UNION BANKSHARES INC - Quarter Report: 2009 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2009

Commission file number: 001-15985

UNION BANKSHARES, INC.

P.O. BOX 667

MAIN STREET

MORRISVILLE, VT 05661

Registrant’s telephone number:      802-888-6600

Former name, former address and former fiscal year, if changed since last report: Not applicable

Securities registered pursuant to section 12(b) of the Act:

Common Stock, $2.00 par value	Nasdaq Stock Market
(Title of class)	(Exchanges registered on)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]    No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of
August 6, 2009:

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UNION BANKSHARES, INC.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

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Part l Financial Information

  Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2009				December 31, 2008
Assets	(Dollars in thousands)
Cash and due from banks	$	5,453				$	4,793
Federal funds sold and overnight deposits		5,457					21,537
Cash and cash equivalents		10,910					26,330
Interest bearing deposits in banks		9,779					14,789
Investment securities available-for-sale		22,810					27,834
Loans held for sale		16,722					3,178
Loans		346,780					350,238
Allowance for loan losses		(3,565)					(3,556)
Unearned net loan fees		(42)					(107)
Net loans		343,173					346,575
Accrued interest receivable		1,949					1,939
Premises and equipment, net		7,602					7,461
Other assets		11,935					11,998
Total assets	$	424,880				$	440,104
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	54,019				$	61,315
Interest bearing		293,869					303,055
Total deposits		347,888					364,370
Borrowed funds		28,514					27,416
Liability on defined benefit pension plan		4,483					5,232
Accrued interest and other liabilities		4,459					3,936
Total liabilities		385,344					400,954
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized;  4,921,786 shares issued at June 30, 2009 and December 31, 2008		9,844					9,844
Paid-in capital		213					207
Retained earnings		36,001					35,869
Treasury stock at cost; 453,243 shares at June 30, 2009 and  447,188 shares at December 31, 2008		(3,607)					(3,500)
Accumulated other comprehensive loss		(2,915)					(3,270)
Total stockholders’ equity		39,536					39,150
Total liabilities and stockholders’ equity	$	424,880				$	440,104

See accompanying notes to unaudited interim consolidated financial statements.

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Common stock										Accumulated
	Shares, net of treasury		Amount		Paid-in capital		Retained earnings		Treasury stock		other comprehensive loss		Total stockholders’ equity
	(Dollars in thousands)
Balances, December 31, 2008	4,474,598		$9,844		$207		$35,869		$(3,500)		$(3,270)		$39,150
Comprehensive income:
Net income	-		-		-		2,502		-		-		2,502
Other comprehensive income  (loss), net of tax:
Change in net unrealized gain  (loss) on investment securities  available-for-sale, net of  reclassification adjustment  and tax effects	-		-		-		-		-		244		244
Change in net unrealized gain  (loss) on unfunded defined  benefit plan liability,  net of reclassification  adjustment and tax effects	-		-		-		-		-		111		111
Total other comprehensive  income											355
Total comprehensive  income													2,857
Cash dividends declared
($0.53 per share)	-		-		-		(2,370)		-		-		(2,370)
Stock based compensation  expense	-		-		6		-		-		-		6
Purchase of treasury stock	(6,055)		-		-		-		(107)		-		(107)
Balances, June 30, 2009	4,468,543		$9,844		$213		$36,001		$(3,607)		$(2,915)		$39,536

See accompanying notes to unaudited interim consolidated financial statements.

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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See accompanying notes to unaudited interim consolidated financial statements.

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UNION BANKSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. (the Company) as of June 30, 2009 and 2008, and for the three and six months then ended have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of Company’s management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of the information contained herein have been made. This information should be read in conjunction with the Company’s 2008 Annual Report to Shareholders and 2008 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2009, or any other interim period.

Certain amounts in the 2008 unaudited interim consolidated financial statements have been reclassified to conform to the 2009 presentation.

Note 2. Commitments and Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.

Note 3. Per Share Information

Earnings per common share amounts are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The assumed conversion of available outstanding stock options does not result in material dilution.

Note 4. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. Under the Statement, The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC), under authority of federal securities laws, are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the FASB’s view, the issuance of this Statement and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38–76. The Company does not expect that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of SFAS No. 167 and comply with its requirements. The Company does not expect that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of SFAS No. 140, to improve the reporting for the transfer of financial assets resulting from

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(1) practices that have developed since the issuance of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement; and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of SFAS No. 166 and comply with its requirements. The Company does not expect that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards for disclosing and accounting for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This SFAS was effective for interim and annual periods ending after June 15, 2009. The Company has complied with the requirements of SFAS No. 165. See Note 9.

