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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission file number 000-28449
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year,
if changed since last report: Not applicable
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $2.00 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant, based on the last known trade price March 15, 2002
was $41,314,207. For purposes of this calculation, all directors and
executive officers of the Registrant are assumed to be affiliates. Such
assumptions, however, shall not be deemed to be an admission of such status
as to any such individual.
As of March 15, 2002, there were 3,027,557 shares of the registrant's $2
par value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically designated portions of the following documents, are
incorporated by reference in the indicated Part of this Annual Report on
Form 10-K:
Document Part
-------- ----
Annual Report to Shareholders for the year ended December 31, 2001 I, II
Proxy Statement for the 2002 Annual Meeting of Shareholders III
1
UNION BANKSHARES, INC.
Table of Contents
Part I
Item 1 -- Business 3
Item 2 -- Properties 8
Item 3 -- Legal Proceedings 8
Item 4 -- Submission of Matters to a Vote of Security Holders 8
Part II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters* 8
Item 6 -- Selected Financial Data 9
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations* 10
Item 7A -- Quantitative and Qualitative Disclosures about Market Risk* 10
Item 8 -- Financial Statements and Supplementary Data* 10
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 10
Part III
Item 10 -- Directors and Executive Officers of Registrant** 10
Item 11 -- Executive Compensation** 11
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management** 11
Item 13 -- Certain Relationships and Related Party Transactions** 11
Part IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on
Form 8-K 11
Signatures 13
- --------------------
* The information required by Part II, Items 5,7, 7A and 10 is
incorporated herein by reference from the 2001 Annual Report to
Shareholders
** The information required by Part III is incorporated herein by
reference from Union's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 15 , 2002.
2
Part I-Item 1 Business
General: Union Bankshares, Inc. (Union or the Company) is a two-bank holding
company whose subsidiaries are Citizens Savings Bank & Trust Co. (Citizens)
and Union Bank. It was incorporated in the State of Vermont in 1982. Citizens
Savings Bank and Trust Company was chartered under Vermont law in 1887 as a
State bank and is headquartered in St. Johnsbury, Vermont. Citizens became a
wholly owned subsidiary of Union on November 30, 1999 through a transaction
accounted for as a pooling of interests but kept its separate name and banking
franchise. Union Bank was organized and chartered as a State bank in 1891
and became a wholly owned subsidiary of Union in 1982 upon its formation.
Union and Union Bank are headquartered in Morrisville, Vermont.
Union has two definable segments that are Citizens Savings Bank & Trust Co.
and Union Bank which both generally operate in the same line of business,
commercial banking, and in the same geographic and economic environments in
Northern Vermont. Citizens Savings Bank & Trust Co. has 49 full time
equivalent employees while Union Bank has 98. Union, itself, does not have
any paid employees.
Union's income is derived principally from interest on loans and earnings
on other investments. Its primary expenses arise from interest paid on
deposits and borrowings and general overhead expenses. The consolidated
assets of Union have grown from $ 273 million to $ 337 million over the
last five years or 23.5 % while our total consolidated deposits have grown
from $ 239 million to $ 286 million or 19.4 % during that same period.
Please refer to our schedule of Selected Financial Data, which has been
restated for all periods for the pooling of interest acquisition of
Citizens, see Item 6 of this annual report for further details.
The deposits of both banks are insured by the Bank Insurance Fund of the
FDIC up to legal limits (generally $100,000 per depositor).
In addition to its commercial banking business, Citizens offers a full line
of personal trust services to its customers. Previously Union Bank operated
its own trust department, but those operations were transferred to Citizens
in late 2000. Assets held in fiduciary capacity by Citizens' trust department
are not included in Union's consolidated balance sheet for financial
reporting purposes other than trust cash on deposit.
Competition: Union and its two subsidiaries face substantial competition
for loans and deposits in their market area from local commercial banks,
savings banks, credit unions, and financial services affiliates of bank
holding companies, as well as from national financial service providers
such as mutual funds, brokerage houses, consumer finance companies and
internet banks. Union anticipates continued strong competition from such
financial institutions in the foreseeable future. Within Union's market
area are branches of several commercial and savings banks that are
substantially larger than Union. Both the subsidiary banks focus on their
community banking niche and on providing convenient hours and modes of
delivery to provide outstanding customer service. Union competes for
checking, savings, money market accounts and other deposits by offering
depositors competitive rates, personal service, local area expertise,
convenient locations and access, and an array of financial services and
products.
