase of the three New Hampshire branches.
There were also expenses incurred to replace customer checkbooks and branch supplies.
Expenses of OREO and OAO, net. Expenses for 2012 included $408 thousand in the write-down of value of ten
OREO properties and an other asset owned to their fair market value less estimated costs to sell, while the
expenses for 2011 included write-downs of $278 thousand. The 2011 expenses are net of a recovery of $111
thousand during the second half of 2011 resulting from settlement of a prior year's foreclosure action.
Postage and shipping. The increase in postage and shipping expense between years of $43 thousand, or 17.2%,
is due to the increased number of branches and accounts.
2012 Annual Report
I 81
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Amortization of core deposit intangible. As a result of the purchase of branches in May 2011, a core deposit
intangible of $1.7 million was recorded and is being amortized over the estimated 10 year estimated average
life of the core deposit base.
Other expenses. The 2012 results include an increase of $115 thousand related to other loan costs associated
primarily with the origination and sale of residential real estate loans. Benefit administration costs were $21
thousand higher in 2012 related to the freezing of the Union Bank Pension Plan and the development of the
STIPP. New Hampshire state income taxes also increased $43 thousand in 2012 with the Company's growing
presence in the NH market area as well as the increased taxable income in 2012. These increases were partially
offset by a reduction in outsourced information technology services of $31 thousand for 2012 compared to 2011.
Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for
the current and all prior periods presented. The Company's net provision for income taxes increased to $1.7
million for 2012 from $1.1 million for 2011. The Company's effective tax rate for 2012 was 19.5% compared to
17.7% for 2011. Federal income taxes and the effective tax rate increased due to the increase in taxable income.
However, the effect of that increase was partially mitigated by an increase in tax exempt interest income to $1.5
million for 2012 versus $1.2 million for 2011, and tax credits recorded from investments in affordable housing
projects, which increased to $597 thousand for 2012 versus $455 thousand for 2011. There was an additional
$99 thousand federal rehabilitation credit on the rehabilitation of a building owned by the Company in 2011 that
was not available in 2012.
FINANCIAL CONDITION
At December 31, 2012, the Company had total consolidated assets of $577.3 million, including gross loans and
loans held for sale ("total loans") of $455,2 million, deposits of $510.0 million and stockholders' equity of $45.0
million. The Company's total assets increased $24.5 million, or 4.4%, to $577.3 million at December 31, 2012,
from $552.8 million at December 31, 2011.
Total net loans and loans held for sale increased a total of $25.5 million, or 6.0%, to $450.6 million, or 78.1% of
total assets, at December 31, 2012, compared to $425.2 million, or 76.9% of total assets, at December 31, 2011.
The increase in 2012 resulted mainly from growth of $7.9 million in construction real estate loans, $7.5 million
in residential real estate loans, and $11.9 million in municipal loans. These increases were partially offset by
decreases in commercial real estate, commercial and consumer loans. Residential mortgage loan demand was
strong during the year but growth of the loan portfolio was moderated significantly by management's decision
to continue to sell qualified lower fixed rate residential loans into the secondary market during 2012 to mitigate
future interest rate risk and to participate out or sell some commercial real estate loans to mitigate the level of
credit and interest rate risk.
Federal funds sold and overnight deposits increased $23.0 million to $41.5 million at December 31, 2012 from
$18.5 million at December 31, 2011. Interest bearing deposits in banks decreased $2.1 million, or 8.7%, from
$24.0 million at December 31, 2011 to $21.9 million at December 31, 2012. Investment securities available-
for-sale decreased $22.3 million, or 52.0%, from $43.0 million at December 31, 2011 to $20.5 million at
December 31, 2012, with investment securities held-to-maturity increasing $1.5 million from $4.0 million at
December 31, 2011 to $5.5 million at December 31, 2012, The decrease in investment securities available-for-
sale from 2011 to 2012 is partially attributable to the deleveraging transaction that occurred in December of
2012, in which $11.7 million in available-for-sale securities were sold with the proceeds utilized to prepay FHLB
of Boston advances totaling $11.0 million.
82 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Deposits increased $36.6 million, or 7.7%, to $510.0 million at December 31, 2012, from $473.4 million at
December 31, 2011. Noninterest bearing deposits increased $7.0 million, or 9.2%, from $76.7 million at
December 31, 2011 to $83.7 million at December 31, 2012. Interest bearing deposits increased $34.4 million,
or 14.4%, from $239,1 million at December 31, 2011 to $273.5 million at December 31, 2012. Time deposits
decreased $4.9 million, or 3.1%, from $157.7 million at December 31, 2011, to $152.8 million at December 31,
2012. (See average balances and rates in the Yields Earned and Rates Paid table on page 75.)
Although the Company has thus far been able to grow the deposit base, the continuing low interest rate
environment and aggressive rate competition from in-market and out-of-market financial institutions makes
deposit accounts increasingly difficult to attract and retain. Deposit account relationships, particuiariy noninterest
bearing deposits, are especially difficult to develop due to the customer's anticipated cost and inconvenience
associated with new checks, debit cards, direct deposits and automated clearing house transaction changes.
Therefore, the May 2011 acquisition of the three New Hampshire branches is viewed by management and the
Board of Directors as a strong strategic move for the Company, by increasing deposits and expanding the
Company's New Hampshire market area. For the year ended December 31, 2012, the average deposits in the
branches acquired in May 2011 were $53.3 million.
Total borrowed funds decreased $13.3 million, or 45.7%, from $29.0 million at December 31, 2011 to $15,7
million at December 31, 2012. The decrease is partially due to a reduction in customer overnight collateralized
repurchase sweeps of $2.7 million from $6.7 million at December 31, 2011 to $4.0 million at December 31,2012.
Borrowed funds from the FHLB of Boston decreased $10.5 million, or 47.1%, from $22.3 million at December 31,
2011 to $11.8 million at December 31, 2012. The decrease is attributable to the prepayment of FHLB of Boston
advances in the deleveraging transaction of $11.0 million, a $258 thousand prepayment of an FHLB of Boston
advance unrelated to the deleveraging transaction, and normal monthly payments on FHLB of Boston amortizing
advances. These decreases were partially offset by an advance taken during 2012 in the amount of $2.0 million.
The total dollar value of the Company's stockholders' equity increased from $40.3 million at December 31,
2011 to $45.0 million at December 31, 2012, reflecting net income of $5.8 million for 2012, an increase of
$8 thousand from stock based compensation, a $12 thousand increase due to the issuance of 700 shares
of common stock resulting from the exercise of 700 incentive stock options, and an increase of $2.7 million
in the net other comprehensive income attributable to a decrease in the unfunded defined benefit pension
liability. These increases were partially offset by cash dividends paid of $4.5 million, a decrease in the net other
comprehensive income of $384 thousand on investment securities available-for-sale, and a purchase of $36
thousand of treasury stock.
Loan Portfolio. The Company's loan portfolio (including loans held for sale) primarily consists of adjustable-
rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real
estate. As of December 31, 2012, the gross loan portfolio totaled $455.2 million, or 78.8% of assets, compared
to $429.2 million, or 77.6% of assets, as of December 31, 2011. Total loans increased $26.0 million, or 6.0%,
since December 31, 2011, despite the sale of $126.3 million of loans held for sale during 2012, which resulted
in a gain on sale of loans of $3.6 million, and the net participation of an additional $4.5 million of commercial
real estate loans. Sales of loans in 2011 totaled $80.4 million with a gain of $1.6 million. Management expects
to continue to sell and/or participate loans to manage interest rate risk, credit exposure or liquidity needs in the
future, especially in light of the continuing low interest rate environment. Although competition for good loans is
strong, especially in the commercial sector, the Company has been able to originate loans to both current and
new customers while maintaining credit quality.
2012 Annual Report
83
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The composition of the Company's loan portfolio at year-end for each of the last five years was as follows:
2012
$
o/o
2011
%
$
2010
$
o/o
2009
%
$
2008
%
$
(Dollars in thousands)
Residential real estate
Construction real estate
Commercial real estate
Commercial
Consumer
Municipal
Loans held for sale
Total loans
154,938
36,018
183,900
21,463
6,065
41,761
11,014
455,159
34,0
7.9
40.4
4,7
1.3
9.2
2.5
100.0
147,426
28,077
189,770
23,018
6,134
29,894
4,888
429,207
34,4
6,5
44.2
5,4
1.4
7,0
1.1
100.0
132,533
18,578
167,056
20,604
6,046
31,455
5,611
381,883
34.7
4,9
43,7
5.4
1,6
8.2
1,5
100.0
123,915
19,391
159,095
15,597
6,967
23,862
9,262
358,089
34.6
5.4
44.4
4.4
1.9
6.7
2.6
100.0
128,292
19,038
153,821
18,833
6,735
23,519
3,178
353,416
36.3
5.4
43,5
5,3
1.9
6.7
0.9
100.0
For residential loans, the Company generally does not lend more than 80% ofthe appraised value ofthe home
without a government guaranty or the borrower purchasing private mortgage insurance, and does not lend
more than 100% of the appraised value. Although the Company lends up to 80% of the collateral value on
commercial real estate loans to strong borrowers, the majority of commercial real estate loans do not exceed
75% of the appraised collateral value. However, the loan to value may go up to 90% on loans with government
guarantees or other mitigating circumstances. The Vermont and northwestern New Hampshire real estate
market experienced declines in home prices as a result of the stagnant economy but to a lesser extent than in
many areas of the country. Sales of homes in Vermont and northwestern New Hampshire slowed considerably
over the last four years but signs of improvement were seen during both 2011 and 2012 in the majority of our
local markets. Real estate secured loans represent $385.9 million, or 84.8%, of total loans at December 31,
2012 compared to $370.2 million, or 86.2%, of total loans at December 31, 2011.
The Company does not make loans that are interest only, have teaser rates or that result in negative amortization
of the principal, except for construction and other short-term loans for either commercial or consumer purposes
where the credit risk is evaluated on a borrower by borrower basis. The Company evaluates the borrower's
ability to pay on variable-rate loans over a variety of interest rate scenarios, not only the rate at origination.