In April 2009, the FASB issued the following three FASB Staff Positions (FSP) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased, and on measuring fair value in inactive markets. The provisions of FSP No. FAS 157-4 were effective for the Company’s interim period ended June 30, 2009 and the Company has complied with the requirements.

FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP No. FAS 107-1 and APB No. 28-1 were effective for the Company’s interim period ended June 30, 2009 and the Company has complied with the requirements. See Note 8.

FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends current other-than-temporary impairment guidance in GAAP for certain debt securities and requires a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when certain criteria are met, impairment losses related to credit losses would be recognized in earnings, while noncredit losses would be recorded in Other Comprehensive Income. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP No. FAS 115-2 and FAS 124-2 were effective for the Company’s interim period ended June 30, 2009 and the Company has complied with the requirements. See Note 5.

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Note 5. Investment Securities

Investment securities available-for-sale consists of the following:

Proceeds from the sale of securities available-for-sale for the six months ended June 30, 2009 and June 30, 2008 were $2.4 million and $1.8 million, respectively. Gross realized gains from sales of investments available-for-sale were $44 thousand and $34 thousand with gross realized losses of $0 and $18 thousand for the six months ended June 30, 2009 and 2008, respectively. 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 securities (dollars in thousands) by contractual scheduled maturity of debt securities available-for-sale as of June 30, 2009 were as follows:

Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these mortgage-backed securities are not included in the maturity categories in the above maturity summary.

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Information (dollars in thousands) pertaining to investment securities available-for-sale with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations to determine if an other-than-temporary impairment exists pursuant to guidelines established in FSP FAS No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. A debt security is considered impaired if the fair value is less than its amortized cost basis at the report date. If impaired, management then assesses whether the unrealized loss is other-than-temporary. Prior to the adoption of FSP FAS No. 115-2 Recognition and Presentation of Other-Than-Temporary Impairments, on April 1, 2009, we generally recognized an other-than-temporary impairment on debt securities when we did not expect full recovery of value or did not have the ability and intent to hold such securities until they had fully recovered their amortized cost. The recognition of other-than-temporary impairments prior to April 1, 2009 represented the entire loss between the amortized cost and fair value with this loss being recorded, net of tax effect, through net income and as an adjustment to the amortized cost of the security. Both credit losses and market losses would be recognized in this manner.

Under FSP FAS No. 115-2 and FAS 124-2, an unrealized loss 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 amortized cost basis of the debt security. The credit loss component of an other-than-temporary impairment write-down is recorded in earnings, net of tax effect, as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of income, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided we do not intend to sell the underlying debt security and it is “more likely than not” that we will not have to sell the debt security prior to recovery.

We considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

•

The length of time, and the extent to which, the fair value has been less than the amortized cost;

•

Adverse conditions specifically related to the security, industry, or geographic area;

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•

The historical and implied volatility of the fair value of the security;

•

The payment structure of the debt security and the likelihood of the 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; and

•

Recoveries or additional declines in fair value subsequent to the balance sheet date.

At June 30, 2009 twenty debt securities, consisting of three collateralized mortgage obligations, five corporate bonds and twelve municipal bonds had unrealized losses of $254 thousand. One marketable equity security had an unrealized loss of $7 thousand at June 30, 2009. For all securities in the available-for-sale portfolio for which unrealized losses have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. Management believes that the unrealized losses on any debt or equity securities at June 30, 2009 represent temporary impairments and no other-than-temporary impairments were recognized in 2009 through income or other comprehensive income (loss).

Note 6. Defined Benefit Pension Plan

Union Bank (Union), the Company’s sole subsidiary, sponsors a noncontributory defined benefit pension plan covering all eligible employees. The plan provides defined benefits based on years of service and final average salary.

Net periodic pension benefit cost for the three and six months ended June 30 consisted of the following components:

Note 7. Other Comprehensive Income (Loss)

Accounting principles generally require recognized revenue, expenses, gains, and losses to 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, are not reflected in the statement of income, but the cumulative effect of such items from period-to-period is reflected as a separate component of the equity section of the balance sheet (accumulated other comprehensive income or loss). Other comprehensive income or loss, along with net income, comprises the Company’s total comprehensive income or loss. As of the balance sheet dates, the components of accumulated other comprehensive loss, net of tax, were:

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The following comprise total comprehensive income for the three and six months ended June 30:

Note 8: Fair Value Measurements

The Company determines the fair market value of its financial instruments based on the fair value hierarchy established in SFAS No. 157, Fair Value Measurements. The definition of fair value is clarified by SFAS No. 157 to be the price 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. SFAS No. 157 establishes a three-level hierarchy for fair value measurements based upon the inputs to the valuation of an asset or liability. 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.

Under SFAS No. 157, 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;

•

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).