The competition in originating real estate and other loans comes
principally from commercial banks, mortgage banking companies and credit
unions. Union competes for loan originations primarily through the interest
rates and loan fees it charges, the types of loans it offers, and the
efficiency and quality of services it provides. In addition to residential
mortgage lending and municipal loans, Union also emphasizes commercial real
estate, construction, and both conventional and SBA commercial lending.
Factors that affect Union's ability to compete for loans include general
and local economic conditions, prevailing interest rates including "prime"
rate, and pricing volatility of the secondary mortgage markets. Union
attempts to promote an increased level of personal service and expertise
within the community to position itself as a lender to small to middle
market business and residential customers, which tend to be under-served by
larger institutions.
Union competes through Citizens for personal trust business with trust
companies, commercial banks having trust departments, investment advisory
firms, brokerage firms, mutual funds and insurance companies.
Management's strategy includes continued evaluation of changing market
needs and design and implementation of products and services to meet those
needs. The directors and management of Union intend to continue to offer
products and services that will allow Union to manage responsibly the
growth of its assets, while building and
3
enhancing both shareholder value and both Citizens' and Union Bank's image
as premiere Vermont community banks.
The competitive environment for financial institutions has undergone
significant change in recent years and that trend is likely to continue in
light of changes in applicable law (see "Financial Services Modernization"
below) which permit the integration of the historically separate banking,
insurance and securities industries. Change is also occurring due to rapid
technological advances which increasingly permit the delivery of financial
products and services without the need for a physical presence in the
market area served and which also are likely to diminish the importance of
financial intermediaries, such as banks, in the transfer of funds between
parties.
Regulation and Supervision: As Vermont-chartered commercial banks, each
subsidiary is subject to regulation, examination, and supervision by the
Vermont Banking Department and the FDIC. Regular examinations of Union Bank
and Citizens by the Vermont Banking Department and the FDIC include
examination of the banks' financial condition and operations, including but
not limited to their capital adequacy, loan reserves, loans, investments,
earnings, liquidity, compliance with laws and regulations, record of
performance under the federal Community Reinvestment Act of 1997 ("CRA"),
and the performance of their management. In addition Union, as a bank
holding company, is subject to regulation, examination and supervision by
the Federal Reserve Board. The regulations of these authorities govern
certain of the operations of Union and its subsidiaries. The following
discussion summarizes the material aspects of various federal and state
banking laws and regulations that apply to Union, Citizens, and Union Bank:
Bank Holding Company Acquisitions and Activities. As a bank holding
company, Union is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under the
BHC Act, the activities of bank holding companies, such as Union, and those
of companies that they control, such as Union Bank and Citizens, or in
which they hold more than 5% of the voting stock, are limited to banking,
managing or controlling banks, furnishing services to or performing
services for their subsidiaries, or certain activities that the Federal
Reserve Board has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. As
described below, a bank holding company that has elected to become a
"financial holding company" under the federal Gramm-Leach-Bliley Financial
Modernization Act of 1999 ("Gramm-Leach-Bliley Act") may engage in certain
additional activities. Bank holding companies such as Union that have not
elected to become financial holding companies, are required to obtain the
prior approval of the Federal Reserve Board to engage in any new activity
or to acquire more than 5% of any class of voting stock of any bank or
other company.
The Federal Reserve Board has authority to issue cease and desist orders to
prevent or terminate unsafe or unsound banking practices or violations of
law or regulations and to assess civil money penalties against bank holding
companies and their subsidiaries and other affiliates. The Federal Reserve
Board also has the authority to remove officers, directors and other
institution-affiliated parties.
Financial Services Modernization. The Gramm-Leach-Bliley Act permits
eligible bank holding companies to elect to become financial holding
companies and thereby engage in a broader range of activities than is
permitted to bank holding companies generally. Under the Gramm-Leach-Bliley
Act, a financial holding company may engage in activities that are
"financial in nature," which includes securities underwriting, dealing and
market making, sponsoring mutual funds and investment companies, insurance
underwriting, merchant banking and additional activities that the Federal
Reserve Board, in consultation with the Secretary of the Treasury,
determines to be financial in nature, or incident or complementary to such
financial activities, provided that such activities do not pose a
substantial risk to the safety and soundness of depository institutions or
the financial system generally. The Gramm-Leach-Bliley Act effectively
permits the integration, under a financial holding company umbrella, of
firms engaged in banking, insurance and securities activities, and preempts
state laws that purport to limit or prohibit such affiliations. No
regulatory approval is required for a financial holding company to acquire
a company, other than a bank or savings association, engaged in permitted
activities.