The Company originates and sells residential mortgages into the secondary market, with most of the sales
made to Freddie Mac and occasionally to the FHLB of Boston Mortgage Partnership Finance Program ("MPF"),
the Vermont Housing Finance Agency ("VHFA") orthe New Hampshire Housing Finance Agency ("NHHFA"). As
of December 31, 2012, the Company had $28.5 million in loans sold through the MPF program and a contract
for delivery of an additional $21,4 million of future loan sales. These loans are classified as held for sale at the
time of origination or when a decision is made to sell the loans. The Company generally retains the servicing
rights on sold residential mortgage loans. During the first quarter of 2011, the Company received approval to
originate and sell FHA and VA residential mortgage loans. In April 2012, Union received an Unconditional Direct
Endorsement Approval from HUD which allows it to approve FHA loans originated in any of its Vermont or New
Hampshire locations without needing prior HUD approval. These government backed loans qualify for down
payments that can be as low as 3.5% without geographic or income restrictions. The Company sells VA and FHA
loans as originated with servicing released. These loan products increase the Company's ability to serve the
borrowing needs of residents in the communities we serve. Loans held for sale are accounted for at the lower of
cost or fair value and are reviewed at least quarterly based on current market pricing.
The Company serviced a residential real estate mortgage portfolio of $399.5 million and $338.5 million
at December 31, 2012 and 2011, respectively. Of that portfolio, $233.5 million at December 31, 2012 and
$186.3 million at December 31, 2011 was serviced for unaffiliated third parties. Additionally, the Company
84
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
originates commercial real estate and commercial loans under various Small Business Administration ("SBA"),
U.S. Department of Agriculture Rural Development Authority ("USDA") and Vermont Economic Development
Authority ("VEDA") programs that provide an agency guarantee for a portion of the loan amount. There was $4.5
million guaranteed under these various programs at December 31, 2012 on an aggregate balance of $5.7 million
in subject loans. The Company occasionally sells the guaranteed portion of a loan to other financial concerns
and retains servicing rights, which generates fee income. The Company sold $576 thousand of commercial real
estate loans during 2012, resulting in a gain of $54 thousand. The Company recognizes gains and losses on the
sale ofthe principal portion of these loans as they occur.
The Company serviced $26.9 million and $21.8 million of commercial, municipal and commercial real estate
loans for unaffiliated third parties as of December 31, 2012 and 2011, respectively. This includes $23.1 million
and $18.6 million of commercial, municipal or commercial real estate loans the Company had participated out
to other financial institutions at December 31, 2012 and 2011, respectively. These loans were participated in the
ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
The Company capitalizes servicing rights for both residential mortgage and commercial loans sold with servicing
retained and recognizes gains and losses on the sale of the principal portion of these loans as they occur. The
unamortized balance of servicing rights on loans sold with servicing retained was $1.1 million as of December 31,
2012 and $818 thousand as of December 31, 2011, with an estimated market value in excess of their carrying
value at both year ends. Management periodically evaluates and measures the servicing assets for impairment.
The majority of the Company's loan portfolio is secured by real estate located throughout the Company's
primary market area of northern Vermont and northwestern New Hampshire. Underlying real estate values for
both residential and commercial properties have decreased slightly in the Company's market area during the
last few years, though a quick sale may result in a steeper discount should such a sale of real estate collateral
become necessary. Although the Company's loan portfolio consists of different segments, there is a portion of
the loan portfolio centered in tourism related loans. The local tourism industry had been adversely affected
by the weakened economy and a below average snowfall during the winter of 2012 but the outlook improved
somewhat with the excellent summer weather and a reasonably good fall foliage season. The Company has
implemented risk management strategies to mitigate exposure in this industry through utilizing government
guaranty programs as well as participations with other financial institutions as discussed above. Additionally, the
loan portfolio contains many loans to seasoned and well established businesses and/or well secured loans which
further reduce the Company's risk. Management closely follows the local and national economies and their
impact on the local businesses, especially on the tourism industry, as part of the Company's risk management
program.
2012 Annual Report
| 85
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table breaks down by classification the contractual maturities of the gross loans held in portfolio
and for sale as of December 31, 2012:
Witiiin 1
Year
2-5
Years
(Dollars in thousands)
Overs
Years
Residential real estate
Fixed-rate
Variable-rate
Construction real estate
Fixed-rate
Variable-rate
Commercial real estate
Fixed-rate
Variable-rate
Commercial
Fixed-rate
Variable-rate
Municipal
Fixed-rate
Variable-rate
Consumer & Other
Fixed-rate
Variable-rate
Total
$
359
1,901
$ 2,745
2,187
$ 82,866
75,894
13,363
4,173
270
21,450
2,144
3,556
24,591
—
3,242
3,561
5,383
7,791
3,847
3,250
1,351
—
2,810
8,869
6,887
142,119
6,423
2,233
8,623
7,186
2,586
66
$ 74,459
2,982
91
$36,450
320
20
$344,250
Asset Quality. The Company, like all financial institutions, is exposed to certain credit risks including those
related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans.
Vermont and northwestern New Hampshire did not see the drastic drop in real estate values at the start of the
recession as some parts of the country experienced. However, there has been a steady decline in real estate
values for our market area over the past few years. Consistent application of the Company's conservative
loan policies has helped to mitigate this risk and has been prudent for both the Company and its customers.
Renewed market volatility, high unemployment rates and weakness in the general economic condition of the
country or our market area, may continue to have a negative effect on our customers' ability to make their loan
payments on a timely basis and/or on underlying collateral values. Management closely monitors the Company's
loan and investment portfolios, other real estate and other assets owned for potential problems and reports to
the Company's and the subsidiary's Boards of Directors at regularly scheduled meetings. Repossessed assets
and loans or investments that are 90 days or more past due are considered to be nonperforming assets.
Board approved policies set forth portfolio diversification levels to mitigate concentration risk and the Company
participates large credits out to other financial institutions to further mitigate that risk.
The Company's Board of Directors has set forth well-defined lending policies (which are periodically reviewed
and revised as appropriate) that include conservative individual lending limits for officers, aggregate and
advisory board approval levels. Board approval for large credit relationships, a quality control program, a loan
review program and other limits or standards deemed necessary and prudent. The Company's loan review
program encompasses a review process for loan documentation and underwriting for select loans as well as
a monitoring process for credit extensions to assess the credit quality and degree of risk in the loan portfolio.
Management performs, and shares with the Board of Directors, periodic concentration analyses based on
various factors such as industries, collateral types, location, large credit sizes and officer portfolio loads. The
86 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Company has established underwriting guidelines to be followed by its officers; material exceptions are required
to be approved by a senior loan officer or the Board of Directors. The Company monitors its delinquency levels
for any adverse trends. There can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower financial strength or declining collateral values
due to general or local economic conditions. The Company did not target sub-prime borrowers and has not
experienced elevated delinquency in this area.
Restructured loans include the Company's troubled debt restructurings that involved forgiving a portion of
interest or principal, refinancing at a rate materially less than the market rate, rescheduling loan payments, or
granting other concessions to a borrower due to financial or economic reasons related to the debtor's financial
difficulties that the Company would not ordinarily grant. Restructured loans do not include qualifying restructured
loans that have complied with the terms of their restructure agreement for a satisfactory period of time. There
were three commercial real estate, two construction real estate, and five residential real estate loans totaling
$2.9 million restructured at December 31, 2012 and one commercial real estate and three residential real
estate restructured loans totaling $2.2 million at December 31, 2011. When evaluating the loan loss reserve,
management makes a specific allocation for restructured loans as they are considered impaired.
The following chart details the composition of the Company's nonperforming assets as of December 31:
Nonaccrual loans
Loans past due 90 days or more
and still accruing interest
Total nonperforming loans
Other real estate owned ("OREO")
Other assets owned ("OAO")
Total nonperforming assets
2012
$2,839
2011
(Dollars in thousands)
$4,308
2010
$2,792
307
3,146
1,052
—
$4,198
1,897
6,205
1,476
40
$7,721
806
3,598
1,509
—
$5,207
The Company had no guarantees of U.S. or state government agencies on the above nonperforming loans at
December 31, 2012, $730 thousand of guarantees at December 31, 2011 and $129 thousand at December 31,
2010. There was one loan in process of foreclosure at December 31, 2012 included in nonperforming loans. The
aggregate interest on nonaccrual loans not recognized for the years ended December 31, 2012, 2011 and 2010
was $1.0 million, $903 thousand and $677 thousand, respectively.
2012 Annual Report
87
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table reviews certain asset quality ratios monitored by Company's management at December 31:
2012
2011
2010
2009
2008
Allowance for loan losses to loans
not held for sale (1)
Allowance for loan losses to
nonperforming loans
Nonperforming loans to total loans
Nonperforming assets to total assets
Delinquent loans (30 days to nonaccruing)
to total loans
Net charge-offs to average loans not
held for sale
Loan loss provision to net charge-offs
1.05%
1.00%
1.00%
1.00%
1.02%
148.03%
0.59%
0.73%
68.11%
1.45%
1.40%
104.35%
0.94%
1.15%
81.59%
1.19%
1.15%
48.75%
2.06%
1.85%
2.56%
3.86%
3.43%
3.26%
4.41%
0.05%
287.66%
0.08%
254.93%
0.07%
201.42%
0.13%
86.39%
0.05%
213.38%
(1) Calculation includes the net carrying amount of loans recorded at fair value from the branch acquisitions
as of December 31, 2012 ($22.9 million) and December 31, 2011 ($27.9 million). Excluding such loans, the
allowance for loan losses to loans not purchased and not held for sale was 1.11% at December 31, 2012 and
1.07% at December 31, 2011.
Nonperforming loans at December 31, 2012 decreased in terms of dollars (49.3%) and percentages from
December 31, 2011 with the allowance for loan losses as a percentage of nonperforming loans increasing. The
nonperforming and delinquency ratios have also dropped in comparison to December 31, 2011 and management
considers the ratios to be at favorable levels. The Company's success at keeping the ratios at favorable levels
in these challenging economic conditions is the result of continued focus on maintaining strict underwriting
standards, as well as our practice, as a community bank, of actively working with troubled borrowers to resolve
the borrower's delinquency, while maintaining the safe and sound credit practices ofthe Bank and safeguarding
our strong capital position.
At December 31, 2012, the Company had loans rated substandard that were on a performing status totaling $6.2
million, representing 19 customer relationships, compared to $4.1 million at December 31, 2011, representing
11 customer relationships. In management's view, such loans represent a higher degree of risk of becoming
nonperforming loans in the future. While still on a performing status, in accordance with the Company's credit
policy, loans are internally classified when a review indicates the existence of any of the following conditions,
making the likelihood of collection questionable:
the financial condition of the borrower is unsatisfactory;
repayment terms have not been met;
the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth;
confi'dence is diminished;
loan covenants have been violated;
collateral is inadequate; or
other unfavorable factors are present.