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: The majority of the 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. Certain 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.

Assets measured at fair value on a recurring basis at June 30, 2009 and December 31, 2008, segregated by fair value hierarchy level, are summarized below:

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Certain 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 certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a non-recurring basis such as OREO and impaired loans were not significant at June 30, 2009 or December 31, 2008. The Company has not elected to apply the fair value option to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

SFAS No. 107 Disclosures about Fair Value of Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value 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 affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments or the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

Investment securities and interest bearing deposits in banks: Fair values for investment securities and interest bearing deposits in banks are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or discounted present values of cash flows.

Loans and loans held for sale: Fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan type. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans, and 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 loss experience and risk characteristics. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their fair values. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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Deposits: The fair values disclosed for demand deposits or nonmaturity deposits (for example, checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate time deposits approximate their fair values at the reporting date. The fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities on such time deposits.

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 offered on similar debt instruments. The fair values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values.

Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ 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 quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments is not significant.

As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company’s significant financial instruments were as follows:

The carrying amounts in the preceding table are included in the balance sheet under the applicable captions.

Note 9. Subsequent Events

Subsequent events per SFAS No. 165, Subsequent Events, for public entities, represent events or transactions occurring after 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.

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 after such date (referred to as nonrecognized subsequent events).

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On July 15, 2009, Union Bankshares, Inc. declared a $0.25 per share regular quarterly cash dividend payable August 6, 2009 to stockholders of record on July 25, 2009.

Subsequent events have been evaluated through August 14, 2009, the issuance date of the June 30, 2009 financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis by management focuses on those factors that had a material effect on Union Bankshares, Inc.’s (Company) financial position as of June 30, 2009, and as of December 31, 2008, and its results of operations for the three and six months ended June 30, 2009 and 2008. This discussion is being presented to provide a narrative explanation of the financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data appearing elsewhere in this filing and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of the Company’s management, the interim unaudited data reflects all adjustments, consisting only of normal recurring adjustments, and disclosures necessary to fairly present the Company’s consolidated financial position and results of operations for the interim period. Management is not aware of the occurrence of any events between June 30, 2009 and August 14, 2009 which would materially affect the information presented.

CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral statements that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Company may include forward-looking statements in its filings with the Securities and Exchange Commission (SEC), in its reports to stockholders, including this Quarterly Report, in 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 those predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. When management uses any of the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “seeks,” “estimates”, or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in forward-looking statements. The possible events or factors that might affect the forward-looking statements include, but are not limited to, the following:

•

uses of monetary, fiscal, and tax policy by various governments including measures taken by the Federal government to stimulate the economy;

•

political, legislative, or regulatory developments in Vermont, New Hampshire, or the United States including changes in laws concerning accounting, taxes, financial reporting, banking, and other aspects of the financial services industry;

•

disruptions in U.S. and global financial and credit markets;

•

developments in general economic or business conditions, globally, nationally, in Vermont, or in northwestern New Hampshire, including interest rate fluctuations, market fluctuations and perceptions, job creation and unemployment rates, ability to attract new business, and inflation or deflation and their effects on the Company or its customers;

•

changes in the competitive environment for financial services organizations, including increased competition from tax-advantaged credit unions, mutual banks and out-of-market competitors offering financial services over the internet;

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•

the implementation of international financial reporting standards (IFRS) for United States companies;

•

impact of governmental interposition in financial services or other industries;

•

the Company’s ability to attract and retain key personnel;

•

adverse changes in the local real estate market, which negatively impact collateral values and the Company’s ability to recoup loan losses through disposition of real estate collateral;

•

changes in technology, including demands for greater automation which could present operational issues or significant capital outlays;

•

acts or threats of terrorism or war, and actions taken by the United States or other governments that might adversely affect business or economic conditions for the Company or its customers;

•

adverse changes in the securities market generally or in the market for financial institution securities which could adversely affect the value of the Company’s stock;

•

any actual or alleged conduct which could harm the Company’s reputation;

•

natural or other disasters which could affect the ability of the Company to operate under normal conditions;

•

the Company’s ability to attract and retain deposits and loans;

•

illegal acts of theft or fraud perpetuated against the Company’s subsidiary bank or its customers;

•

unanticipated lower revenues or increased cost of funds, loss of customers or business, or higher operating expenses;

•

the failure of assumptions underlying the establishment of the allowance for loan losses and estimations of values of collateral and various financial assets and liabilities;

•

the amount invested in new business opportunities and the timing of these investments;

•

the failure of actuarial, investment, work force, salary and other assumptions underlying the establishment of reserves for future pension costs or changes in legislative or regulatory requirements affecting such costs;

•

future cash requirements might be higher than anticipated due to loan commitments or unused lines of credit being drawn upon or depositors withdrawing their funds;

•

assumptions made regarding interest rate movement and sensitivity could vary substantially if actual experience differs from historical experience which could adversely affect the Company’s results of operations;

•

the creditworthiness of current loan customers is different from management’s understanding or changes dramatically and therefore the allowance for loan losses becomes inadequate; and

•

uncontrollable increase in the cost of doing business such as increased costs of FDIC insurance for deposits, higher taxes or assessments by regulatory bodies.