In order to become a financial holding company, all of the bank holding
company's bank subsidiaries must be well-capitalized and well-managed under
applicable regulatory guidelines, and each of such banks must have been
rated "Satisfactory" or better in its most recent evaluation under the
federal CRA. Once a bank holding company has
4
elected to be treated as a financial holding company, it may face
significant consequences if it subsequently fails to meet one or more of
the criteria for eligibility. For example, it may be required to enter into
an agreement with the Federal Reserve Board imposing limitations on its
operations and requiring divestitures. In addition, the need to maintain
eligibility could hamper a financial holding company's ability to expand or
to acquire financial institutions that do not meet the required criteria.
As of March 15, 2002, Union has not elected to become a financial holding
company.
Source of Strength. Under Federal Reserve Board policy, bank holding
companies, such as Union, are expected to act as a source of financial
strength to their subsidiary banks, such as Union Bank and Citizens, and to
commit resources to support them. This support may be called for at times
when a bank holding company may not have the required resources to do so.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 permits bank holding companies to acquire banks
based outside their home states, generally without regard to whether the
state's law would permit the acquisition. The Act also authorizes banks to
merge across state lines thereby creating interstate branches. In addition,
the Act permits banks to acquire existing interstate branches (short of
merger) or to establish new interstate branches. States were given the
right, exercisable before June 1, 1997, to prohibit altogether or impose
certain limitations on, interstate mergers and the acquisition or
establishment of interstate branches. None of the states contiguous to
Vermont (New Hampshire, New York and Massachusetts) has in effect any
statute which would substantially impede the ability of a Vermont bank to
acquire or create interstate branches directly or through an interstate
merger. Similarly, Vermont law does not limit the ability of out-of-state
banks to acquire or create branches in Vermont. Although interstate banking
and branching may result in increased competitive pressures in the markets
in which Union operates, interstate branching may present competitive
opportunities for locally-owned and managed banks, such as Union Bank and
Citizens, that are familiar with the local markets and that emphasize
personal service and prompt, local decision-making.
Affiliate Restrictions. Bank holding companies and their affiliates are
subject to certain restrictions under the Federal Reserve Act in their
dealings with each other, such as in connection with extensions of credit,
transfers of assets, and purchase of services among affiliated parties.
Generally, loans or extensions of credit, investments or purchases of
assets by a subsidiary bank from a bank holding company or its affiliates
are limited to 10% of the bank's capital and surplus with respect to each
affiliate and to 20% in the aggregate for all affiliates, and borrowings
are also subject to certain collateral requirements. These transactions, as
well as other transactions between a subsidiary bank and its holding
company or other affiliates must generally be on arms-length terms, that
is, on terms comparable to those involving nonaffiliated companies.
Further, under the Federal Reserve Act and Federal Reserve Board
regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in-arrangements in connection with extensions
of credit or furnishing of property or services to third parties. Union,
Union Bank and Citizens are subject to these restrictions in their
intercompany transactions.
Banks. The various laws and regulations applicable to Citizens and Union
that are administered by the FDIC and the Vermont Banking Commissioner
affect the banks' corporate practices, such as payment of dividends,
incurring of debt and acquisition of financial institutions and other
companies. These laws also affect their business practices, such as payment
of interest on deposits, the charging of interest on loans, privacy issues
and the location of offices. There are no outstanding regulatory orders
resulting from regulatory examinations of Union, Union Bank or Citizens.
Dividend Limitations. As a holding company, Union's ability to pay
dividends to its shareholders is largely dependent on the ability of its
subsidiaries to pay dividends to it. Payment of dividends by Vermont-
chartered banks, such as Union Bank and Citizens, is subject to applicable
state and federal laws. Under Vermont banking laws, a Vermont-chartered
bank may not authorize dividends or other distributions that reduce the
bank's capital below any required amount of capital required in the bank's
Certificate of General Good or under any capital or surplus standards
established by the Vermont Banking Commissioner. Union Bank and Citizens do
not have any capital restrictions in their Certificates of General Good
and, to date, the Vermont Banking Commissioner has not adopted capital or
surplus standards. Nevertheless, the capital standards established by the
FDIC, described below under "Capital Requirements," apply to both Union
Bank and Citizens, and the capital standards of the Federal Reserve Board
apply to Union on a consolidated basis. In addition, the Federal Reserve
Board, the FDIC and the
5
Vermont Banking Commissioner are authorized under applicable federal and
state laws to prohibit payment of dividends that they determine would be an
unsafe or unsound practice. Payment of dividends that deplete the capital
of a bank or a bank holding company, or render it illiquid, could be found
to be an unsafe or unsound practice.
