UNB

Union Bankshares Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Union Bankshares, Inc., a smaller reporting company and bank holding company based in Morrisville, Vermont. The report covers the quarterly and nine-month periods ended September 30, 2009. The Company operates primarily through its subsidiary, Union Bank, focusing on community banking services in Vermont and northern New Hampshire.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 24.0% in Q3 2009 compared to Q3 2008, driven by a 3.6% increase in net interest income and an 80.1% surge in noninterest income.
• Noninterest Income: The significant increase in noninterest income was primarily due to higher net gains on sales of loans held for sale ($314k in Q3 2009 vs. $74k in Q3 2008) and the absence of a $512k write-down of impaired investment securities that occurred in Q3 2008.
• Interest Rates: Net interest margin decreased 17 basis points to 4.50% due to a 400 basis point drop in the prime rate (from 7.25% in Jan 2008 to 3.25% in Sep 2009), which lowered yields on loans. However, this was partially offset by a significant decrease in interest expense on deposits.
• Asset Quality: Nonperforming assets improved significantly, dropping from 2.01% of total assets in Sep 2008 to 1.42% in Sep 2009. Nonaccrual loans increased slightly year-over-year but decreased from the Dec 2008 peak.
• Expenses: Noninterest expenses increased 7.5% in Q3 2009. Notable increases included FDIC insurance assessments (up 621.4% due to regulatory changes and special assessments) and pension/employee benefits (up 58.0% due to actuarial valuation changes and medical costs).

Guidance, Outlook, and Risks

• Outlook: Management expects loan refinancing trends to slow as interest rates rise or as customers complete refinancing. The Company anticipates continued strong loan demand due to low rates and a changing competitive landscape favoring community banks.
• FDIC Assessments: The Company anticipates total FDIC premium assessments for 2009 to be approximately $700,000 compared to $87,000 in 2008. A potential prepayment of assessments totaling approximately $1.8 million is under consideration if the FDIC proposal is approved.
• Capital: The Company is "well capitalized" under regulatory standards. Total capital to risk-weighted assets was 15.7% as of September 30, 2009. A quarterly dividend of $0.25 per share was declared on October 21, 2009.
• Risks: Key risks include disruptions in financial markets, adverse changes in the local real estate market affecting collateral values, and the impact of government programs. The Company does not expect new accounting pronouncements on fair value or securitizations to have a material impact in 2010.
• Unusual Items: Q3 2008 included a $512k write-down of impaired securities, which is not present in 2009. Q3 2008 also included a $234k nontaxable death benefit from a life insurance policy not repeated in 2009.

Investor Verification Checklist

• FDIC Assessment Impact: Verify the final impact of the FDIC special assessment and potential prepayment on future liquidity and earnings.
• Loan Sales Volume: Confirm the sustainability of the high volume of residential mortgage loan sales ($24.9M in Q3 2009) which drove noninterest income gains.
• Pension Liability: Review the actuarial assumptions driving the 86.3% increase in pension expense and the potential for future volatility in this line item.
• Nonperforming Assets: Monitor the composition of the $6.29M in nonperforming assets, specifically the $3.93M in nonaccrual loans, to ensure the allowance for loan losses remains adequate.
• Interest Rate Sensitivity: Assess the Company's exposure to rising interest rates given the current low-rate environment and the potential for margin compression if funding costs do not decline as fast as asset yields.