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. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.

RECENT DEVELOPMENTS

The U.S. and global economies have experienced significant stress and disruptions in the financial sector over the last nine months and have recently started to show signs of stabilization. Interest rates remain at historic lows, bank failures are higher than they have been in over 20 years and the amount of U.S. Government dollars pumped into the system is unprecedented. Dramatic slowdowns in certain sectors of the housing industry with falling home prices, continuing foreclosures and increasing unemployment have resulted in major issues for some financial institutions, including government-sponsored entities and investment banks. These issues have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. The economic instability has progressed to many other business sectors and appears to be affecting the majority of consumers as well.

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Despite the volatile economy, Vermont continues to have one of the lowest residential foreclosure rates in the country. Also, as northern New England did not experience the dramatic run up in housing prices that preceded the current economic downturn, likewise, we have not seen the values drop as far as other parts of the country.

In response to the financial crisis affecting the banking and financial markets, many new laws and regulations have been promulgated. We will not attempt to discuss them all within this Form 10-Q but will mention the ones that have a known financial impact on the Company.

In October 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the Federal Deposit Insurance Corporation temporarily increased the deposit insurance coverage limits to $250,000 per ownership category at each insured financial institution. That coverage has been extended until December 31, 2013. Also, the U.S. Treasury (the “Treasury”) was granted the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets under the Troubled Asset Purchase Program (the “TARP”).

In addition, under a program, known as the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), from the $700 billion authorized by the EESA, the Treasury is authorized to invest up to $250 billion in U.S. financial institutions in the form of purchases of preferred stock and common stock warrants. Participating publicly-held financial institutions are required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program and are restricted from increasing dividends to common shareholders or repurchasing common stock for three years without the consent of the Treasury.

Further, after receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (the “FDIC”) and the Federal Reserve System (the “Federal Reserve”), the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as 100% of deposits in noninterest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program was available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for noninterest bearing transaction deposits in excess of the $250,000 insured deposit limit.

The Company made a decision to participate in the Temporary Liquidity Guarantee Program regarding the Noninterest Bearing Deposit Account Guarantee but to opt out of the Senior Unsecured Debt Guaranty portion of that program. The Company also decided it is not in the best interest of the Company or its shareholders to participate in either the Troubled Asset Purchase Program or the Capital Purchase Program available under TARP given the strength of the Company’s capital position, the nature of the government restrictions with the possibility of additional restrictions in the future, the fact that the Company did not target sub-prime borrowers and the fact that the Company is able to meet the lending and withdrawal needs of our customers with our available funding sources. (For additional information, see the Capital Resources on page 48.)

In addition, as a result of the weakness of certain financial institutions, the FDIC has taken action that will result in increased FDIC insurance assessments for United States FDIC-insured financial institutions, including Union. Under the deposit insurance restoration plan approved by the FDIC in October 2008, the FDIC Board set a rate schedule to raise the insurance reserve ratio to 1.15% within five years. On February 27, 2009, the FDIC announced that the restoration plan horizon has been extended to seven years in light of the current significant strains on banks and the financial system and the likelihood of a severe recession. In addition, the FDIC announced a special assessment of 5 basis points to be assessed on net assets at June 30, 2009 and collected on September 30, 2009. The FDIC may also impose an additional emergency special assessment after June 30, 2009 if the FDIC deems that an additional special assessment is necessary to maintain public confidence in federal deposit insurance. Based on the FDIC insurance premium schedule for 2009, we anticipate our premium, exclusive of the

18

special assessment, to be $548 thousand for 2009 compared to $87 thousand for 2008. The special assessment based on our estimated net assets at June 30, 2009 was $191 thousand.

Union is a member of the Federal Home Loan Bank (FHLB) of Boston with an investment of $1.9 million in its Class B common stock at June 30, 2009. The FHLB system is a cooperative that provides services to member banking institutions. The primary reason for joining the FHLB of Boston which requires the purchase of FHLB of Boston Class B common stock, is to obtain funding from the FHLB of Boston. FHLB of Boston stock is an activity based stock that is directly proportional to the volume of funding. FHLB of Boston stock is bought and redeemed at par value. In response to adverse financial results primarily related to its write-down of its holdings of private mortgage backed securities, the FHLB of Boston in late 2008 adopted a revised retained earnings target, a repurchase moratorium on their Class B common stock, and a quarterly dividend payout restriction under their capital plan. These decisions will most likely limit the level of funds available under certain FHLB of Boston programs, affect the pricing of other programs and negatively impact the amount of quarterly dividends received by Union on its Class B common stock investment in the future.