Capital Requirements. The Federal Reserve Board, the FDIC and other federal
banking regulators have issued substantially similar risk-based and
leverage capital guidelines for United States Banking organizations. Those
regulatory agencies are also authorized to require that a banking
organization maintain capital above the minimum levels, whether because of
its financial condition or actual or anticipated growth. The Federal
Reserve Board's risk-based capital guidelines define a three-tier capital
framework and specify three relevant capital ratios: Tier 1 Capital Ratio,
a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of
common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. The remainder (Tier 2 and Tier 3
Capital) consists of subordinate and other qualifying debt, preferred stock
that does not qualify as Tier 1 Capital, and the allowance for loan losses
up to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 Capital, less investments in
unconsolidated subsidiaries, represents qualifying "Total Capital," at
least 50% of which must consist of Tier 1 Capital. Risk-based capital
ratios are calculated by dividing Tier 1 Capital and Total Capital by risk-
weighted assets. Assets and off-balance sheet exposures are assigned to one
of four categories or risk weights, based primarily on relative credit
risk. The minimum Tier 1 Capital Ratio is 4% and the minimum Total Capital
Ratio is 8%. The Leverage Ratio is determined by dividing Tier 1 Capital by
adjusted average total assets. Although the minimum Leverage Ratio is 3%,
most banking organizations are required to maintain Leverage Ratios of at
least 1 to 2 percentage points above 3%.
Federal bank regulatory agencies require banking organizations that engage
in significant trading activity to calculate a capital charge for market
risk. Significant trading activity means trading activity of at least 10%
of total assets or $1 billion, whichever is smaller, calculated on a
consolidated basis for bank holding companies. Federal bank regulators may
apply the market risk measure to other bank holding companies, as the
agency deems necessary or appropriate for safe and sound banking practices.
Each agency may exclude organizations that it supervises that otherwise
meet the criteria under certain circumstances. The market risk charge will
be included in the calculation of an organization's risk-based capital
ratio. Neither Union, Union Bank, nor Citizens is currently subject to this
special capital charge.
Federal Reserve Board policy provides that banking organizations generally,
and, in particular, those that are experiencing internal growth or actively
making acquisitions, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets, such as goodwill. Furthermore, the capital
guidelines indicate that the Federal Reserve Board will continue to
consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for
expansion or new activities. The Tangible Tier 1 Leverage Ratio is
calculated by dividing a banking organization's Tier 1 Capital less all
intangible assets by its total consolidated quarterly average assets less
all intangible assets.
The Federal Reserve Board's capital adequacy guidelines generally provide
that bank holding companies with a ratio of intangible assets to tangible
Tier 1 Capital in excess of 25% will be subject to close scrutiny for
certain purposes, including the Federal Reserve Board's evaluation of
acquisition proposals. Union does not have a material amount of intangibles
in its capital base, nor was any intangible goodwill created as a result of
its acquisition of Citizens in 1999, which was accomplished through a merger
transaction accounted for as a pooling of interests.
Prompt Corrective Action. At December 31, 2001, Union's consolidated Total
and Tier I Risk-Based Capital Ratios were 17.43% and 16.16%, respectively,
and its Leverage Capital Ratio was 11.06%, and is considered well-
capitalized under the above regulatory guidelines. In addition, both Union
Bank and Citizens are considered well-capitalized under such guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and requires the respective federal banking agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements. FDICIA imposes
progressively more restrictive constraints on operations, management and
capital distributions, depending on the category in which an institution is
classified. Failure to meet the capital
6
guidelines could also subject a banking institution to capital raising
requirements. An "undercapitalized" bank must develop a capital restoration
plan and its parent holding company must guarantee that bank's compliance
with the plan. The liability of the parent holding company under any such
guarantee is limited to the lesser of 5% of the bank's assets at the time
it became undercapitalized or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company,
such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various federal banking
agencies to prescribe certain noncapital standards for safety and soundness
related generally to operations and management, asset quality and executive
compensation, and permits regulatory action against a financial institution
that does not meet such standards.
The various federal banking agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA,
using the Total Capital, Tier 1 Ratio and the Leverage Ratio as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution
must have a Tier 1 capital ratio of at least 6%, a total capital ratio of
at least 10% and a leverage ratio of at least 5% and not be subject to a
capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8%
and a leverage ratio of at least 4%, or 3% in some cases.