The Company actively works with customers who may be delinquent or who may have financial difficulties.
One of the benefits of being a community financial institution is our employees' and Boards' knowledge of the
community and borrowers, which allows us to be proactive in working closely with our loan customers. The
Company's delinquency rates have historically run higher than similar institutions nationally, while losses have
88 I
2012 Annual Report:
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
been lower. Although management believes that the Company's nonperforming and internally classified loans
are generally well-secured and that probable credit losses inherent in the loan portfolio are provided for in the
Company's allowance for loan losses, there can be no assurance that future deterioration in economic conditions
and/or collateral values, or changes in other relevant factors will not result in future credit losses. Except for
those nonperforming loans discussed above, the Company's management is not aware of any loans as of
December 31, 2012, for which known financial problems of the borrower would cause serious doubts as to the
borrower's ability to materially comply with the present loan repayment terms, nor are there any known events
that would result in any other loans being designated as nonperforming as of December 31, 2012. However, a
combination of negative economic conditions in the Company's market has the potential to create a situation
where any borrower's status can quickly change. Since the fourth quarter of 2007, residential and commercial
real estate values have declined nationally with some other areas of the country experiencing significant
weakening. The region's real estate market has also experienced declines in prices as a result of the stagnant
economy but to a lesser extent than in many areas ofthe country. The residential real estate market in Vermont
and northwestern New Hampshire slowed considerably over the last four years but signs of improvement were
seen during 2011 in the majority of our markets and have continued modestly during 2012, The real estate
market decline significantly contributed to the downturn in the general economy, and unemployment rates and
business failures rose nationally. Locally these indicators have improved but conditions can cause borrowers
who are current in their payments to experience deterioration in the value of their collateral and increase the
potential of default if their income levels decline. Management continues to monitor the national, regional and
local economic environment and its impact on unemployment, business failures and real estate values in the
Company's market area.
Vermont and New Hampshire continue to have lower residential foreclosure rates than the United States
average. On occasion, the Company acquires residential or commercial real estate properties through or in
lieu of loan foreclosure. These properties are held for sale and are initially recorded as OREO at fair value less
estimated selling costs at the date of the Company's acquisition of the property, with fair value based on an
appraisal for more significant properties and on a broker's price opinion for minor properties. Holding costs
and declines in fair value on properties acquired are expensed as incurred. The Company had 12 residential,
land development or commercial real estate properties classified as OREO at December 31, 2012 valued at
$1.1 million, and 11 properties valued at $1.5 million so classified on December 31, 2011. Ofthe 12 properties
in OREO at December 31, 2012, three of the properties have since been sold at a minimal loss and three are
currently under contract to sell. Further softening in the local real estate market would make the potential to
recover all principal and related costs for OREO properties uncertain.
Allowance for Loan Losses. Some of the Company's loan customers ultimately do not make all of their
contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining
principal balance due. The Company maintains an allowance for loan losses to absorb such losses. The allowance
is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in
the loan portfolio; however, actual loan losses may vary from current estimates.
The allowance for loan losses is evaluated quarterly using a consistent, systematic methodology, which
analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specifi'c loans when
determining the appropriate level ofthe allowance, management also takes into consideration other qualitative
factors such as changes in the mix and size ofthe loan portfolio, credit concentrations, historic loss experience,
the amount of delinquencies and loans adversely classified, industry trends, and the impact of the local and
regional economy on the Company's borrowers as well as the estimated value of any underiying collateral. The
appropriate level of the allowance for loan losses is assessed by an allocation process whereby specific loss
allocations are made against impaired loans and general loss allocations are made against segments ofthe loan
portfolio that have similar attributes. Although the allowance for loan losses is assessed by allocating reserves
2012 Annual Report
| 89
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
by loan category, the total allowance for possible loan losses is available to absorb losses that may occur within
any loan category.
The allowance is increased by a provision for loan losses charged to earnings, and reduced by charge-offs, net
of recoveries. The provision for loan losses represents management's estimate of the current period credit
cost associated with maintaining an appropriate allowance for loan losses. Based on an evaluation of the loan
portfolio and other relevant qualitative factors, management presents a quarteriy analysis of the appropriate
level ofthe allowance to the Board of Directors, indicating any changes in the allowance since the last review and
any recommendations as to adjustments in the allowance and the level of future provisions.
Credit quality ofthe commercial portfolio is quantified by a credit rating system designed to parallel regulatory
criteria and categories of loan risk and has historically been well received by the various regulatory authorities.
Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis.
Risk ratings and quality of commercial and retail credit portfolios are also assessed on a regular basis by an
internal independent Loan Review Department, Loan Review personnel conduct ongoing portfolio analyses and
individual credit reviews to evaluate loan risk and compliance with lending policies.
The level of allowance allocable to each loan portfolio category with similar risk characteristics is determined
based on historical charge-offs, adjusted for qualitative risk factors. A quarterly analysis of various qualitative
factors, including portfolio characteristics, national and local economic trends, overall market conditions, and
levels of, and trends in, delinquencies and nonperforming loans, helps to ensure that areas with the potential risk
for loss are considered in management's allowance estimate. In addition, loans are also evaluated for specific
impairment and may be classified as impaired when management believes it is probable that the Company will
not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired
loans may also include troubled loans that are restructured, A specific reserve amount is allocated to the
allowance for individual loans that have been classified as impaired on the basis ofthe fair value of the collateral
for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows.
The composition ofthe Company's loan portfolio remained relatively unchanged from December 31, 2011, and
there was no material change in the Company's lending programs or terms during the year.
90 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table reflects activity in the allowance for loan losses for the years ended December 31:
Balance at the beginning of year
Charge-offs
Real estate
Commercial
Consumer and other
Total charge-offs
Recoveries
Real estate
Commercial
Consumer and other
Total recoveries
Net charge-offs
Provision for loan losses
2012
$4,226
247
—
25
272
20
6
17
43
2011
2010
(Dollars in thousands)
$3,493
$3,755
$3,556
2009
314
1
33
348
3
14
27
44
268
27
20
315
7
21
29
57
379
101
43
523
10
15
35
50
2008
$3,378
50
54
102
206
2
8
39
49
(229)
660
(304)
775
(258)
520
(453)
400
(157)
335
Balance at end of year
Provision charged to income as a
percent of average loans
$4,657
$4,226
$3,755
$3,493
$3,556
0.15%
0,19%
0.15%
0.11%
0.10%
The following table shows (net of loans held for sale) the internal breakdown by risk component ofthe Company's
allowance for loan losses and the percentage of loans in each category to total loans in the respective portfolios
at December 31:
Real Estate:
Residential
Construction
Commercial
Other Loans:
Commercial
Consumer, municipal.
other and unallocated
Total
2012
%
$
2010
2011
%
$
%
(Dollars in thousands)
$
2009
%
$
2008
%
$
1,291
456
2,532
34.9
8.1
44.4
1,250
357
2,278
34,7
6,6
47,2
1,033
240
2,117
35.2
4.9
47.3
976
240
1,959
35.5
5.6
47.8
933
223
1,917
36.7
5.4
43.9
159
4.4
232
5.0
250
5.5
235
4.5
391
5.4
219
4,657
8.2
100.0
99
4,226
6.5
100,0
115
7.1
3,755 100.0
83
3,493
6.6
100.0
92
3,556
8.6
100.0
As a result of the qualitative factor reviews during 2012, the reserve factor assigned to the commercial
real estate portfolio in total remained unchanged, however, the factor for the value of underlying collateral
component was increased by 0.05% and the factor for the volume and severity of past due, nonaccrual and
classified loans decreased by 0.05%. The qualitative factor review also resulted in decreases in the factor for
the volume and severity of past due, nonaccrual and classified loans of 0.10% and 0.05% for the commercial
and consumer installment portfolios, respectively. Management of the Company believes, in its best estimate,
that the allowance for loan losses at December 31, 2012, is appropriate to cover probable credit losses inherent
in the Company's loan portfolio as of such date. However, there can be no assurance that the Company will not
sustain losses in future periods which could be greater than the size of the allowance at December 31, 2012.
In addition, our banking regulators, as an integral part of their examination process, periodically review our
2012 Annual Report
91
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on
their judgments about information available to them at the time of their examination. A large adjustment to the
allowance for loan losses in future periods may require increased provisions to replenish the allowance, which
could negatively affect earnings.
While the Company recognizes that further economic slowdown or financial and credit market turmoil may
adversely impact its borrowers' financial performance and ultimately their ability to repay their loans,
management continues to be cautiously optimistic about the collectability of the Company's loan portfolio.
Investment Activities. The investment portfolio is used to generate interest and dividend income, manage
liquidity and mitigate interest rate sensitivity. At December 31, 2012, the reported value of investment
securities available-for-sale was $20.6 million, or 3,6% of assets, compared to $43.0 million, or 7.8% of assets
at December 31, 2011. At December 31, 2012, there were $5.5 million of investment securities classified as held-
to-maturity, compared to $4.0 million at December 31, 2011. The Company had no investments classified as
trading. In December 2012 the Company decreased its investment portfolio by selling $11.7 million in available-
for-sale securities, of varying types, in connection with the deleveraging strategy to pay down $11.0 million in
FHLB of Boston borrowings. The weighted average yield on the investments sold approximated 3.1%. Investment
securities classified as available-for-sale are marked-to-market, with any unrealized gain or loss after estimated
taxes charged to the equity portion of the balance sheet through the Accumulated other comprehensive income
(loss) component of stockholders' equity. The reported value of investment securities available-for-sale at
December 31, 2012 reflects a net unrealized gain of $771 thousand.
At December 31, 2012, eleven debt securities and four marketable equity securities had unrealized losses of
$67 thousand with aggregate depreciation of 0.26% from the Company's amortized cost basis. Securities are
evaluated at least quarteriy for other than temporary impairment and at December 31, 2012, in management's
estimation no security was other than temporarily impaired. Management's evaluation of other than temporary
impairments is subject to risks and uncertainties and is intended to determine the appropriate amount and
timing of recognition of any impairment charge. The assessment of whether such impairment for debt securities
has occurred is based on management's best estimate of the cash flows expected to be collected at the
individual security level. We regulariy monitor our investment portfolio to ensure that securities that may be
other than temporarily impaired are identified in a timely manner and that any impairment charge is recognized
in the proper period and, with respect to debt securities, that the impairment is properly allocated between
credit losses recognized in earnings and noncredit unrealized losses recognized in other comprehensive income
(loss). Further deterioration in credit quality, imbalances in liquidity in the financial marketplace or a quick rise in
interest rates might adversely affect the fair values of the Company's investment portfolio and may increase the
potential that certain unrealized losses will be designated as other than temporary in future periods, resulting
in write-downs.