It is not completely clear at this time what impact current or future government sponsored programs will have on the Company, its customers or the U.S. and global financial markets.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America (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 the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, capital, or the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. Adequacy of the allowance for loan losses is determined quarterly using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specific loans when determining the adequacy of the allowance, management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, industry trends, and the impact of the local and regional economy on the Company’s borrowers. Changes in these factors may cause management’s estimate of the allowance for loan losses to increase or decrease and result in adjustments to the Company’s provision for loan losses in future periods. For additional information, see FINANCIAL CONDITION – Allowance for Loan Losses below.

The decision to recognize other-than-temporary impairment on investments securities available-for-sale has become more difficult as complete information is not always available and market conditions and other relevant factors are subject to rapid changes. The other-than-temporary impairment decision has become a critical accounting policy for the Company and accounting guidance is given under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, FASB Staff Position (FSP) No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Benefits, FSP No. FAS 157-4, Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are Not Orderly, and FSP No. FAS 115-2 and FAS 124-2, Recognition and

19

Presentation of Other-Than-Temporary Impairments. These statements require companies to perform periodic reviews of individual securities in their investment portfolios 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 of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to continue to hold the security. 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 may be recorded in earnings as realized losses if they are deemed credit losses while noncredit losses would be recorded in Other Comprehensive Income.

The Company’s pension benefit obligations and net periodic benefit cost are actuarially determined based on the following assumptions: discount rate, current and estimated future return on plan assets, wage base rate, anticipated mortality rates, Consumer Price Index, and rate of increase in compensation levels. The annual determination of the pension benefit obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment 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 or results of operations.

The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding the results including the valuation of deferred tax assets, and determination of the fair values of investment securities and other real estate owned. Given the market volatility and the number and volume of corporate failures and bailouts over the last nine months, the determination of fair value and other-than-temporary impairment for investment securities has been especially challenging. See FINANCIAL CONDITION – Allowance for Loan Losses and Investment Activities below. 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 of the Company. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

OVERVIEW

The Company’s net income was $1.24 million for the quarter ended June 30, 2009 and $1.19 million for the quarter ended June 30, 2008. A modest increase of $45 thousand, or 3.8%, was the cumulative result of an increase in net interest income of $137 thousand, or 3.2%, a decrease in the provision for loan losses from $90 thousand for the quarter ended June 30, 2008 to $75 thousand for the quarter ended June 30, 2009, and an increase of $90 thousand, or 7.6%, in noninterest income which was mainly due to the increase in net gains on sales of loans held for sale. These positive changes were partially offset by an increase in noninterest expense of $214 thousand, which reflected an increase of $318 thousand in the FDIC insurance assessment. The increase in the FDIC insurance assessment was partially offset by a reduction in salaries and wages of $122 thousand, or 7.6%, due to the deferral of $100 thousand of loan origination costs for 2009 and increased operating efficiencies despite the addition of two full service branches in the third quarter of 2008.

The Company faced a challenging interest rate environment as the prime rate has been reduced seven times since January 1, 2008 from 7.25% to 3.25% on June 30, 2009. Total interest income decreased by $282 thousand, or 4.6%, to $5.8 million in the second quarter of 2009 versus $6.1 million in the second quarter of 2008, while the decrease in interest expense from $1.8 million in 2008 to $1.4 million in 2009 was $419 thousand, or 23.6%, between periods. The result of the changes in interest income and interest expense was that net interest income for the second quarter of 2009 was $4.5 million, up $137 thousand, or 3.2%, from the second quarter of 2008 of $4.3 million. The increase in net interest income was more a function of the decrease in interest paid on interest bearing liabilities as this mitigated the decrease in interest income. During the second quarter of 2009, the Company’s net interest margin decreased 22 basis points to 4.61%, from 4.83% for the second quarter of 2008. The Company’s net interest spread

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declined 8 basis points to 4.30% for the second quarter of 2009, compared to 4.38% for the same period last year. The decline in the net interest spread was primarily the result of the decline in average interest rates earned on loans as the 400 basis point drop in the prime rate between January 1, 2008 and June 30, 2009 had an effect on the repricing of adjustable rate loans and the volume of refinancings, as customers took advantage of the lower rates. Further drops in the prime rate and/or increases in competitors’ deposit rates could be problematic as individual instruments continue to reprice.