Community Reinvestment Act (CRA). Union Bank and Citizens are subject to
the federal CRA, which requires banks to demonstrate their commitment to
serving the credit needs of low and moderate income residents of their
communities. Both banks participate in a variety of direct and indirect
lending programs and other investments for the benefit of the low and
moderate income residents in our communities. The FDIC conducts
examinations of insured banks' compliance with CRA requirements and rates
such institutions as "Outstanding," "Satisfactory," "Needs to Improve," and
"Substantial Non-Compliance." Failure of an institution to receive at least
a "Satisfactory" CRA rating could adversely affect its ability to undertake
certain activities, such as acquisitions of other financial institutions,
which require regulatory approval based, in part, on the institution's
record of CRA compliance. In addition, failure of a bank subsidiary to
receive at least a "Satisfactory" rating would disqualify a bank holding
company from eligibility to become or remain a financial holding company
under the Gramm-Leach-Bliley Act. (See "Financial Services Modernization"
above.) At their last CRA compliance examinations by the FDIC, Union Bank
received a rating of "Outstanding" and Citizens received a rating of
"Satisfactory."
Deposit Insurance Premium Assessments. Under applicable federal laws and
regulations, deposit insurance premium assessments to the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are based
on a supervisory risk rating system, with the most favorably rated
institutions paying the lowest premiums. The deposits of Union Bank and
Citizens are insured under the BIF. As "well capitalized" institutions,
both banks are presently in the most favorable deposit insurance assessment
category, and pay the minimum deposit premium assessment.
FDICIA Cross-Guarantees. Under the cross-guarantee provisions of FDICIA, in
some circumstances in the event of a loss suffered or anticipated by the
FDIC-either as a result of a bank's insolvency or FDIC assistance provided
to a bank in danger of default-the FDIC may assess the other banks in the
same holding company family to recoup its losses to the deposit insurance
fund.
Brokered Deposits. The FDICIA restricts the ability of an FDIC-insured bank
to accept brokered deposits unless it is a well-capitalized institution
under FDICIA's prompt corrective action guidelines. Although eligible to do
so, neither Union Bank nor Citizens has accepted any brokered deposits.
Consumer Protection Laws. In connection with their lending activities, both
Union Bank and Citizens are subject to a variety of federal and state laws
designed to protect borrowers and to promote lending to various sectors of
the economy and population. In addition to the provisions of the CRA
(discussed above), Union Bank and Citizens are subject to, among other
laws, the federal Home Mortgage Disclosure Act, the federal Real Estate
Settlement Procedures Act, the federal Truth-in-Lending Act, the federal
and Vermont Equal Credit Opportunity Acts, and the federal and Vermont Fair
Credit Reporting Acts.
Both Union Bank and Citizens are subject to the provisions of Title V of
the Gramm-Leach-Bliley Act, which require them to notify their consumer
customers of their information collection and sharing practices and
restrict
7
those practices in certain respects. In addition, both banks are subject to
similar, but more restrictive, requirements of the Vermont Banking
Department. Generally those Vermont requirements prohibit the disclosure of
consumer information to nonaffiliated third parties without the express
written consent of the consumer, except for disclosures permitted under
specified regulatory exceptions.
The deposit taking activities of Union Bank and Citizens are subject to
various federal and state requirements, including those mandating uniform
disclosures to depositors with respect to rates of interest, fees and other
terms of consumer deposit accounts, and with respect to their policies on
the availability of deposited funds.
Bank Secrecy Act Compliance. Union Bank and Citizens are subject to federal
laws establishing certain record keeping, customer identification, and
reporting requirements with respect to large cash transactions, sales of
travelers checks and other monetary instruments, and the international
transfer of cash or monetary instruments. New provisions, designed to help
combat international terrorism, were added in 2001 to the Bank Secrecy Act
by the USA Patriot Act. These provisions impose due diligence standards on
banks in opening correspondent accounts of foreign off-shore banks and
banks in jurisdictions that have been found to fall significantly below
international anti-money laundering standards. In addition, U.S. banks are
prohibited from opening correspondent accounts for off-shore shell banks,
defined as banks that have no physical presence and that are not part of a
regulated and recognized banking company. The USA Patriot Act requires all
financial institutions to adopt money laundering programs. In addition, the
USA Patriot Act amended certain provisions of the federal Right to
Financial Privacy Act to facilitate the access of law enforcement to bank
customer records in connection with investigating international terrorism.
Part I-Item 2 Properties
As of December 31, 2001, Union's subsidiaries operated 12 community-banking
locations all of which are in Lamoille or Caledonia counties of Vermont.
Eight of these branch locations are Union Bank's and four are Citizens'.