At December 31, 2012, the Company had no investments in a single company or entity (other than U.S.
Government-sponsored enterprise securities) that had an aggregate book value in excess of 2% of our
stockholders' equity. As of December 31, 2012, all mortgage-backed securities the Company owned were issued
by Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("Fannie Mae")
or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Although the Fannie Mae and Freddie Mac
debt securities are not explicitly guaranteed by the federal government, one of the stated purposes of the U.S.
Treasury's September, 2008 conservatorship and capital support of the two institutions was to stabilize the
market in their debt securities, and that purpose was again evident in legislation passed by Congress in late
2009 which effectively lifted any dollar ceiling on the implicit U.S. Treasury guaranty of Fannie Mae and Freddie
Mac debt securities.
92 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following tables show as of December 31 the amortized cost, fair value and weighted average yield on a
tax equivalent basis of the Company's investment debt securities portfolio maturing within the stated periods:
December 3 1, 2012 Maturities
Witiiin
One Year
One to
Five
Years
Five to
Ten
Years
Weighted
Over
Ten Amortized Average
Years
Cost
Yield
(Dollars in thousands)
Investment securities available-for-sale:
U.S. Government-sponsored
enterprises
Agency mortgage-backed
State and political subdivisions
Corporate debt
500
54
1,077
1,788
$ 2,000
124
2,450
505
2,000 $ 4,500
1,343
1,055
9,803
6,076
3,294
500
1.85%
2.59%
4.90%
2.59%
190
500
Investment securities held-to-maturity:
U.S. Government-sponsored
enterprises
_
_
Total investment debt securities
$ 690
$ 3,529
1,500
$ 5,590
3,996
$13,627
5,496
$ 24,436
1.95%
3,24%
Fair value
$ 696
$ 3,589
$ 6,785
$14,066
$25,137
Weighted average yield
5.01%
3.04%
3.23%
3.28%
3.24%
December 31,
2011 l^aturities
Witiiin
One Year
One to
Five
Years
Five to
Ten
Years
Over
Ten
Years
Weiglited
Amortized Average
Cost
Yield
(Dollars in thousands)
Investment securities available-for-sale:
U.S. Government-sponsored
enterprises
Agency mortgage-backed
State and political subdivisions
Corporate debt
Investment securities held-to-maturity:
U.S. Government-sponsored
enterprises
Total investment debt securities
$
-
—
—
500
_
$ 500
$ 5,709
138
623
5,866
$ 5,750
1,087
4,707
1,751
$ 5,997
2,101
6,483
$ 17,456
3,326
11,813
8,127
1,98%
2.27%
5,29%
3.11%
1,000
$13,336
2,000
$15,305
1,000
$15,581
4,000
$44,722
1.63%
2.98%
Fairvalue
$ 503
$13,509
$15,779
$16,253
$46,044
Weighted average yield
5.13%
2.05%
3.09%
3.57%
2.98%
2012 Annual Report
I 93
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
December 3 1, 2011 Maturities
.
Within
One Year
One to
Five
Years
Investment securities available-for-sale:
U.S. Government-sponsored
Five to
Ten
Years
(Dollars in
Over
Ten
Years
thousands)
Amortized
Cost
Weighted
Average
Yield
enterprises
Agency mortgage-backed
State and political subdivisions
Corporate debt
$
-
740
502
750
$ 1,000
498
190
2,503
$ 2,500
955
2,585
1,484
$ 1,021
2,541
5,096
—
$ 4,521
4,735
9,373
4,737
2.00%
2.80%
5.47%
5.40%
Investment securities held-to-maturity:
U.S. Government-sponsored
enterprises
Total investment debt securities
$1,992
—
$ 4,191
500
$ 8,025
—
$ 9,558
500
$23,866
2.00%
4.19%
Fair value
$2,014
$ 4,358
$ 8,192
$ 9,573
$ 24,137
Weighted average yield
3.47%
4,08%
4.18%
4,42%
4.19%
The tables above exclude marketable equity securities with a book value of $746 thousand and a market value
of $797 thousand at December 31, 2012, a book value of $746 thousand and a market value of $773 thousand
at December 31, 2011, and a book value of $50 thousand and a market value of $45 thousand at December 31,
2010, which have no maturity but may be sold by the Company at any time. The table also excludes mutual
funds with a book and market value of $173 thousand at December 31, 2012, of $135 thousand at December 31,
2011 and of $100 thousand at December 31, 2010.
Federal Home Loan Bank of Boston Stock. Union is a member of the FHLB of Boston with an investment
of $1.9 million in its Class B common stock at both December 31, 2012 and 2011. The Class B common stock
has a five year notice requirement for redemption and there is no guarantee of future redemption. Also, there
is the possibility of future capital calls by the FHLB of Boston on member banks to ensure compliance with its
capital plan. Union's investment in FHLB of Boston stock is carried in Other assets at cost and is nonmarketable.
Similar to evaluating investment securities for other than temporary impairment, the Company has evaluated its
investment in the FHLB of Boston. The FHLB of Boston remains in compliance with all regulatory capital ratios
as of December 31, 2012 and 2011. In 2008, the FHLB of Boston suspended dividend payments and instituted
a moratorium on excess stock repurchases. The FHLB of Boston resumed paying dividends at a modest rate
in February 2011 and in February 2012 it lifted the ban on stock repurchases and increased its dividend rate.
Management's most recent evaluation of the Company's holdings of FHLB of Boston common stock concluded
that the investment is not impaired at December 31, 2012.
94
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Deposits. The following table shows information concerning the Company's average deposits by account type and the weighted
average nominal rates at which interest was paid on such deposits for the years ended December 31:
2012
Percent
of Total
Deposits
Average
Rate
Average
Balance
2011
Percent
of Total
Deposits
(Dollars in thousands)
Average
Rate
Average
Amount
2010
Percent
of Total
Deposits
Average
Rate
Average
Amount
Nontime deposits:
Noninterest bearing deposits
$ 75,265
15.6
-
$ 66,389
15.6
-
$ 55,829
15.1
-
Interest bearing checking
accounts
l^oney Market accounts
Savings accounts
Total nontime deposits
Time deposits:
Less than $100,000
$100,000 and over
Total time deposits
Total deposits
88,007
102,071
65,775
331,118
81,480
70,605
152,085
18,2
21.1
13,6
68.5
16.9
14,6
31.5
0.16%
0,32%
0.14%
0.17%
1,13%
1.33%
1,22%
74,862
85,694
55,442
17,5
20.1
13,0
0,23%
0.49%
0,24%
62,094
73,484
46,985
282,387
66.2
0,26%
238,392
78,167
66,327
144,494
18.3
15.5
33.8
1.40%
1,52%
1.45%
71,205
59,179
130,384
16.8
19.9
12.8
64.6
19.3
16.1
35.4
$483,203
100.0
0.50%
$426,881
100.0
0,66%
$ 368,776
100.0
0.22%
0.66%
0.30%
0,32%
1,67%
1.73%
1.70%
0.81%
The Company participates in the Certificate of Deposit Account Registry Service ("CDARS") of Promontory Interfinancial
Network, LLC, which permits the Company to offer full deposit insurance coverage to its customers by exchanging deposit
balances with other CDARS participants. Participants may also purchase deposits through CDARS. There were $5.7 million of
time deposits of $250,000 or less on the balance sheet at December 31, 2012, $5.9 million at December 31, 2011 and $9.8 million
at December 31, 2010, which were exchanged with other CDARS participants and are therefore considered for certain regulatory
purposes to be "brokered" deposits. The Company also participates in Promontory Interfinancial Network's Insured Cash Sweep
("ICS") program. ICS is a service through which Union can offer its customers a savings product with access to multi-million
dollar FDIC insurance while receiving reciprocal deposits from other banks. Like the exchange of certificate of deposit accounts
through CDARS, exchange of savings deposits through ICS provides full deposit insurance coverage for the customer, thereby
helping Union to retain the full amount of the deposit on its balance sheet. There were $1.9 million in ICS money market deposits
on the balance sheet at December 31, 2012, $1,8 million at December 31, 2011 and none at December 31, 2010. None ofthe
Company's CDARS or ICS deposits, as of the respective balance sheet dates, represent purchased deposits as all such deposits
were matched dollar for dollar with Union's customer deposits which were placed in other participating financial institutions in
order to provide our customers with full FDIC insurance coverage.
Deposits grew $35.5 million, or 7.7%, from $473.4 million at December 31, 2011 to $510,0 million at December 31, 2012. Total
average deposits grew $56.3 million, or 13.2%, between years with average nontime deposits growing $48.7 million, or 17.3%,
during the same time frame. For the year ended December 31, 2012, the average deposits in the branches acquired in May 2011
was $53.3 million. All categories of deposits, except time deposits, grew between years exclusive ofthe deposits in the acquired
branches. Time deposits have trended towards very short duration or migrated to nontime deposits because of the low interest
rate environment and the perceived customer desire to be in a position to take advantage ofthe inevitable rise in interest rates.
Time deposits, exclusive ofthe deposits in the acquired branches, have decreased slightly and management believes that most
of the funds have flowed into money market accounts where current interest rates are higher than on short-term certificates of
deposit.
A provision of the Dodd-Frank Act permanently raised FDIC deposit insurance coverage to $250 thousand per depositor per
insured depository institution for each account ownership category. At December 31, 2012, the Company had deposit accounts
with less than $250 thousand totaling $364.8 million, or 71.5% of its deposits, which now have permanent FDIC insurance
protection. There was an additional $22.3 million in noninterest bearing and lOLTA deposit accounts greater than $250 thousand
2012 Annual Report
95
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
at December 31, 2012 with temporary unlimited FDIC insurance, however, this unlimited coverage expired on
December 31, 2012 and as of January 1, 2013, these accounts are included in the insurance coverage to $250
thousand per depositor for each account ownership category. An additional $13.8 million of municipal deposits
which were over the FDIC insurance coverage limit at December 31, 2012 were collateralized by Union under
applicable state and federal regulations by investment securities or loans.