The Company’s total assets decreased from $440.1 million at December 31, 2008, to $424.9 million at June 30, 2009, a decrease of $15.2 million, or 3.5%. The decrease between periods is a normal seasonal decline mainly due to the payoffs of $14.3 million in municipal loans during the last few days of June due to Vermont state regulations governing their short-term funding. Municipal loans increased by $16.7 million the first two business days of July, 2009. Deposits decreased from $364.4 million at December 31, 2008 to $347.9 million at June 30, 2009, a decrease of $16.5 million, or 4.5%, with that decrease comprised of a drop of $6.7 million in commercial noninterest-bearing deposits and a drop of $15.9 million in overall municipal deposits which are subject to great seasonality due to Vermont state regulations governing their short-term funding. Municipal deposits increased by $16.4 million the first two business days of July, 2009. These decreases were partially offset by an increase in consumer deposits with savings accounts growing $3.6 million and money market accounts growing $4.5 million. Total loans, including loans held for sale, increased $10.1 million, or 2.9%, from $353.4 million at December 31, 2008 to $363.5 million at June 30, 2009 despite the seasonal paydown of $14.3 million in municipal loans during the last few days of June. Total loans at June 30, 2009 are net of $29.2 million in residential real estate loans sold during the first six months of 2009. Despite a weakening economy, loan demand is strong due, in large part, to lower interest rates which have sparked both existing and new customers to refinance loans. The Company has also benefited from a changing competitive environment. Additionally, our competitors have changed their pricing strategies, tightened their credit underwriting requirements and shifted to more conventional financial products.

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The following unaudited per share information and key ratios depict several measurements of performance or financial condition for or at the three and six months ended June 30, 2009 and 2008, respectively:

____________________

(1)

Annualized.

(2)

The ratio of tax equivalent net interest income to average earning assets. See page 24 for more information.

(3)

The ratio of noninterest expense to tax equivalent net interest income and noninterest income, excluding quarter to date net security gains of $23 thousand and year to date of $44 thousand at June 30, 2009. The 2008 numbers exclude net security gains of $16 thousand for both the three months and six months ended June 30. The efficiency ratio is a non-GAAP standard measure of expense utilization effectiveness used in the banking industry.

(4)

The difference between the average rate earned on assets minus the average rate paid on liabilities. See page 25 for more information.

(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 share divided by consolidated net income per share.

RESULTS OF OPERATIONS

Net Interest Income. The largest component of the Company’s operating income is net interest income, which is the difference between interest and dividend income received from interest-earning assets and the interest expense paid on interest-bearing liabilities. The Company’s net interest income increased $137 thousand, or 3.2%, to $4.5 million for the three months ended June 30, 2009, from $4.3 million for the three months ended June 30, 2008. The net interest spread decreased 8 basis points to 4.30% for the three months ended June 30, 2009, from 4.38% for the three months ended June 30, 2008. The decline in the net interest spread was primarily the result of the drop in average interest rates earned on loans from 7.06% for the quarter ended June 30, 2008 to 6.27% for the quarter ended June 30, 2009. The prime rate was 7.25% on January 1, 2008, 5.00% by June 30, 2008 and 3.25% throughout 2009, which affected the repricing of adjustable rate loans as well as the volume of new loans and refinancing activity during the first half of 2009, as customers took advantage of the lower rates. The adverse effect of declining rates on the Company’s net interest spread was mitigated somewhat by a 72 basis point decline in the average rate paid on deposits and borrowed funds in the second quarter of 2009 versus the same period last year. The net interest margin for the second quarter of 2009 decreased 22 basis points to 4.61% from the 2008 period at 4.83% reflecting the net effect of an increase in net interest income of $137 thousand and an increase of $31.9 million, or 8.6%, in average earning assets.

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The trend of increasing pressure on the net interest spread and net interest margin were also reflected in the year-to-date results, with a decline of 16 basis points in the net interest spread from 4.41% for the six months ended June 30, 2008 to 4.25% for the six months ended June 30, 2009. The net interest margin declined 32 basis points from 4.90% to 4.58% over the same period. Further decrease in the prime rate would not necessarily be beneficial to the Company in the near term, especially if funding rates did not follow a similar downward trend. (See Market Risk and Asset and Liability Management on page 42.)

Yields Earned and Rates Paid. The following tables show, for the periods indicated, the total amount of income recorded from average interest-earning assets and the related average yields, the interest expense associated with average interest-bearing liabilities, the related average rates paid, and the relative net interest spread and net interest margin. Yield and rate information is calculated on an annualized tax equivalent basis. Yield and rate information for a period is average information for the period, and is calculated by dividing the annualized tax equivalent income or expense item for the period by the average balance of the appropriate balance sheet item during the period. Net interest margin is annualized tax equivalent net interest income divided by average interest-earning assets. Nonaccrual loans and 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.