Citizens opened a loan production office in Littleton, New Hampshire in May
of 2001. Together they also operate 24 automated teller machines (ATM's) in
northern Vermont and Citizens plans to install an ATM at its Littleton, New
Hampshire loan center later this year. The Company owns eight of its branch
locations and leases the other branches and certain ATM premises from third
parties under terms and conditions considered by management to be favorable
to the Company.
Additional information relating to the Company's properties is set forth in
Note 7 to the consolidated financial statements and incorporated herein by
reference.
Part I-Item 3 Legal Proceedings
There are no known pending legal proceedings to which Union or any of its
subsidiaries is a party, or to which any of their properties is subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, based
upon the opinion of counsel, any such liability will not have a material
effect on the consolidated financial position of Union and its
subsidiaries.
Part I-Item 4 Submission of Matters to a Vote of Security Holders
There was no submission of matters to a vote of security holders during the
fourth quarter of 2001.
Part II-Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
Please refer to page 55 of the Company's 2001 Annual Report to
Shareholders, which page is incorporated herein by reference.
8
Part II-Item 6 Selected Financial Data
At or For The Years Ended December 31 (5)
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2001 2000 1999 1998 1997
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(Dollars in thousands except per share data)
Balance Sheet Data:
Total Assets $337,475 $303,394 $295,476 $290,129 $273,280
Investment Securities 49,613 56,642 60,441 58,585 45,900
Loans, net of unearned income 250,943 224,796 209,353 202,468 201,918
Allowance for loan losses (2,801) (2,863) (2,870) (2,845) (2,811)
Total nonperforming loans 4,864 4,398 4,123 2,407 4,161
Total nonperforming assets 6,160 4,514 4,150 2,932 4,829
Other real estate owned 1,296 116 27 525 668
Deposits 285,722 258,737 257,593 248,919 239,229
Borrowed funds 10,344 6,382 2,872 6,084 1,636
Stockholders' equity (1) 37,215 35,157 32,220 31,762 29,023
Income Statement Data:
Net interest and dividend income $ 14,559 $ 14,249 $ 13,747 $ 13,374 $ 12,884
Provision for loan losses 320 250 359 400 425
Noninterest income 3,073 2,569 2,568 2,911 2,412
Noninterest expense 10,496 9,944 10,065 9,278 8,567
Net income 4,832 4,800 4,075 4,551 4,355
Per Common Shara Data: (2)
Net income (3) $ 1.59 $ 1.58 $ 1.35 $ 1.51 $ 1.44
Cash dividends paid 1.06 0.98 0.90 0.82 0.75
Book value (1) 12.29 11.60 10.64 10.50 9.60
Selected Ratios:
Return on average assets 1.51% 1.61% 1.39% 1.65% 1.66%
Return on average equity 13.34% 14.54% 12.70% 14.95% 15.73%
Dividend payout (4) 66.67% 62.03% 66.67% 54.30% 52.08%
Interest rate spread 4.29% 4.40% 4.41% 4.61% 4.61%
Net interest margin 4.99% 5.19% 5.13% 5.34% 5.35%
Operating expenses to average assets 3.29% 3.32% 3.42% 3.36% 3.26%
Average interest earning assets to
average interest bearing liabilities 122.11% 122.26% 121.58% 120.42% 121.11%
Average Shareholders' equity
to average assets 11.35% 11.01% 10.92% 11.03% 10.52%
Tier 1 leverage capital ratio 11.06% 11.74% 11.35% 10.87% 10.68%
Tier 1 risk-based capital ratio 16.16% 16.27% 17.27% 16.24% 15.95%
Total risk-based capital ratio 17.43% 17.62% 18.55% 17.57% 17.21%
Asset Quality Ratios:
Non-performing loans to total loans 1.94% 1.96% 1.97% 1.19% 2.06%
Non-performing assets to total assets 1.83% 1.49% 1.40% 1.01% 1.77%
Allowance for loan losses
to non-performing loans 57.59% 65.10% 69.61% 118.20% 67.56%
Allowance for loan losses
to loans 1.12% 1.27% 1.37% 1.41% 1.39%
- --------------------
Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available for sale."
Adjusted to reflect a two-for-one stock split of Union's common
stock, completed June 6, 1997 and effected in the form of a 100%
stock dividend.
Computed using the weighted average number of shares outstanding for
the period.
Cash dividend declared and paid per share for the holding company
divided by consolidated net income per share.
Restated for all periods presented to reflect the merger with
Citizens accomplished through a merger transaction accounted for as a
pooling of interest.
9
Part II-Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Please refer to pages 42 to 50 of the Company's 2001 Annual Report to
Shareholders, which pages are incorporated herein by reference.
Part II-Item 7A Quantitative and Qualitative Disclosures About Market Risk
Please refer to pages 51 to 54 of the Company's 2001 Annual Report to
Shareholders, which pages are incorporated herein by reference.
Part II-Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of Union Bankshares, Inc. as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2001, together with related notes and the
opinion of Urbach Kahn & Werlin LLP, independent accountants, with respect
to December 31, 2001 all as contained on pages 11 to 41 of the Company's
2001 Annual Report to Shareholders, are incorporated herein by reference.
The opinion of the Company's former independent accountants, A.M. Peisch &
Company, LLP, on the Company's audited consolidated financial statements
for the years ended December 31, 2000 and 1999 is set forth in Part IV,
Item 14.A2 of this report and is incorporated herein by reference.
Part II-Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
a) On February 21, 2001, the audit committee of the Board of Directors
recommended to and the Board of Directors approved dismissing A.M.
Peisch & Company, independent accountants, after the Form 10-K report
for December 31, 2000 was filed.
b) The accountant had not issued a report in the last two fiscal years
containing either a disclaimer or an adverse or qualified opinion,
nor were the reports subsequently modified as to uncertainty, audit
scope or accounting principles.
c) The Registrant had no disagreement with our former accountant on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure during the two most recent
fiscal years.
d) The Registrant requested A.M. Peisch & Company to furnish it with a
letter addressed to the SEC stating whether it agrees with the above
statements. A copy of A.M. Peisch & Company's letter to the SEC,
dated February 26, 2001, was filed as exhibit 16 to the Form 8-K on
February 27, 2001.
e) At its Board meeting of February 21, 2001, the Board of Directors of
Union Bankshares, Inc. engaged the accounting firm of Urbach Kahn &
Werlin LLP as independent accountants for the Registrant for 2001.
Part III-Item 10 Directors and Executive Officers of Registrant
The following information from the Company's Proxy Statement for the 2002
Annual Meeting of Shareholders is hereby incorporated by reference.
Listing of the names, ages, principal occupations and business experience
of the directors under the caption "PROPOSAL I: TO ELECT DIRECTORS"
Listing of the names, ages, titles and business experience of the executive
officers under the caption "EXECUTIVE OFFICERS"
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 under the caption "SHARE OWNERSHIP INFORMATION -
Section 16(a) Beneficial Ownership Reporting Compliance"
10
Part III-Item 11 Executive Compensation
The following information from the Company's Proxy Statement for the 2002
Annual Meeting of Shareholders is hereby incorporated by reference.
Information regarding compensation of directors under the caption "PROPOSAL
I: TO ELECT DIRECTORS - Directors' Compensation"
Information regarding executive compensation and benefit plans under the
caption "EXECUTIVE OFFICERS - Executive Compensation and Benefit Plans"
Information regarding management interlocks and certain transactions under
the caption "PROPOSAL I: TO ELECT DIRECTORS - Compensation Committee
Interlocks and Insider Participation"
Information set forth under the caption "REPORT OF THE COMPENSATION COMMITTEE"
Part III-Item 12 Security Ownership of Certain Beneficial Owners and Management
The following information from the Company's Proxy Statement for the 2002
Annual Meeting of Shareholders is hereby incorporated by reference.
Information regarding the share ownership of management and principal
shareholders under the caption "SHARE OWNERSHIP INFORMATION - Share
Ownership of Management and Principal holders"
Part III-Item 13 Certain Relationships and Related Party Transactions
The following information from the Company's Proxy Statement for the 2002
Annual Meeting of Shareholders is hereby incorporated by reference.
Information regarding transactions with management under the caption
"PROPOSAL I: TO ELECT DIRECTORS - Transactions with Management"
Part IV-Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
A. Documents Filed as Part of this Report:
(1) The following consolidated financial statements, as included in
the 2001 Annual Report to Shareholders, are incorporated herein
by reference.
1) Consolidated Balance Sheets at December 31, 2001 and 2000
2) Consolidated Income Statements for the years ended
December 31, 2001, 2000 and 1999
3) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2001, 2000 and 1999
4) Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
(2) Report of Former Accountant
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Union Bankshares, Inc. and Subsidiaries
Morrisville, Vermont
We have audited the consolidated balance sheets of Union Bankshares, Inc.
and Subsidiaries as of December 31, 2000 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for
the years ended December 31, 2000 and 1999. These consolidated financial
statements are the responsibility of the 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 U. S. generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures 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 presentation. 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 respects, the consolidated financial
position of Union Bankshares, Inc. and Subsidiaries as of December 31,
2000, and the results of their operations and their cash flows for the
years ended December 31, 2000 and 1999, in conformity with U. S. generally
accepted accounting principles.