The following table provides a maturity distribution of the Company's time deposits in denominations of $100
thousand or more at December 31:
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
2010
2011
(Dollars in thousands)
$10,861
34,217
12,835
15,401
$74,315
$ 9,922
3,154
7,140
4,341
$74,557
Borrowings. Advances from the FHLB of Boston are another key source of funds to support earning assets.
These funds are also used to manage the Bank's interest rate and liquidity risk exposures. The Company's
borrowed funds at December 31, 2012 were comprised of borrowings from the FHLB of Boston of $11.8 million,
at a weighted average rate of 3.98%, and overnight secured customer repurchase agreement sweeps of $4.0
million, at a weighted average rate of 0.38%. At December 31, 2011, borrowed funds were comprised of FHLB
of Boston advances of $22.3 million, at a weighted average rate of 4.06%, and overnight secured customer
repurchase agreement sweeps of $6.7 million, at a weighted average rate of 0.58%. The maximum borrowings
outstanding on overnight secured customer repurchase agreement sweeps at any month-end were $6.0 million
and $6.7 million during 2012 and 2011, respectively. The decline in FHLB of Boston borrowings between years
was due to the prepayment of $11.3 million of advances during 2012, $11,0 million of which was part of the
deleveraging transaction that occurred in 2012 in which the Company prepaid seven amortizing and bullet
advances with maturities through 2020 with fixed interest rates ranging from 2.25% to 5.61%. In addition to
the deleveraging transaction, there was another prepayment during the first quarter 2012 of a $268 thousand
advance at 4,07% with a March 2015 maturity date. The reductions in borrowings were partially offset by a
$2,0 million FHLB of Boston advance taken during the third quarter 2012 to lock in long term funding at 0.99%.
The Company also made scheduled monthly payments on long-term amortizing advances of $799 thousand
during 2012 and a balloon payment of $513 thousand upon the maturity of another advance. The borrowing
prepayments resulted in penalties paid for the year ended December 31, 2012 of $890 thousand compared to
prepayment penalties of $177 thousand during 2011, which are included in Other expenses on the Company's
consolidated Statements of Income. The Company had no overnight federal funds purchased on December 31,
2012 or 2011. Average borrowings outstanding for 2012 were $27.3 million, compared to average borrowings
outstanding for 2011 of $29.6 million. The weighted average interest rate on the Company's borrowings dropped
from 3.61% for 2011 to 3.38% for 2012, reflecting the low interest rate environment that prevailed throughout
both years and the prepayment of some higher rate advances.
Liability for Pension Benefits. On October 5, 2012, the Company closed The Union Bank Pension Plan ("Plan")
to new participants and froze the accrual of retirement benefits for current participants. The Company had a
net liability for defined pension benefit plan of $2.8 million at December 31, 2012, compared to $5.7 million at
December 31, 2011, The decrease in the pension liability between years is mainly due to closing the Plan to
new participants and freezing the accrual of retirement benefits for current participants. Offsetting the pension
liability at December 31, 2012, the Company had deferred tax assets of $1.3 million, and Accumulated other
96
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
comprehensive loss, net of tax, of $2.5 million. The Accumulated other comprehensive loss has no impact on
regulatory capital amounts or ratios or the Company's legal lending limit.
Weighted average assumptions used to determine net periodic pension benefi't cost for the years ended
December 31, 2012 and 2011 were a discount rate of 3,85% and 5.56%, respectively, a rate of compensation
increase of 4,50% for 2011 and actual wages paid to the freeze date of October 5, 2012 for 2012, and an
expected long-term rate of return on Plan assets of 6.75% for both years. The investments of the Plan that were
in the "market" were not immune to the turmoil experienced over the previous years but did see substantial
improvement in 2012 with a net gain of 12,16% compared to a net loss of 1.55% for 2011. The Plan achieved
a cumulative net gain for the last three years of 6.80%, with a cumulative net gain of only 1.32% for the last
five years. Although weighted average asset allocations at December 31, 2012 were conservative in response
to the market volatility, in light of the Plan's long-term (40 -i- years) horizon, the investments are managed for
the long-term. Note 15 to the Consolidated Financial Statements includes further discussion and information on
the Company's employee benefi'ts.
There was a $1,0 million minimum required contribution to the Plan under the ERISA guidelines for 2012
and a $576 thousand minimum required contribution for 2011. Union elected to utilize a portion of the pre-
funding balance to offset the 2011 minimum required contribution and $424 thousand ofthe minimum required
contribution for 2012. Union is awaiting the December 31, 2012 actuarial valuation to determine whether to
make a final 2012 contribution to the Plan or to utilize an additional portion of the pre-funding balance to satisfy
the remainder ofthe 2012 minimum required contribution due September 30, 2013.
The Company's defined pension benefit obligation and net periodic benefit cost are actuarially determined based
on the following assumptions: discount rate, current and expected future return on Plan assets, and anticipated
mortality rates. While a change in any of the assumptions would have an impact on financial condition and future
results of operations, a change in the discount rate and future rate of return on Plan assets could be material.
A discount rate is used both to determine the present value of future benefit obligations and the net periodic
benefi't cost. The expected rate of return on Plan assets is only used to determine net periodic benefit cost.
The 2012 pension benefi't obligation discount rate utilized is based on the Plan's expected benefi't payment
stream utilizing December 2012 benchmark pension liability index yield curve spot rates. In light of the
persistent low interest rate environment, the discount rate at December 31, 2012 was 3.95% down from 4.41%
at December 31, 2011.
The Company bases its expected rate of return on Plan assets on past history, current earning rates available
on investments and economic forecasts of where rates are headed in the future. The expected rate of return is
conservative as the Plan has typically taken short-term risk by investing more heavily in equity and international
mutual fund markets which over the long-term have proven to be good decisions. Through the end of 2012, our
actual net annual investment returns over the last 21 years had a high of 20.73% and a low of negative 25.93%,
The latest one year return, as of December 31, 2012, was a gain of 12.16%. Therefore, the expectation of a
6.75% return is balanced by our discount rate of 3.95% since the Plan has a very long-term horizon. The net
periodic pension cost (or pension plan expense on the Company's consolidated Statements of Income) was $1.2
million for 2012 and $833 thousand for 2011. Management estimates that the impact of the pension plan for
2013 on the results of operations will approximate a credit of $119 thousand, as calculated by the actuary as of
December 31, 2012, compared to the actual expense of $1.2 million for 2012.
2012 Annual Report
97
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the potential of loss in a financial
instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates,
commodity prices and equity prices. As of December 31, 2012, the Company did not have any market risk
sensitive instruments acquired for trading purposes. The Company's market risk arises primarily from interest
rate risk inherent in its lending, investing, deposit taking and borrowing activities, as yields on assets change
in a different time period or to a different extent from that of interest costs on liabilities. Many other factors
also affect the Company's exposure to changes in interest rates, such as national, regional and local economic
and financial conditions, financial market conditions, legislative and regulatory actions, competitive pressures,
customer preferences including loan prepayments and/or early withdrawal of time deposits, and historical
pricing relationships.
The earnings ofthe Company and its subsidiary are affected not only by general economic, financial and credit
market conditions, but also by the monetary and fiscal policies ofthe United States and its agencies, particuiariy
the Federal Reserve System. The monetary policies of the Federal Reserve System influence to a significant
extent the overall growth of loans, investments, deposits and borrowings; the level of interest rates earned on
assets and paid for liabilities; and interest rates charged on loans and paid on deposits. The nature and impact
of future changes in monetary policies are often not predictable. The dramatic change in the financial markets
in a very short window of time during 2008 proved that monetary policies are not foolproof and that "exotic"
investment vehicles that had been allowed to proliferate over the previous twenty years were often not solidly
based or understood, monitored, and policed by the appropriate regulatory agency. The Company did not
invest in any of the "exotic" vehicles directiy but had invested in a few companies and agencies that were hurt
by their investments or operating practices. Few predicted the 500 basis point drop in the prime rate between
September 2007 and December 2008 or the stagnation of the financial markets and the economy in the last four
months of 2008 that continued throughout 2011 and that only slowly started to recover in 2012.
A key element in the process of managing market risk involves direct involvement by senior management and
oversight by the Board of Directors as to the level of risk assumed by the Company in its balance sheet. The
Board of Directors reviews and approves risk management policies, including risk limits and guidelines, and
reviews at least quarteriy the current position in relationship to those limits and guidelines. Daily oversight
functions are delegated to the Asset Liability Management Committee ("ALCO"), The ALCO, consisting of
senior business and finance officers, actively measures, monitors, controls and manages the interest rate risk
exposure that can significantly impact the Company's financial position and operating results. The ALCO sets
liquidity targets based on the Company's financial condition and existing and projected economic and market
conditions. Liquidity ratios are reviewed monthly by both senior management and the Board of Directors of
Union. A monthly cash flow report is reviewed by senior management and daily reports and projections are
reviewed by senior finance personnel. The Company attempts to structure its balance sheet to maximize net
interest income and shareholder value, while controlling its exposure to interest rate risk. Strategies might
include selling or participating out loans held for sale, selling or purchasing investments available-for-sale, match
funding new loans with FHLB of Boston advances or purchasing or selling brokered deposits through CDARS.
The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of
such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and
indicators, liquidity, competitive pressures and various business strategies. The ALCO's methods for evaluating
interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which provides a static
analysis of the maturity and repricing characteristics of the Company's entire balance sheet, and a simulation
analysis, which calculates projected net interest income based on alternative balance sheet and interest rate
scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market
rates of interest.
98 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Members of ALCO meet at least weekly to set loan and deposit rates, make investment decisions, monitor liquidity
and evaluate loan demand and review opportunities to sell residential or commercial loans into the secondary
market. Deposit runoff is monitored daily and loan prepayments evaluated monthly. The Company historically
has maintained a substantial portion of its loan portfolio on a variable-rate basis (52.5% at December 31,
2012) and plans to continue this Asset/Liability/Management ("ALM") strategy in the future. The majority ofthe
variable-rate loan portfolio has interest rate floors and caps which are taken into account by the Company's
ALM modeling software to predict interest rate sensitivity, including prepayment risk. The utilization of interest
rate floors embedded in variable rate loans became Company policy at the beginning of 2009 due to historic
low interest rates. As of December 31, 2012, $20,5 million, or 79,0%, ofthe investment portfolio was classified
as available-for-sale and the modified duration was relatively short. The Company does not utilize any exotic
derivative products or invest in any "high risk" instruments.
Interest rates remained at historic lows throughout 2011 and 2012. There continues to be a significant amount
of uncertainty in the financial markets. Although recent modest improvement in the economic outlook is
hopeful, modeling software is limited to mathematically provable results. Given these facts, management
believes it is especially important to know your customers and your market and to have an experienced team
of employees with varied experience in the financial field. The Company has operated successfully for over 120
years, throughout a variety of challenging economic environments.
The Company's interest rate sensitivity analysis (simulation) as of December 2011 for a flat rate environment
(the prime rate at both December 31, 2011 and December 31, 2012 was 3,25%) projected the following 2012
results compared to the actual:
Interest and fees on loans
Other interest income
Interest expense
Net interest income
Net income
Return on average assets
Return on average equity
2012
Projected
2012
Actual
%
Variance
(Dollars in thousands)
$24,382
1,466
(3,262)
$22,586
$ 5,751
1.03%
12.47%
$23,684
1,344
(3,351)
$21,577
$ 6,844
1.22%
16.35%
(2.9)
(8.3)
(2.7)
(4.0)
19.0
18.4
31.1
Net interest income for 2012 was $21.7 million, $909 thousand or 4.0%, lower than projected as interest rates
on loans, investment securities and interest bearing deposits saw continued downward pressure due to market
rate influences. Loan demand, especially in residential construction and mortgage lending, has been strong
through the 2012, however growth in some other loan categories lagged in 2012. The Company, in an attempt
to grow the residential mortgage loan portfolio and increase interest income, increased the loan portfolio by
retaining in portfolio some secondary market qualified residential loans originated during 2012 rather than
selling them to the secondary market,
Actual net income for 2012 was higher than projected by $1.1 million, due to changes in several components since
the projections were performed. Although our actual net interest income compared to the projected amount
resulted in a negative variance of $909 thousand, this was offset by the combined effect of positive variances of
$2.4 million in net gain on the sale of loans, $673 thousand in gain on sale of available-for-sale securities, and
$220 thousand in income from life insurance, partially offset by negative variances of $193 thousand in salaries
and wages, $63 thousand in pension and other employee benefits, $174 thousand in equipment expenses, $280
2012 Annual Report
99
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
thousand in OREO expenses, $890 thousand in FHLB of Boston prepayment penalties, and $351 thousand in
income taxes.
Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The Company is a party
to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers, to reduce its own exposure to fluctuations in interest rates, and to implement its strategic
objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest
rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments
to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or
guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest
rate risk in excess ofthe amount recognized on the balance sheet. The contractual or notional amounts of these
instruments reflect the extent of involvement the Company has in a particular class of financial instrument.
The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate caps and
floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company's
exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals,
limits and monitoring procedures. The Company generally requires collateral or other security to support
financial instruments with credit risk.
The following table details the contractual or notional amount of financial instruments that represented credit
risk at December 31, 2012:
Contract or Notional Amount
2013
2014
2015
2016
2017
Thereafter
Total
(Dollars
$ 7,320
53,973
1,719
1,008
$
$
-
2,843
76
—
$
-
3,113
91
—
in thousands)
-
$
5
—
—
-
166
—
—
$
-
128
—
—
$ 7,320
50,228
1,886
1,008
Commitments to originate loans
Unused lines of credit
Standby letters of credit
Credit card arrangement
FHLB of Boston MPF credit
enhancement obligation, net
307
—
—
Commitment to purchase
investment securities
Total
1,021
$65,348
—
$2,919
—
$3,204
$_
—
—
5
—
—
307
—
$ 166
$128
1,021
$71,770
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have a fixed expiration date or other termination
clause and may require payment of a fee. Approximately $11.7 million of the unused lines of credit outstanding
at December 31, 2012 relate to real estate construction loans that are expected to fund within the next twelve
months. The remaining lines primarily relate to revolving lines of credit for other real estate or commercial loans.
Since many of the loan commitments are expected to expire without being drawn upon and not all credit lines
will be utilized, the total commitment amounts do not necessarily represent future cash requirements. Lines of
credit incur seasonal volume fluctuations due to the nature of some customers' businesses, such as tourism and
maple syrup products production.
100 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Unused lines of credit increased $578 thousand, or 1.0%, from $59.7 million at December 31, 2011 to $60,2
million at December 31, 2012. Some ofthe larger lines have underlying participation agreements in place with
other financial institutions in order to permit the Company to support the credit needs of larger dollar borrowers
without bearing all the credit risk in the Company's balance sheet. Commitments to originate loans decreased
$2.9 million, or 28.1%, from $10.2 million at December 31, 2011 to $7.3 million at December 31, 2012.
The Company may, from time-to-time, enter into commitments to purchase, participate or sell loans, securities,
certificates of deposit, or other investment instruments which involve market and interest rate risk. At
December 31, 2012, the Company had binding loan commitments to sell residential mortgage loans at fixed
rates totaling $1,9 million.
The Company sells 1-4 family residential mortgage loans under a loss-sharing program with FHLB of Boston, the
Mortgage Partnership Finance program ("MPF") when management believes it is economically advantageous
to do so. Under this program the Company shares in the credit risk of each mortgage, while receiving fee
income in return. The Company is responsible for a Credit Enhancement Obligation ("CEO") based on the credit
quality of these loans. FHLB of Boston funds a First Loss Account ("FLA") based on the Company's outstanding
MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default,
homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLB of
Boston's FLA funds are then utilized, followed by the member's CEO, with the balance the responsibility of FHLB
of Boston. These loans must meet specific underwriting standards of the FHLB of Boston. As of December 31,
2012, the Company had $28.5 million in loans sold through the MPF program with an outstanding balance of
$19.1 million and a contract for the potential delivery of an additional $21,4 million of future loan sales. The
volume of loans sold to the MPF program and the corresponding credit obligation are closely monitored by
management. As of December 31, 2012, the notional amount of the maximum contingent contractual liability
related to this program was $339 thousand, of which $32 thousand was recorded as a reserve through Other
liabilities.
Contractual Obligations: The Company has various financial obligations, including contractual obligations that
may require future cash payments. The following table presents, as of December 31, 2012, signift'cant fixed and
determinable contractual obligations to third parties by payment date:
Payments Due By Period
Less than
l y e ar
2 &3
years
4 &5
years
Thereafter
Total
(Dollars in thousands)
Operating lease commitments
Contractual payments on borrowed funds (1)
Deposits without stated maturity (1)(2)
Certificates of deposit (1)(2)
Deferred compensation payouts (3)
Total
$
109
4,705
357,220
105,910
171
$468,115
$
115
1,227
—
38,338
182
$39,862
$
59
3,444
—
8,525
182
$12,210
$
-
6,371
-
-
449
$ 5,820
$
283
15,747
357,220
152,773
984
$ 527,007
(1) The amounts exclude interest payable, as such amounts other than $278 thousand in accrued interest
payable at December 31, 2012 are not able to be estimated at this time.
(2) While Union has a contractual obligation to depositors should they wish to withdraw all or some of the
funds on deposit, management believes, based on historical analysis as well as current conditions in the
financial markets, that the majority of these deposits will remain on deposit for the foreseeable future.
(3) The amounts exclude $144 thousand in benefit payments, where the payment period begins at the
individual's retirement which is not determinable at this time.
2012 Annual Report
101
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company's subsidiary bank is required (as are all banks) to maintain vault cash or a noninterest bearing
reserve balance as established by Federal Reserve regulations. The Bank's average total required reserve for
the 14 day maintenance period including December 31, 2012 was $504 thousand, which was satisfied by vault
cash.
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is defined as the difference
between interest earning assets and interest bearing liabilities maturing or repricing within a given time period.
A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income adversely. Because different types
of assets and liabilities with the same or similar maturities may react differently to changes in overall market
interest rates or conditions, changes in interest rates may affect net interest income positively or negatively
even if an institution were perfectly matched in each maturity category.
The Company prepares its interest rate sensitivity "gap" analysis by scheduling interest earning assets and
interest bearing liabilities into periods based upon the next date on which such assets and liabilities could mature
or reprice. The amount of assets and liabilities shown within a particular period was determined in accordance
with the contractual terms of the assets and liabilities, except that:
adjustable-rate loans, investment securities, variable rate interest bearing deposits in banks, variable-
rate time deposits, FHLB of Boston advances and other secured borrowings are included in the period
when they are first scheduled to adjust and not in the period in which they mature;
fixed-rate mortgage-related securities and residential loans reflect estimated prepayments, which
were estimated based on analyses of broker estimates, the results of a prepayment model utilized by
the Company, and empirical data;
other nonmortgage related fixed-rate loans reflect scheduled contractual amortization, with no
estimated prepayments; and
interest bearing checking, money market and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of
the sensitivity of each such category of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and considers them reasonable.
However, the interest rate sensitivity of the Company's assets and liabilities in the following table could vary
substantially if different assumptions were used, callable investment options were modeled, prepayment speeds
changed or actual experience differs from the historical experience on which the assumptions are based.
102 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table shows the Company's rate sensitivity analysis as of December 31, 2012:
Cumulative repriced within
3 Months
or Less
4 to 12
Months
l t o3
Years
3 to 5
Years
Overs
Years
Total
(Dollars in thousands, by repricing date)
Interest sensitive assets:
Overnight deposits
Interest bearing deposits in banks
Investment securities (1)(3)
Nonmarketable securities
Loans and loans held for sale (2)(3)
Total interest sensitive assets
Interest sensitive liabilities:
Time deposits
Money markets
Regular savings
Interest bearing checking
Borrowed funds
Total interest sensitive liabilities
$ 41,487
1,787
556
—
171,636
$215,566
$
7,188
7,079
—
93,696
$107,963
$
$
10,806
3,435
-
-
2,141
4,992
-
90,197
$104,438
52,091
59,224
$_
$ 25,677
60,606
35,600
67,263
4,136
$ 193,282
$ 80,404
-
-
-
442
$ 80,846
$ 38,167
-
-
-
1,354
$ 39,521
8,525
-
-
-
3,444
11,969
$
$
$
$
-
8,994
1,976
47,678
$ 58,648
$
40,269
33,607
36,160
6,371
$116,407
$ 41,487
21,922
25,156
1,976
455,298
$ 545,839
$ 152,773
100,875
69,207
103,423
15,747
$ 442,025
Net interest rate sensitivity gap
$ 22,284
$ 27,117
$ 64,917
47,255
$ (57,759)
$ 103,814
Cumulative net interest rate sensitivity gap
$ 22,284
$ 49,401
$114,318
$161,573
$103,814
Cumulative net interest rate sensitivity gap
as a percentage of total assets
Cumulative net interest rate sensitivity gap
as a percentage of total interest
sensitive assets
Cumulative net interest rate sensitivity gap
as a percentage of total interest
sensitive liabilities
3,9%
8,6%
19.8%
28.0%
18,0%
4.1%
9.1%
20.9%
29,6%
19,0%
5.0%
11.2%
25.9%
36,6%
23,5%
(1)
Investment securities exclude marketable equity securities and mutual funds with a fair value of $797
thousand and $173 thousand, respectively, that may be sold by the Company at any time.
(2) Balances shown include deferred unamortized loan costs of $139 thousand.
(3) Reflects estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, the Company uses computer software to simulate the estimated
impact on net interest income under various interest rate scenarios, balance sheet trends and strategies over a
relatively short time horizon. These simulations incorporate assumptions about balance sheet dynamics such as
loan and deposit growth, product pricing, prepayment speeds on mortgage related assets, principal maturities
or calls on other financial instruments and changes in the funding mix. While such assumptions are inherentiy
uncertain as actual rate changes and balance sheet growth rarely follow any given forecast and asset/liability
pricing and other model inputs usually do not remain constant in their historical relationships, management
believes that these assumptions are reasonable. Based on the results of these simulations, the Company is able
to quantify its estimate of interest rate risk and develop and implement appropriate strategies.
The following chart reflects the cumulative results of the Company's latest simulation analysis for the next
twelve months on net interest income, net income, return on average assets and return on average equity.
Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting to the new
2012 Annual Report
I 103
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
level. The projection utilizes a parallel rate shock of up 300 basis points and down 100 basis points from the
December 31, 2012 prime rate of 3,25%. A 300 basis point shock is the highest internal slope monitored. This
slope range was determined to be the most relevant during this economic cycle. It should be noted that given
the current prime rate and other key rates at December 31, 2012, the floor rates on various loans and deposits
may have already been reached or will be hit in a down 100 basis point environment which is handled by the
simulation model. What the model cannot take into account is what rates the Company will find necessary to
accept on loans or pay on deposits given the current competitive, low interest rate environment.
INTEREST RATE SENSITIVITY SIMULATION ANALYSIS
December 3 1, 2012
(Dollars in thousands)
Year
Ending
December-2013
Prime Net Interest Change
Rate
Income
$22,099
22,728
21,481
%
(2,77)%
-%
(5,49)%
5.25%
3.25%
2.25%
Net
Income
$ 5,972
5,318
5,416
Return on Return on
Average
Average
Equity
Assets
12.85%
1.05%
13.57%
1.11%
11.72%
0.96%
The resulting projected cumulative effect of these estimates on net interest income for the year ending
December 31, 2013 are within the approved ALCO guidelines. The return on assets in all scenarios are lower
than the Board guideline of 1,25%. The return on equity in the flat rate and -i-300bp scenarios is above the Board
guideline of 12.00%, Although the return on equity in the -100 basis point scenario is below the Board guideline
of 12.00% it is the opinion of management that interest rates declining 100 basis in our current interest rate
environment is unlikely. The simulation of earnings do not incorporate any management actions, which might
moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual
results, but serve as conservative estimates of interest rate risk. Any further drops in interest rates would not
be in the best interests of the Company. Noninterest income and expenses in the simulation are based on the
budget for 2013 and will change over the course of the next twelve months as management actions are taken
in response to current economic conditions and operational changes.
Liquidity. Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings.
Liquidity is a measurement of the Company's ability to meet potential cash requirements, including ongoing
commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, and
fund other general business initiatives. The Company's principal sources of funds are deposits, amortization,
prepayment and maturity of loans, securities, interest bearing deposits and other short-term investments,
sales of securities and loans available-for-sale, and earnings and funds provided from operations. Maintaining a
relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit
products, and extending the contractual maturity of liabilities, reduces the Company's exposure to rollover risk
on deposits and limits reliance on volatile short-term purchased funds. Short-term funding needs arise from
declines in deposits or other funding sources, funding of loan commitments, draws on unused lines of credit
and requests for new loans. The Company's strategy is to fund assets, to the maximum extent possible, with
core deposits which provide a sizable source of relatively stable and low-cost funds. The Company has seasonal
short-term funding needs which are normally satisfied by short-term FHLB of Boston advances or utilization of
Federal Funds Purchased lines.
For the year ended December 31, 2012, the Company's ratio of average loans to average deposits dropped
to 92.1% compared to 94.1% for the year ended December 31, 2011. Deposits grew $36.6 million, or
7.7%, from $473.4 million at December 31, 2011 to $510.0 million at December 31, 2012, while total loan
104
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
growth was $25.0 million, or 6,0%, over 2011, net of loan sales of $126.3 million in 2012 compared to
loan sales of $80.4 million for 2011.
As a member of the FHLB of Boston, Union has access to preapproved lines of credit up $15.6 million at
December 31, 2012 over and above the $11.8 million term advances already drawn on the lines, based on
a FHLB of Boston estimate as of that date. With the purchase of required FHLB of Boston Class B common
stock and evaluation by the FHLB of Boston ofthe underiying collateral available, line availability could rise to
approximately $33.7 million. This line of credit can be used for either short-term or long-term liquidity or other
needs.
In addition to its borrowing arrangements with the FHLB of Boston, Union maintains preapproved Federal Funds
lines of credit totaling $12.0 million with two of its correspondent banks, a $15.0 million repurchase agreement
line of credit and access to the Federal Reserve discount window, which would require pledging of qualified
assets. There were no balances outstanding on the Federal Funds purchase lines, repurchase agreement line or
at the discount window at December 31, 2012.
Union is a member of the CDARS and the ICS programs of Promontory Interfinancial Network, which allow
Union to provide higher FDIC deposit insurance to customers by exchanging time and/or money market or
demand deposits with other members and also allow Union to purchase deposits from other members as
another source of funding. There were no purchased deposits at either December 31, 2012 or 2011, although
Union had exchanged $8.7 million and $7.7 million of deposits, respectively, with other CDARS/ICS members at
those dates in order to provide our customers with full FDIC insurance coverage.
Union maintains an IDEAL Way Line of Credit with the FHLB of Boston. The total line available was $551 thousand
at December 31, 2012 and 2011. There were no borrowings against this line of credit at either year-end. Interest
on these borrowings is chargeable at a rate determined by the FHLB of Boston and payable monthly. Should
Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these
borrowings.
While scheduled loan and securities payments and FHLB of Boston advances are relatively predictable sources
of funds, deposit flows and prepayments on loans and mortgage-backed securities are greatly influenced by
market interest rates, economic conditions and competition. The Company's liquidity is actively managed on a
daily basis, monitored by the ALCO, and reviewed monthly with the subsidiary's Board of Directors. The ALCO
measures the Company's marketable assets and credit available to fund liquidity requirements and compares
the adequacy of that aggregate amount against the aggregate amount of the Company's interest sensitive or
volatile liabilities, such as core deposits and time deposits in excess of $100,000, borrowings and term deposits
with short maturities, and credit commitments outstanding. The primary objective is to manage the Company's
liquidity position and funding sources in order to ensure that it has the ability to meet its ongoing commitments
to its depositors, to fund loan commitments and unused lines of credit and to maintain a portfolio of investment
securities.
The Company's management monitors current and projected cash flows and adjusts positions as necessary to
maintain adequate levels of liquidity. Approximately 69.3% of the Company's time deposits will mature within
twelve months, which is less than the preceding five years which ranged from 70.2% to 87,8%. The deposit
gathering activities of financial institutions generally have been affected by the low interest rates which earlier
in the recession made customers reluctant to lock in funds for a longer term but short-term rates have dropped
so low during the last four years that some customers extend out in order to receive a better rate or have
shifted funds into money markets where the interest rates are better than on the shortest term time deposits.
Since the federal funds target rate has remained unchanged at a historic low of 0.00% to 0.25% during the
2012 Annual Report
| 105
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
last four years, as customers' time deposits matured, the rollover interest rate available to those customers is
most often lower than their previous deposit rate and therefore the Company's cost of funding has continued
to drop. This phenomenon is happening throughout the banking industry and the Company is optimistic that it
can maintain and grow its customer deposit base through good customer service, new deposit products offered,
competitive but prudent pricing strategy and the continued expansion of the branch network. Management
believes the introduction of more electronic options for deposit products and their off premise utilization through
the internet and mobile banking will also assist in the growth of the deposit base. The relationships developed
with local municipalities, businesses and retail customers and the variety of deposit products offered should, in
management's view, help to ensure that Union will retain a substantial portion of these deposits. Management
will continue to offer a competitive but prudent pricing strategy to facilitate retention of such deposits. The
FOMC anticipates keeping interest rates low until mid-2015. In the future, when interest rates begin to rise,
the increase in rates may lead to eariy redemptions by customers which will present its own liquidity challenge
which will have to be managed. Funds moving from FDIC insured deposits back into the financial market is also
something that we monitor and can cause a liquidity concern.
A reduction in total deposits could be offset by other funding sources, such as purchases of federal funds,
utilization of the repurchase agreement line of credit, utilization of the Federal Reserve discount window,
purchases of brokered deposits such as one-way CDARS or ICS deposits, short-or-long-term FHLB of Boston
borrowings, or liquidation of investment securities available-for-sale or loans held for sale. Such steps could
result in an increase in the Company's cost of funds or a decrease in the yield earned on assets and therefore
adversely impact the net interest spread and margin. Management believes the Company has sufficient liquidity
to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However,
any projections of future cash needs and flows are subject to substantial uncertainty. Management continually
evaluates opportunities to buy/sell securities available-for-sale and loans held for sale, to participate out loans
and lines of credit, obtain credit facilities from lenders and restructure debt for strategic reasons or to further
strengthen the Company's financial position.
Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective
structure that meets target regulatory ratios, supports management's internal assessment of economic capital,
funds the Company's business strategies and builds long-term stockholder value. Dividends are generally in line
with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are
retained to support anticipated business growth, fund strategic investments and provide continued support for
deposits. The Company and its subsidiary continue to be considered well capitalized underthe capital adequacy
requirements to which they are subject. The Company continues to evaluate growth opportunities both through
internal growth or potential acquisitions. The dividend payouts and treasury stock purchases during the last few
years, as well as the mid-2011 acquisition of the three New Hampshire branches, reflect the Board's desire to
utilize our capital for the benefit of the stockholders.
The total dollar value of the Company's stockholders' equity increased from $40.3 million at December 31, 2011
to $45.0 million at December 31, 2012, reflecting net income of $6.8 million for 2012, an increase of $8 thousand
from stock based compensation, a $12 thousand increase due to the issuance of 700 shares of common stock
resulting from the exercise of 700 incentive stock options, and an increase of $2.7 million in other comprehensive
income attributable to the unfunded defined benefit pension liability. These increases were partially offset by
cash dividends paid of $4.5 million, a decrease in other comprehensive income of $384 thousand on investment
securities available-for-sale, and Treasury stock purchases of $35 thousand.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of December 31, 2012, the
Company had 4,923,986 shares issued, ofwhich 4,456,081 were outstanding and 467,905 were held in treasury.
Also as of December 31, 2012, there were outstanding employee incentive stock options with respect to 11,800
106 I
2012 Annual Report
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
shares granted under the 2008 Incentive Stock Option Plan, of which 5,800 were exercisable. The 2008 Plan
authorizes the issuance of incentive stock options with respect to up to 50,000 shares (subject to antidilution
adjustments). As of December 31, 2012 options with respect to 31,000 shares were available for future grants.
In May 2010, the Company adopted a limited stock repurchase plan to authorize the repurchase of up to 2,500
shares of its common stock each calendar quarter in open market purchases or privately negotiated transactions,
as management may deem advisable and as market conditions may warrant. The repurchase authorization for
a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried
forward into future quarters. The quarteriy repurchase program was most recently reauthorized in December
2012 and will expire on December 31, 2013 unless reauthorized. Since inception, as of December 31, 2012, the
Company had repurchased 6,827 shares under this program, for a total cost of $126 thousand.
The Company's total capital to risk weighted assets increased to 13.0% at December 31, 2012 from 12,2%
at December 31, 2011. Tier I capital to risk weighted assets was 11.7% at December 31, 2012 and 11.0%
at December 31, 2011 and Tier I capital to average assets was 7,6% at December 31, 2012 and 7,5% at
December 31, 2011, Union is categorized as well capitalized underthe regulatory framework and the Company
is well over the minimum capital requirements. The Company remains focused on long-term growth and above-
average shareholder return. It has become more important than ever in today's economic environment for
banks to ensure and plan ahead to maintain strong capital reserves.
Impact of Inflation and Changing Prices. The Company's consolidated financial statements have been
prepared in accordance with GAAP, which allows for the measurement of financial position and results of
operations in terms of historical dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature,
and their general and administrative costs constitute relatively small percentages of total expenses. Thus,
increases in the general price levels for goods and services have a relatively minor effect on the Company's
total expenses but could have an impact on our loan customers' financial condition. Interest rates have a more
significant impact on the Company's financial performance than the effect of general inflation. During the last
four years, the Federal Reserve maintained a target federal funds rate of 0.00% to 0.25% while the U.S. prime
rate, which is the base rate that banks use in pricing short-term maturity commercial loans to their best, or most
creditworthy, customers remained at 3.25%. The target federal funds rate, which is likely to remain unchanged
at least until mid-2015, has never been this low and the last time the prime rate was at 3.25% was in 1955.
These market rates are out of the Company's control but have a dramatic impact on net interest income.
Interest rates do not necessarily move in the same direction or change in the same magnitude as the prices of
goods and services, although periods of increased inflation may accompany a rising interest rate environment.
Inflation in the price of goods and services, while not having a substantial impact on the operating results of the
Company, does affect all customers and therefore may impact their ability to keep funds on deposit or make
loan payments in a timely fashion. The Company is aware ofthis risk and evaluates that risk along with others in
making business decisions. Unprecedented defi'cit spending by federal, state and local governments and control
ofthe money supply by the Federal Reserve including further quantitative easing ofthe money supply, may have
unanticipated impacts on interest rates or inflation in future periods that could have an unfavorable impact on
the future operating results of the Company.
Regulatory Matters. The Company and Union are subject to periodic examinations by the various regulatory
agencies. These examinations include, but are not limited to, procedures designed to review lending practices,
risk management, credit quality, liquidity, compliance and capital adequacy. During 2012, the FDIC and Federal
Reserve, and during 2011, the Vermont Department of Financial Regulation, performed their regular, periodic
2012 Annual Report
I 107
Union Bankshares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
regulatory examinations of Union. No comments were received from these bodies that would have a material
adverse effect on the Company's or Union's liquidity, financial position, capital resources, or results of operations.
Form 10-K. A copy of the Company's Form 10-K Report for the year ended December 31, 2012 filed with the
Securities and Exchange Commission may be obtained without charge upon written request to:
Marsha A, Mongeon, Treasurer and Chief Financial Officer
Union Bankshares, Inc.
RO. Box 657
Morrisville, VT 05661-0667
Or may be accessed on the Investor Relations page at www.unionbankvt.com.
Corporate Name: Union Bankshares, Inc.
Corporate Transfer Agent: Registrar & Transfer Company, 10 Commerce Drive, Cranford, NJ 07016
108
2012 Annual Report
DIRECTORS - UNION BANKSHARES, INC.
OFFICERS - UNION BANK
Kenneth D. Gibbons - Chairman
Cynthia D. Borck
Steven J. Bourgeois
Timothy W. Sargent
David S. Silverman
John H. Steel
Schuyler W. Sweet
Neil J. Van Dyke
Tracy Pierce Ash - Assistant Treasurer
Rhonda L. Bennett - Vice President
Stacey L.B. Chase - Assistant Treasurer
Jeffrey G. Coslett - SeniorVice President
John Currier - Assistant Vice President
Michael C. Curtis - Vice President
Jennifer Degree - Assistant Treasurer
j
^
" Littleton
Morrisville
Morrisville
Morrisville
Groveton
St. Albans
Morrisville
Jessica Eastman - Assistant Treasurer
So. Buriington
OFFICERS - UNION BANKSHARES, INC
Don D. Goodhue - Vice President
Melissa A. Greene - Assistant Vice President
Kenneth D. Gibbons - Chairman
David S. Silverman - President & CEO
Marsha A. Mongeon - Vice President/Treasurer/CFO
Paul E. Grogan - Facilities Officer
Karyn J. Hale - Vice President
Claire A. Hindes - Vice President
Robert D. Hofmann - Senior Vice President
Patricia N. Hogan - Vice President
Tracey D. Holbrook - Regional Vice President
St. Johnsbury
John H. Steel - Secretary
JoAnn A. Tallman - Assistant Secretary
llRECTORS -JJNION BANK
Kenneth D. Gibbons - Chairman
Cynthia D. Borck
Steven J. Bourgeois
John M. Goodrich
Timothy W. Sargent
David S. Silverman
John H. Steel
Schuyler W. Sweet
Neil J. Van Dyke
REGIONAL ADVISORY BOARD MEMBERS
Joel S. Bourassa - Northern New Hampshire
Steven J. Bourgeois - St. Albans
Dwight A. Davis - St. Johnsbury
Stanley T. Fillion - Northern New Hampshire
Rosemary H. Gingue - St. Johnsbury
David S. Silverman - All
Coleen K. Kohaut - St. Albans
Justin P. Lavely - St. Johnsbury
Daniel J. Luneau - St. Albans
Samuel H. Ruggiano - St. Albans
Lura L. Jacques - Assistant Vice President, Trust Officer
Lynne P. Jewett - Assistant Vice President
Stephen H. Kendall - SeniorVice President
Susan R Lassiter - Vice President
Christine S. Latulip - Regional Vice President
Edward L. Levite - Senior Loan Originator
Virginia M. Locke - Assistant Vice President
Carrie R. Locklin - Assistant Vice President
John L. Malm - Vice President
Robyn A. Masi - Vice President
Sherrie A. Menard - Assistant Vice President
Marsha A. Mongeon - Senior Vice President, CFO
Karen Carison Noyes - Vice President
Barbara A. Olden - Vice President
Deborah J. Partlow - Asst. Vice Pres., Senior Trust Officer
Bradley S. Prior - Assistant Treasurer
Craig S. Provost - Vice President
Robert J. Richardson - Vice President
David S. Silverman - President & CEO
Judy R. Smith - Vice President
John H. Steel - Secretary
Curtis C. Swan - Assistant Vice President
JoAnn A. Tallman - Assistant Secretary
Schuyler W. Sweet - Northern New Hampshire
Francis E. Welch - Assistant Vice President
Norrine A. Williams - Northern New Hampshire
Martha J. Wilkins - Assistant Treasurer
Lorraine G. Willett - Assistant Vice President
Morrisville
Hardwick
Morrisville
Morrisville
Morrisville
Morrisville
Morrisville
St. Albans
Morrisville
Morrisville
Jeffersonville
Littleton
So. Buriington
Littieton
Morrisville
Littieton
Morrisville
Morrisville
Morrisville
St. Johnsbury
Morrisville
Morrisville
Morrisville
Morrisville
St. Albans
Morrisville
St. Albans
Morrisville
Morrisville
St. Johnsbury
Morrisville
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Union Bank
VEFIMONT
DANVILLE
421 Route 2 East
802-684-2211 S. BURLINGTON Loan Center
FAIRFAX
Jet. Routes 104 & 128
802-849-2600
30 Kimball Avenue
HARDWICK
103 VT Route 15
802-472-8100 STOWE
47 Park Street
802-865-1000
802-253-6600
JEFFERSONVILLE 44 Main Street
802-644-6600
JOHNSON
198 Lower Main Street
802-635-6600
r
IB
MORRISVILLE
20 Lower Main Street
LYNDONVILLE
183 Depot Street
802-626-3100
802-888-6600
NEW HAMPSHIRE
65 Northgate Plaza
802-888-6860 GROVETON
3 State Street
ST ALBANS
15 Mapleville Depot
802-524-9000 LITTLETON
263 Dells Road
ST JOHNSBURY
364 Railroad Street
802-748-3131
76 Main Street
325 Portland Street
802-748-3121 N. WOODSTOCK
155 Main Street
603-636-1611
603-444-7136
603-444-5321
603-745-2488
1 - 8 6 6 - 8 6 2 - 1 8 91 (ton tree)
www.UnionBankVT.com — www.UnionBankNH.com
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