Tax-exempt interest income amounted to $344 thousand and $259 thousand for the three months ended June 30, 2009 and 2008, respectively and $640 thousand and $503 thousand for the six months ended June 30, 2009 and 2008, respectively. The following table presents the effect of tax-exempt income on the calculation of the net interest margin, using a marginal tax rate of 34% for 2009 and 2008:

	For the three months ended, June 30,				For the six months ended, June 30,
	2009		2008		2009		2008
Net interest income as presented	$4,455		$4,318		$8,817		$8,658
Effect of tax-exempt interest
Securities available-for-sale	32		34		65		70
Loans	113		76		205		143
Net interest income, tax equivalent	$4,600		$4,428		$9,087		$8,871

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____________________

(1)

Average yields reported on a tax-equivalent basis using a marginal tax rate of 34%.

(2)

Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities.

(3)

Includes loans held for sale as well as nonaccrual loans and is net of unearned income and allowance or loan losses.

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____________________

(1)

Average yields reported on a tax-equivalent basis using a marginal tax rate of 34%.

(2)

Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities.

(3)

Includes loans held for sale as well as nonaccrual loans and is net of unearned income and allowance for loan losses.

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 period 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.

25

Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008 Increase/(Decrease) Due to Change In
	Volume		Rate		Net
	(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits	$     11		$     (36)		$  (25)
Interest bearing deposits in banks	35		(34)		1
Investment securities	(69)		16		(53)
Loans, net	491		(680)		(189)
FHLB of Boston stock	1		(17)		(16)
Total interest earning assets	$   469		$   (751)		$(282)
Interest bearing liabilities:
NOW accounts	$       9		$     (47)		$  (38)
Savings/money market accounts	41		(174)		(133)
Time deposits	56		(302)		(246)
Borrowed funds	(9)		7		(2)
Total interest bearing liabilities	$     97		$   (516)		$(419)
Net change in net interest income	$   372		$   (235)		$ 137

	Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008 Increase/(Decrease) Due to Change In
	Volume		Rate		Net
	(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits	$     25		$     (79)		$  (54)
Interest bearing deposits in banks	72		(74)		(2)
Investment securities	(150)		10		(140)
Loans, net	1,137		(1,600)		(463)
FHLB of Boston stock	4		(41)		(37)
Total interest earning assets	$1,088		$(1,784)		$(696)
Interest bearing liabilities:
NOW accounts	$     19		$     (99)		$  (80)
Savings/money market accounts	89		(375)		(286)
Time deposits	164		(684)		(520)
Borrowed funds	29		2		31
Total interest bearing liabilities	$   301		$(1,156)		$(855)
Net change in net interest income	$   787		$   (628)		$ 159

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008.

Interest and Dividend Income. The Company’s interest and dividend income decreased $282 thousand, or 4.6%, to $5.8 million for the three months ended June 30, 2009, from $6.1 million for the three months ended June 30, 2008. During the second quarter of 2009, average earning assets increased $31.9 million, or 8.6%, to $400.4 million, from $368.6 million for the three months ended June 30, 2008. However, the increase in interest income resulting from the rise in average earning assets was more than offset by the lower rates earned on all interest earning assets except investment securities in the second quarter of 2009 versus 2008. In particular, interest income on loans decreased $189 thousand, or 3.4%, to $5.4 million for the second quarter of 2009 versus the $5.6 million for the 2008 comparison period despite an increase in average loan volume between periods. Average loans approximated $353.0 million

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at an average yield of 6.27% for the three months ended June 30, 2009, up $30.0 million, or 9.3%, from an average of $322.9 million at an average yield of 7.06% for the three months ended June 30, 2008. However, the increase in volume was more than offset by a 79 basis point decrease in yield. Loan demand has risen during 2009 due to lower interest rates which have led many new and existing customers to refinance with Union Bank. The changes in the competitive landscape has also added to the growth in the loan portfolio as it appears that customers are now more inclined to work with community banks while some of the regional banks and mortgage brokers have changed their pricing strategies and financial products making conservative community banks more competitive.

The 225 basis point drop in the prime rate from January 1, 2008 at 7.25% to June 30, 2008 at 5.00%, followed by three further drops in the prime rate in October 2008 and December 2008 to bring prime down another 175 basis points to 3.25%, has now impacted the majority of variable rate loans, as adjustable rate loans have continued to reprice at lower rates. The prime rate has not been as low as 3.25% since 1955.