/s/ A.M. Peisch & Company, LLP
January 12, 2001
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
11
(3) The following exhibits are either filed herewith as part of
this report, or are incorporated herein by reference.
Item No:
3.1 Amended and Restated Articles of Incorporation of Union Bankshares,
Inc. (as of May 7, 1997), previously filed with the Commission as
Exhibit 3.1 to the Company's Registration Statement on Form S-4
(#333-82709) and incorporated herein by reference.
3.2 Amendment filed May 19, 1998 to Amended and Restated Articles of
Association of Union Bankshares, Inc., adding new sections 8 and 9,
previously filed with the Commission as Exhibit 3.1 to the
Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
3.3 Amendment filed November 24, 1999 to Amended and Restated Articles
of Association of Union Bankshares, Inc. increasing the authorized
common shares to 5,000,000, previously filed with the Commission on
December 10, 1999 as Exhibit 3.3 to the Company's Current Report on
Form 8-K 12g3, and incorporated herein by reference.
3.4 Bylaws of Union Bankshares, Inc., as amended, previously filed
with the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (#333-82709) and incorporated herein by
reference.
10.1 Stock Registration Agreement dated as of February 16, 1999, among
Union Bankshares, Inc., Genevieve L. Hovey, individually and as
Trustee of the Genevieve L. Hovey Trust (U.A. dated 8/22/89), and
12
Franklin G. Hovey, II, individually, previously filed with the
Commission as Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (#333-82709) and incorporated herein by reference.
10.2 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary, previously filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.*
10.3 Form of Union Bankshares, Inc. Deferred Compensation Plan and
Agreement.*
10.4 Employment Agreement, dated December 10, 1998, between Citizens
Savings Bank & Trust Company and Jerry S. Rowe, previously filed
with the Commission as Exhibit 10.6 to the Company's 1999 Form 10-K
and incorporated herein by reference.*
11 Statement re: Computation of per share earnings: See footnote 1 to
the consolidated financial statements for details on earnings per
share computations for 2001, 2000 and 1999
13 The following specifically designated portions of Union's 2001
Annual Report to Shareholders have been incorporated by reference
in this Report on Form 10-K, is filed herewith: pages 11 to 54.
16 Letter from A.M. Peisch & Company, our former independent
accountants, dated February 26, 2001, previously filed with the
Commission as Exhibit 16 to Form 8-K filed on February 27, 2001 and
incorporated herein by reference.
21 Subsidiaries of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont
Citizens Savings Bank & Trust Company, St. Johnsbury, Vermont
(3) Reports on Form 8-K
a) Form 8-K filed on October 11, 2001 to report third
quarter and year-to-date earnings and the declaration of
a dividend.
b) Form 8-K filed on October 18, 2001 to report we mailed
our internal, unaudited Third Quarter 2001 Report to our
shareholders and to announce the implementation of a
stock repurchase program.
- --------------------
* denotes management contract or compensatory plan.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Union Bankshares, Inc.
By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon
---------------------- ---------------------
Kenneth D. Gibbons Marsha A. Mongeon
President and Chief Executive Officer Treasurer and Chief Financial
Officer
Date: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---------------------------------------------------------------------------------------------
/s/ W. Arlen Smith Director, Chairman of the Board March 28, 2002
- ------------------------
W. Arlen Smith
/s/ Kenneth D. Gibbons Director, President and Chief Executive Officer March 28, 2002
- ------------------------ (Principal Executive Officer)
Kenneth D. Gibbons
/s/ Marsha A. Mongeon Treasurer and Chief Financial Officer March 28, 2002
- ------------------------ (Principal Financial Officer)
Marsha A. Mongeon
/s/ Cynthia D. Borck Director and Vice President March 28, 2002
- ------------------------
Cynthia D. Borck
/s/ William T. Costa Jr. Director March 28, 2002
- ------------------------
William T. Costa Jr.
/s/ Franklin G. Hovey II Director March 28, 2002
- ------------------------
Franklin G. Hovey II
/s/ Richard C. Marron Director March 28, 2002
- ------------------------
Richard C. Marron
/s/ Robert P. Rollins Director March 28, 2002
- ------------------------
Robert P. Rollins
/s/ Jerry S. Rowe Director and Vice President March 28, 2002
- ------------------------
Jerry S. Rowe
/s/ Richard C. Sargent Director March 28, 2002
- ------------------------
Richard C. Sargent
13