In this historically low interest rate environment, many existing customers, as well as new customers, have approached the Company regarding refinancing loans which has contributed to the increase of $30.0 million, or 9.3%, in average loan volume for the quarter ended June 30, 2009 over the same period of 2008. The Company has continued to manage interest rate risk by selling the majority of low rate qualified residential mortgages originated during this period to the secondary market and has benefited from the sale of these mortgages with gains on the sales of such loans totaling $186 thousand for the quarter ended June 30, 2009 and $486 thousand for the first half of 2009.

The average balance of investments (including mortgage-backed securities) decreased $5.3 million, or 17.8%, to $24.2 million for the three months ended June 30, 2009, from $29.5 million for the three months ended June 30, 2008. Maturing or sold investments were reinvested into short term FDIC insured interest bearing deposits or left at the Federal Reserve Bank of Boston to provide financial security and liquidity to utilize for the future loan growth or to reinvest in investment securities once interest rates rise. The average level of interest bearing deposits in banks for the quarter was $12.2 million, up $3.5 million, or 40.0%, from the 2008 average level of $8.7 million. The average level of federal funds sold and overnight deposits increased $3.5 million, to $9.1 million, or 62.2%, for the three months ended June 30, 2009, from $5.6 million for the three months ended June 30, 2008. Funds invested in federal funds sold, overnight deposits and FDIC insured certificates of deposit have been very short term in nature as it is anticipated that these funds will be needed to fund future loan demand. Interest income from non-loan instruments decreased $93 thousand, or 18.6%, between periods, with $408 thousand for the second quarter of 2009 versus $501 thousand for the same period of 2008, reflecting the decreases in yields on all types of interest earning assets except investment securities as well as cessation of dividends on the FHLB of Boston stock during the fourth quarter of 2008.

Interest Expense. The Company’s interest expense decreased $418 thousand, or 23.5%, to $1.4 million for the three months ended June 30, 2009, from $1.8 million for the three months ended June 30, 2008. Of this decrease, $516 thousand was a result of the decrease in rates, partially offset by the $97 thousand attributable to the increase in volume for all interest bearing deposits.

Interest expense on deposits decreased $416 thousand, or 28.1%, to $1.1 million for the quarter ended June 30, 2009, from $1.5 million for the quarter ended June 30, 2008. Competition for deposits has remained strong but growth in average interest bearing deposits for the quarter ended June 30, 2009 at $27.9 million, or 10.3%, to $299.7 million compared to $271.8 million for the quarter ended June 30, 2008 is illustrative of the overall growth in the franchise with the opening of two new branches during the third quarter of 2008 and some “flight to quality” since September 2008 as the financial markets continue to experience turmoil. Interest rates paid on deposits were slower to drop than the drop in the prime rate and the target rate on Federal Funds Sold, but have moved steadily downward over the last 18 months. Management believes consumers have become more rate sensitive over the last few years due to advertised “specials” and the proliferation of nonlocal financial institutions trying to gather deposits throughout the Company’s market area. Average time deposits rose to $132.8 million for the three months ended June 30, 2009, from $126.1 million for the three months ended June 30, 2008, or an increase of $6.7 million, or 5.3%. While the majority of these deposits are new funds for the Company, there has been movement of deposits from lower yielding deposit accounts to higher paying certificates of

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deposit within its account base. The average rate paid on time deposits decreased 93 basis points, to 2.59% from 3.52% for the three months ended June 30, 2009 and 2008, respectively. The average balances for money market and savings accounts increased $13.9 million, or 15.1%, to $105.4 million for the three months ended June 30, 2009, from $91.5 million for the three months ended June 30, 2008. A $7.4 million, or 13.6%, increase in NOW accounts brought the average balance up to $61.5 million from $54.2 million between the two years.

Interest expense on borrowed funds decreased slightly from $296 thousand for the quarter ended June 30, 2008 to $294 thousand for the quarter ended June 30, 2009 despite a 10 basis point increase in average rate paid between periods. Average funds borrowed from the FHLB of Boston decreased from $27.3 million to $26.3 million between years, while average federal funds purchased was flat between years.

Provision for Loan Losses. There was a $75 thousand loan loss provision for the quarter ended June 30, 2009 and a $90 thousand loan loss provision for the quarter ended June 30, 2008. The lower provision in the second quarter of 2009 versus 2008 was deemed appropriate in light of net charge-offs for the quarter of $34 thousand compared to net charge-offs of $67 thousand for the quarter ended June 30, 2008. There is strong loan demand and, although there continues to be a softening of the economy, there was a decrease in loans 30 or more days past due between years as well as a decline in classified loans since December 31, 2008. For further details, see FINANCIAL CONDITION Allowance for Loan Losses and Asset Quality below.

Noninterest income. The following table sets forth changes from the second quarter of 2008 to the second quarter of 2009 for components of noninterest income: