Back to GetFilings.com
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, 2002
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
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 the number of shares outstanding of each of the issuer's classes
of common stock as of August 6, 2002:
Common Stock, $2 par value 3,027,557 shares
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements
Union Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk. 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 27
Item 4. Submission of Matters to a Vote of Security
Holders. 27
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. 27
Signatures 27
2
Item 1. Financial Statements.
Union Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30 December 31
2002 2001
------- -----------
(dollars in thousands)
Assets
Cash and due from banks $ 14,341 $ 13,926
Federal funds sold and overnight deposits 2,821 7,630
---------------------
Cash and cash equivalents 17,162 21,556
Interest bearing deposits 3,727 4,700
Securities available-for-sale 47,026 49,613
Federal Home Loan Bank stock 1,235 1,064
Loans held for sale 18,842 16,333
Loans 235,382 234,874
Unearned net loan fees (259) (263)
Allowance for loan losses (2,920) (2,801)
---------------------
Loans, net 232,203 231,810
---------------------
Accrued interest receivable 1,965 2,037
Premises and equipment, net 4,806 4,156
Other real estate owned, net 1,256 1,296
Other assets 5,106 4,910
---------------------
Total assets $333,328 $337,475
=====================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Non-interest bearing $ 36,489 $ 39,547
Interest bearing 242,580 246,175
---------------------
Total deposits 279,069 285,722
Borrowed funds 12,756 10,344
Accrued interest and other liabilities 3,643 4,194
---------------------
Total liabilities 295,468 300,260
---------------------
Stockholders' Equity:
Common stock, $2 par value; 5,000,000
shares authorized; 3,268,189 shares issued
at 6/30/02 and 12/31/01. 6,536 6,536
Paid-in capital 277 277
Retained earnings 32,186 31,629
Treasury stock at cost ( 240,632 shares at
6/30/02 and 12/31/01) (1,722) (1,722)
Accumulated other comprehensive income 583 495
---------------------
Total stockholders' equity 37,860 37,215
---------------------
Total liabilities and stockholders' equity $333,328 $337,475
=====================
See accompanying notes to consolidated unaudited financial statements
3
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
3 Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Interest income:
Interest and fees on loans $ 4,780 $ 5,178 $ 9,560 $ 10,272
Interest and dividends on investment
securities 677 784 1,349 1,609
Interest on federal funds sold and
overnight deposits 24 103 54 180
Interest on interest bearing deposits 48 33 102 60
------------------------------------------------
5,529 6,098 11,065 12,121
------------------------------------------------
Interest expense:
Interest on deposits 1,465 2,328 3,088 4,742
Interest on federal funds purchased 2 1 3 3
Interest on borrowed funds 126 132 257 243
------------------------------------------------
1,593 2,461 3,348 4,988
------------------------------------------------
Net interest income 3,936 3,637 7,717 7,133
Provision for loan losses 105 57 195 113
------------------------------------------------
Net interest income after provision for loan losses 3,831 3,580 7,522 7,020
Other income:
Trust income 49 63 116 150
Service fees 610 615 1,194 1,186
Gain (loss) on sale of securities 0 76 (3) 74
Gain on sale of loans 9 0 36 73
Other 23 20 74 22
------------------------------------------------
691 774 1,417 1,505
------------------------------------------------
Other expenses:
Salaries and wages 1,276 1,140 2,536 2,300
Pension and employee benefits 407 336 805 675
Occupancy expense, net 166 172 327 337
Equipment expense 218 217 416 429
Other expense 979 755 1,749 1,403
------------------------------------------------
3,046 2,620 5,833 5,144
------------------------------------------------
Income before income tax expense 1,476 1,734 3,106 3,381
Income tax expense 393 489 854 968
------------------------------------------------
Net income $ 1,083 $ 1,245 $ 2,252 $ 2,413
================================================
Earnings per common share $ .35 $ .41 $ .74 $ .80
================================================
Weighted average number of common
shares outstanding 3,027,557 3,029,784 3,027,557 3,029,757
================================================
Dividends declared per share $ .28 $ .26 $ .56 $ .52
================================================
See accompanying notes to consolidated unaudited financial statements
4
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Paid-in Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock & Surplus Earnings Stock Income Equity
------ --------- -------- -------- ------------- -------------
(dollars in thousands)
Balance, December 31, 2001 $6,536 $277 $31,629 $(1,722) $495 $37,215
Net income - - 2,252 - - 2,252
Change in net unrealized gain on
securities available-for-sale, net of
reclassification adjustment and tax
effects - - - - 88 88
-------
Comprehensive income - - - - - 2,340
-------
Cash dividends declared
($.56 per share) - - (1,695) - - (1,695)
--------------------------------------------------------------------------
Balance June 30, 2002 $6,536 $277 $32,186 $(1,722) $583 $37,860
==========================================================================
See accompanying notes to consolidated unaudited financial statements.
5
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Year to Date
----------------------
June 30 June 30
2002 2001
--------- ---------
(dollars in thousands)
Cash Flows From Operating Activities
Net Income $ 2,252 $ 2,413
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 304 314
Provision for loan losses 195 113
Provision (credit) for deferred income taxes 150 (152)
Net amortization on securities 91 25
Equity in losses of limited partnerships 62 31
Write-downs of other real estate owned 250 0
Increase (decrease) in unamortized loan fees (4) 9
Increase in loans held for sale (2,473) (1,403)
Decrease in accrued interest receivable 72 335
Increase in other assets (431) (374)
Increase in income taxes 18 375
Decrease in accrued interest payable (463) (204)
Increase in other liabilities 148 246
Loss (gain) on sale of securities 3 (74)
Gain on sale of loans (36) (73)
Gain on sale of OREO (15) (16)
(Gain) loss on disposal of fixed assets (1) 9
------------------
Net cash provided by operating activities 122 1,574
Cash Flows From Investing Activities
Interest bearing deposits
Maturities and redemptions 1,568 396
Purchases (595) (1,481)
Securities available for sale
Sales and Maturities 9,052 18,554
Purchases (6,422) (10,760)
Purchase of Federal Home Loan Bank Stock (171) (47)
Increase in loans, net (871) (9,068)
Recoveries of loans charged off 60 64
Purchases of premises and equipment, net (953) (97)
6
Investments in limited partnerships (254) (136)
Proceeds from sale of OREO 0 80
Proceeds from sale of repossessed property 6 17
------------------
Net cash provided (used) by investing activities 1,420 (2,478)
Cash Flows From Financing Activities
Borrowings, net of repayments 2,412 4,495
Proceeds from exercise of stock options 0 2
Net increase (decrease) in non-interest bearing deposits (3,058) 3,818
Net decrease in interest bearing deposits (3,595) (1,303)
Dividends paid (1,695) (1,575)
------------------
Net cash provided (used) by financing activities (5,936) 5,437
Increase (decrease) in cash and cash equivalents (4,394) 4,533
Cash and cash equivalents
Beginning 21,556 11,423
Ending 17,162 15,956
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 3,811 $ 5,155
==================
Income Taxes Paid $ 1,013 $ 735
==================
Supplemental Schedule of Noncash Investing and Financing
Activities:
Other Real Estate Acquired in Settlement of Loans 1,209 85
Repossessed Property Acquired in Settlement of Loans 32 12
Loans Originated to Finance the Sale of Other Real Estate
Owned (1,044) 0
Total Change in Unrealized Gain (Loss) on Securities
Available-For-Sale 134 715
See accompanying notes to consolidated unaudited financial statements.
7
UNION BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Note 1. The accompanying interim unaudited consolidated financial
statements of Union Bankshares, Inc. (the Company) for the interim periods
ended June 30, 2002 and 2001 and for the quarters then ended have been
prepared in accordance with the accounting policies described in the
Company's Annual Report to Shareholders and Annual Report on Form 10K for
the year ended December 31, 2001. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information contained herein have been made.
Certain amounts reported in prior periods have been reclassified for
comparative purposes. This information should be read in conjunction with the
Company's 2001 Annual Report to Shareholders, 2001 Annual Report on Form 10K,
and current reports on Form 8K.
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. Earnings Per Share
Earnings per common share amounts are computed based on the weighted
average number of shares of common stock outstanding during the period
(retroactively adjusted for stock dividends) and reduced for shares held in
Treasury. The assumed conversion of available stock options does not result
in material dilution.
Note 4. Reportable Segments
The company has two reportable operating segments, Union Bank and Citizens
Savings Bank and Trust Company (Citizens). Management regularly evaluates
separate financial information for each segment in deciding how to allocate
resources and in assessing performance.
In accordance with applicable bank regulatory requirements, the Company
accounts for intersegment sales and transfers at current market prices.
8
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
periods ended June 30, follows:
(dollars in thousands)
Intersegment Consolidated
2002 Union Citizens Elimination Other Totals
- ---------------------------------------------------------------------------------------------
Interest income $ 7,592 $ 3,473 $ 0 $ 0 $ 11,065
Interest expense 2,158 1,190 0 0 3,348
Provision for loan losses 90 105 0 0 195
Service fee income 936 258 0 0 1,194
Income tax expense (benefit) 620 273 0 (39) 854
Net income (loss) 1,785 558 0 (91) 2,252
Assets 228,171 104,777 (39) 419 333,328
(dollars in thousands)
Intersegment Consolidated
2001 Union Citizens Elimination Other Totals
- ---------------------------------------------------------------------------------------------
Interest income $ 8,312 $ 3,809 $ 0 $ 0 $ 12,121
Interest expense 3,328 1,660 0 0 4,988
Provision for loan losses 0 113 0 0 113
Service fee income 913 273 0 0 1,186
Income tax expense (benefit) 754 252 0 (38) 968
Net income (loss) 1,956 518 0 (61) 2,413
Assets 210,937 100,601 (42) 393 311,889
Amounts in the "Other" column encompass activity in Union Bankshares, Inc.,
the "parent company." Holding company assets are stated after intercompany
eliminations.
9
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 provides information regarding Union
Bankshares, Inc.'s (Union's) financial position as of June 30, 2002 and as
of December 31, 2001, and its results of operations for the three and six
months ended June 30, 2002 and 2001. This discussion should be read in
conjunction with the information in this document under Financial
Statements and related notes and with other financial data appearing
elsewhere in this filing. In the opinion of Union's management, the interim
unaudited data reflect all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present Union's consolidated financial
position and results of operations to be expected for the interim period.
Management is not aware of the occurrence of any events after June 30,
2002, which would materially affect the information presented.
Union's common stock was listed on the American Stock Exchange on July 13,
2000 with an opening price of $15.125 and it closed on August 6, 2002 at
$22.95.
In May of 2001, Citizens Savings Bank and Trust Company opened a loan
production office in Littleton, New Hampshire. Littleton is 19 miles east
of St. Johnsbury, Vermont where Citizens is based and it is a rapidly
growing community with a diverse economic base. This office generates loans
for both consumer and commercial purposes.
On April 15, 2002 we modified our Route 108 Branch in Stowe to a fully
electronic branch. On April 22, 2002 our newest, full service branch was
opened by Union Bank in Fairfax, Vermont, which is the Company's first
entry into the Franklin County market.
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, in its reports to
stockholders, including this Quarterly Report, in other written materials,
and in statements made by senior management to analysts, rating agencies,
institutional investors, representatives of the media and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risk exists those
predictions, forecasts, projections and other estimates contained in
forward-looking statements will not be achieved. Also when we use any of
the words "believes," "expects," "anticipates" or similar expressions, we
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 our company. This could cause results
or performance to differ materially from those expressed in our forward-
looking statements. The possible events or factors that might affect our
forward-looking statements include, but are not limited to, the following:
* uses of monetary, fiscal and tax policy by various governments
* political, legislative or regulatory developments in Vermont,
New Hampshire or the United States including changes in laws
concerning accounting, taxes, banking and other aspects of the
financial services industry
* developments in general economic or business conditions,
including interest rate fluctuations, market
10
fluctuations and perceptions, and inflation
* changes in the competitive environment for financial services
organizations
* the Company's ability to retain key personnel
* changes in technology including demands for greater automation
* acts of terrorism
* adverse changes in the securities market
* unanticipated lower revenues, loss of customers or business or
higher operating expenses
When relying on forward-looking statements to make decisions with respect
to the Company, investors and others are cautioned to consider these and
other risks and uncertainties.
RESULTS OF OPERATIONS
The Company's net income for the quarter ended June 30, 2002 was $ 1.083
million, compared with net income of $1.245 million for the second quarter
of 2001. Net income per share was $.35 for the second quarter of 2002
compared to $.41 for the same quarter of 2001. Net income for the first six
months of 2002 was $2.252 million, compared with $2.413 million for the
same period in 2001. Net income per share was $.74 for the first six months
of 2002 compared to $.80 for the comparable period in 2001.
Net Interest Income. The largest component of Union'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 its interest-bearing liabilities.
Yields Earned and Rates Paid. The following tables show, for the periods
indicated, the total amount of income recorded from interest-earning
assets, and the related average yields, the interest expense associated
with interest-bearing liabilities, expressed in dollars and average rates,
and the relative net interest spread and net interest margin. All yield and
rate information is calculated on an annualized basis. Yield and rate
information for a period is average information for the period, and is
calculated by dividing the annualized income or expense item for the period
by the average balances of the appropriate balance sheet item during the
period. Net interest margin is annualized net interest income divided by
average interest-earning assets. Nonaccrual loans are included in asset
balances for the appropriate periods, but recognition of interest on such
loans is discontinued and any remaining accrued interest receivable is
reversed, in conformity with federal regulations. The yields, net interest
spread and net interest margins appearing in the following tables have been
calculated on a pre-tax basis:
11
Three months ended June 30,
2002 2001
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
Average Assets:
Federal funds sold and
overnight deposits $ 5,901 $ 24 1.63% $ 9,356 $ 103 4.40%
Interest bearing deposits 3,932 48 4.94% 2,416 33 5.46%
Investments (1) (2) 48,820 677 5.79% 51,082 784 6.34%
Loans, net (1) (3) 249,381 4,780 7.76% 231,909 5,178 9.04%
----------------------------------------------------------------
Total interest-earning assets (1) 308,034 5,529 7.29% 294,763 6,098 8.40%
Cash and due from banks 12,740 8,589
Premises and equipment 4,739 3,927
Other assets 7,851 5,868
-------- --------
Total assets $333,364 $313,147
======== ========
Average Liabilities and
Shareholders' Equity:
Now accounts $ 37,608 $ 107 1.14% $ 34,760 $ 146 1.68%
Savings and money market accounts 103,415 431 1.67% 90,015 723 3.21%
Certificates of deposit 101,418 927 3.67% 107,021 1,459 5.45%
Borrowed funds 13,476 128 3.81% 9,834 133 5.41%
----------------------------------------------------------------
Total interest-bearing liabilities 255,917 1,593 2.50% 241,630 2,461 4.07%
Non-interest bearing deposits 36,047 33,489
Other liabilities 4,085 2,669
-------- --------
Total liabilities 296,049 277,788
Shareholders' equity 37,315 35,359
-------- --------
Total liabilities and
shareholders' equity $333,364 $313,147
======== ========
Net interest income (1) $3,936 $3,637
====== ======
Net interest spread (1) 4.79% 4.33%
Net interest margin (1) 5.21% 5.06%
- --------------------
Average yield reported on a tax-equivalent basis.
The average balance of investments is calculated using the amortized
cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
12
Six months ended June 30,
2002 2001
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
Average Assets:
Federal funds sold and
overnight deposits $ 6,886 $ 54 1.58% $ 7,570 $ 180 4.76%
Interest bearing deposits 4,199 102 4.90% 2,055 60 5.84%
Investments (1) (2) 48,599 1,349 5.78% 52,246 1,609 6.35%
Loans, net (1) (3) 248,876 9,560 7.82% 227,185 10,272 9.15%
----------------------------------------------------------------
Total interest-earning assets (1) 308,560 11,065 7.32% 289,056 12,121 8.51%
Cash and due from banks 12,672 9,186
Premises and equipment 4,557 3,952
Other assets 7,748 5,713
-------- --------
Total assets $333,537 $307,907
======== ========
Average Liabilities and
Shareholders' Equity:
Now accounts $ 36,459 $ 211 1.17% $ 34,037 $ 310 1.82%
Savings and money market accounts 103,930 914 1.77% 88,846 1,515 3.41%
Certificates of deposit 102,334 1,963 3.87% 105,314 2,917 5.54%
Borrowed funds 13,014 260 4.03% 8,583 246 5.73%
----------------------------------------------------------------
Total interest-bearing liabilities 255,737 3,348 2.64% 236,780 4,988 4.21%
Non-interest bearing deposits 36,443 33,275
Other liabilities 4,002 2,836
-------- --------
Total liabilities 296,182 272,891
Shareholders' equity 37,355 35,016
-------- --------
Total liabilities and
shareholders' equity $333,537 $307,907
======== ========
Net interest income (1) $ 7,717 $7,133
======= ======
Net interest spread (1) 4.68% 4.30%
Net interest margin (1) 5.13% 5.06%
- --------------------
Average yield reported on a tax-equivalent basis.
The average balance of investments is calculated using the amortized
cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
Union's net interest income increased by $299 thousand, or 8.22%, to $3.936
million for the three months ended June 30, 2002, from $3.637 million for
the three months ended June 30, 2001. This increase was due to the increase
in average interest earning assets to $308.0 million from $294.8 million
for the second quarter of 2001 offset partially by the drop in yield from
8.40% to 7.29%. And, while average interest bearing liabilities rose $14.3
million the rate dropped from 4.07% to 2.50%. The net interest spread
increased by 46 basis points to 4.79% for the three months ended June 30,
2002, from 4.33% for the three months ended June 30, 2001. The net interest
margin for the 2002 period increased by 15 basis points to 5.21% from 5.06%
for the 2001 period.
Union's net interest income year to date was $7.717 million compared to the
prior year of $7.133 million or an increase of 8.19% between the two years.
This increase was due to the increase in average interest earning assets to
$308.6 million for 2002 from $289.1 million for 2001 partially offset by
the decrease in yield from 8.51% to 7.32%. And, while average interest
bearing liabilities grew $19.0 million, the rate paid dropped from 4.21% to
2.64% between years. The net interest spread increased by 38 basis points
to 4.68% for the six months ended June 30, 2002 from 4.30% for the six
months ended June
13
30, 2001. The net interest margin for the 2002 period increased to 5.13%
from 5.06% for the 2001 period or an increase of 7 basis points.
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected Union's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume);
and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended June 30, 2002 Compared
to Three Months Ended June 30, 2001
-----------------------------------------
Increase/(Decrease) Due to Change In
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (38) $ (41) $ (79)
Interest bearing deposits 20 (5) 15
Investments (38) (69) (107)
Loans, net 394 (792) (398)
-------------------------------
Total interest-earning assets 338 (907) (569)
Interest-bearing liabilities:
Now accounts 12 (51) (39)
Savings and money market accounts 106 (398) (292)
Certificates of deposit (77) (455) (532)
Borrowed funds 49 (54) (5)
-------------------------------
Total interest-bearing liabilities 90 (958) (868)
-------------------------------
Net change in net interest income $ 248 $ 51 $ 299
===============================
Six Months Ended June 30, 2002 Compared
to Six Months Ended June 30, 2001
-----------------------------------------
Increase/(Decrease) Due to Change In
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (16) $ (110) $ (126)
Interest bearing deposits 62 (20) 42
Investments (119) (141) (260)
Loans, net 1,000 (1,712) (712)
-------------------------------
Total interest-earning assets 927 (1,983) (1,056)
Interest-bearing liabilities:
Now accounts 22 (121) (99)
Savings and money market accounts 258 (859) (601)
Certificates of deposit (82) (872) (954)
Borrowed funds 125 (111) 14
-------------------------------
Total interest-bearing liabilities 323 (1,963) (1,640)
-------------------------------
Net change in net interest income $ 604 $ (20) $ 584
===============================
14
Quarter Ended June 30, 2002 compared to Quarter Ended June 30, 2001.
Interest and Dividend Income. Union's interest and dividend income
decreased by $569 thousand or 9.3%, to $5.5 million for the three months
ended June 30, 2002, from $6.1 million for the three months ended June 30,
2001. Average earning assets increased by $13.3 million, or 4.5%, to
$308.0 million for the three months ended June 30, 2002, from $294.8
million for the three months ended June 30, 2001. Average loans
approximated $249.4 million for the three months ended June 30, 2002 up
from $231.9 million for the three months ended June 30, 2001. The $9.3
million, or 12.0% increase in residential real estate secured loans and the
$12.4 million, or 11.1% increase in commercial and commercial real estate
loans was partially offset by the $1.8 million, or 13.3% decrease in
personal loans, the $1.5 million, or 12.2% decrease in municipal loans and
the $1.4 million, or 14.4% decrease in construction loans. A conscious
decision to retain a number of loans packaged for sale in our portfolio
accounts for a portion of the increase in both the residential real estate
and commercial loan portfolios. The decrease in personal loans is due in part
to a late 1998 decision to exit the indirect lending business at Citizens.
The average balance of investment securities (including mortgage-backed
securities) decreased by $2.3 million, or 4.4%, to $48.8 million for the
three months ended June 30, 2002, from $51.1 million for the three months
ended June 30, 2001. The average balance in interest bearing deposits
increased by $1.5 million to $3.9 million from $2.4 million or 62.7%. The
average level of federal funds sold and overnight deposits decreased by
$3.5 million or 36.9%, to $5.9 million for the three months ended June 30,
2002, from $9.4 million for the three months ended June 30, 2001. The net
decrease in the investment portfolio, federal funds sold and overnight
deposits, and interest bearing deposits in 2002 reflects the continuing
growth in our loan portfolio. Interest Income on non-loans was $749
thousand in 2002 compared to $920 thousand for 2001, which is explained by
the $4.2 million decrease in volume and the drop in interest rates.
Interest Expense. Union's interest expense decreased by $868 thousand, or
35.3%, to $1.6 million for the three months ended June 30, 2002 from $2.5
million for the three months ended June 30, 2001. Average interest-bearing
liabilities increased by $14.3 million, or 5.9% to $255.9 million for the
three months ended June 30, 2002, from $241.6 million for the three months
ended June 30, 2001. Average time deposits decreased $5.6 million, or
5.2%, to $101.4 million for the three months ended June 30, 2002, from
$107.0 million for the three months ended June 30, 2001. The average
balances for money market and saving accounts increased by $13.4 million,
or 14.9% to $103.4 million for the three months ended June 30, 2002, from
$90.0 million for the three months ended June 30, 2001. Now accounts
increased $2.8 million, or 8.2% mainly due to municipal account balances.
The average balance on funds borrowed has increased from $9.8 million on
average in 2001 to $13.5 million in 2002 as Union's subsidiaries took some
short term Federal Home Loan Bank borrowings during the second quarter of
2002 to fund loan demand.
Noninterest Income. Union's noninterest income decreased $83 thousand or
10.7%, to $691 thousand for the three months ended June 30, 2002, from $774
thousand for the three months ended June 30, 2001. Trust department income
dropped to $49 thousand in the second quarter of 2002 from $63 thousand in
the same period of 2001 or a 22.2% decrease as there was not a repeat of
estate settlements in the second quarter of 2002. Gain on sales of loans
was $9 thousand for the second quarter of 2002 and there was none in the
second quarter of 2001. Other noninterest income and service fees (sources
of which include among others, deposit and loan servicing fees, ATM fees,
and safe deposit fees) decreased by $2 thousand, to $633 thousand for the
three months ended June 30, 2002, from $635 thousand for the three months
ended June 30, 2001. There was a $76 thousand gain on the sale of
securities in the second quarter of 2001 that was not repeated in 2002.
Noninterest Expense. Union's noninterest expense was up $426 thousand, at
$3.05 million for the three months ended June 30, 2002, compared to $2.62
million for the three months ended June 30, 2001.
15
Salaries increased $136 thousand, or 12.0%, to $1.3 million for the three
months ended June 30, 2002, from $1.1 million for the three months ended
June 30, 2001, due to the normal salary activity, growth and the addition
of the loan production office in Littleton, NH and the staff for the
Fairfax, VT branch. Pension and employee benefits increased $71 thousand
or 21.1% to $407 thousand for the three months ended June 30, 2002, from
$336 thousand for the three months ended June 30, 2001 mainly due to a $56
thousand increase in health insurance costs. Occupancy expense decreased
$6 thousand or 3.5% to $166 thousand from $172 thousand in 2001. Other
expense for the quarter was up $224 thousand from $755 thousand for the
same quarter in 2001 to $979 thousand in 2002, mainly due to the write down
of $204 thousand on one commercial OREO property in April 2002.
Income Tax Expense. Union's income tax expense decreased by $96 thousand,
or 19.6%, to $393 thousand for the three months ended June 30, 2002, from
$489 thousand for the comparable period of 2001 because of our decreased income
before taxes and the increased federal income tax credits available to us
in 2002 due to investments in low income housing projects.
Year to Date June 30, 2002 compared to Year to Date June 30, 2001.
Interest and Dividend Income. Union's interest and dividend income
decreased by $1.06 million, or 8.7%, to $11.1 million for the six months
ended June 30, 2002, from $12.1 million for the six months ended June 30,
2001. Average earning assets increased by $19.5 million, or 6.7%, to
$308.6 million for the six months ended June 30, 2002, from $289.1 million
for the six months ended June 30, 2001. Average loans approximated $248.9
million for the six months ended June 30, 2002 up from $227.2 million for
the six months ended June 30, 2001. Increases of $9.5 million or 12.3%
increase in residential real estate secured loans, and the $16.0 million or
15.0% increase in commercial and commercial real estate loans, was
partially offset by the $2.0 million or 14.4% decrease in personal loans,
the $1.4 million or 11.9% decrease in loans to municipalities and the $835
thousand or 8.5% decrease in construction loans. A conscious decision to
retain some of the loans packaged for sale in our portfolio accounts for
the majority of the increase in both the residential real estate and
commercial loan portfolios. We expanded our commercial lending staff in
1999 at Union Bank and in both 2000 and 2001 at Citizens, which is one
reason for our growth in that area. The decrease in personal loans is due
in part to a late 1998 decision to exit the indirect lending business at
Citizens.
The average balance of investment securities (including mortgage-backed
securities) decreased by $3.6 million, or 7.0%, to $48.6 million for the
six months ended June 30, 2002, from $52.2 million for the six months ended
June 30, 2001. The average level of federal funds sold and overnight
deposits decreased by $.7 million, or 9.0%, to $6.9 million for the six
months ended June 30, 2002, from $7.6 million for the six months ended June
30, 2001. The average balance in interest bearing deposits grew $2.1
million or 104% from $2.1 million in 2001 to $4.2 million in 2002. The net
decrease in the investment portfolio, federal funds sold and overnight
deposits, and interest bearing deposits in 2002 reflects the continuing
growth in our loan portfolio. Interest Income on non-loans was $1.5
million in 2002 and $1.8 million for 2001 reflecting the decrease in yields
and overall decrease in volume.
Interest Expense. Union's interest expense decreased by $1.6 million, or
32.9%, to $3.3 million for the six months ended June 30, 2002 from $5.0
million for the six months ended June 30, 2001. Average interest-bearing
liabilities increased by $19.0 million, or 8.0%, to $255.7 million for the
six months ended June 30, 2002, from $236.8 million for the six months
ended June 30, 2001. Average time deposits decreased $3.0 million, or
2.8%, to $102.3 million for the six months ended June 30, 2002, from $105.3
million for the six months ended June 30, 2001, while the average balances
for money market and savings accounts increased by $15.1 million, or 17.0%,
to $103.9 million for the six months ended June 30, 2002, from $88.8
million for the six months ended June 30, 2001. The average balance in Now
accounts grew $2.4 million, or 7.1%, from $34.0 million to $36.4 million.
Customers have maintained very liquid positions during the last year as
they anticipate the interest rates paid on all deposit instruments, will
rise.
The average balance on funds borrowed has increased from $8.6 million in
2001 to $13.0 million in 2002 as Union's subsidiaries took some short-term
Federal Home Loan Bank advances during the second
16
quarter of 2002 to fund loan demand.
Noninterest Income. Union's noninterest income decreased $88 thousand, or
5.8%, to $1.4 million for the six months ended June 30, 2002 from $1.5
million for the six months ended June 30, 2001. The results for the period
reflected a net loss of $3 thousand from the sale of securities compared to
a $74 thousand gain from sales during 2001. Trust department income
dropped to $116 thousand in the first half of 2002 from $150 thousand in
the same period of 2001 or a 22.7% decrease due to the number of estate
settlements handled in the first half of 2001 which were not repeated in
2002 but which were partially offset by the increase in fees charged in
2002. Gain on sale of loans decreased $37 thousand to $36 thousand for
2002 from $73 thousand for 2001. Other income increased from $22 thousand
in 2001 to $74 thousand in 2002 mainly due the increase of $34 thousand
from the gain on mortgage servicing rights.
Noninterest Expense. Union's noninterest expense increased $689 thousand
to $5.8 million for the six months ended June 30, 2002 from $5.1 million
for the six months ended June 30, 2001. Salaries increased $236 thousand,
or 10.3%, to $2.5 million for the six months ended June 30, 2002, from $2.3
million for the six months ended June 30, 2001, reflecting normal salary
activity, growth and the addition of the loan production office in
Littleton, NH and the staff for the Fairfax, VT branch. Pension and
employee benefits increased $130 thousand, or 19.3%, to $805 thousand for
the six months ended June 30, 2002, from $675 thousand for the six months
ended June 30, 2001 mainly due to a $84 thousand increase in health
insurance costs and the increase in staff. Net occupancy expense decreased
$10 thousand, or 3.0%, to $327 thousand for the six months ended June 30,
2002, from $337 thousand for the six months ended June 30, 2001. Equipment
expense decreased $13 thousand to $416 thousand for the six months ended
June 30, 2002, from $429 thousand for the same period in 2001 primarily
resulting from a decrease of costs for maintenance contracts. Other expense
was $1.7 million for the first six months of 2002 compared to $1.4 million
for the same period in 2001 or a 24.7% increase mainly due to the write
down of $204 thousand on one commercial OREO property in April 2002.
Income Tax Expense. Union's income tax expense decreased by $114 thousand,
or 11.8%, to $854 thousand for the six months ended June 30, 2002, from
$968 thousand for the comparable period of 2001, due to lower income before
taxes and the increased federal tax credits available in 2002 due to
investments in low income housing projects.
FINANCIAL CONDITION
At June 30, 2002, Union had total consolidated assets of $333.3 million,
including net loans and loans held for sale of $251.0 million, deposits of
$279.1 million and stockholders' equity of $37.9 million. Based on the
most recent information published by the Vermont Banking Commissioner, in
terms of total assets at December 31, 2001, Union Bank ranked as the 10th
largest institution of the 23 commercial banks and savings institutions
headquartered in Vermont, and Citizens ranked as the 19th.
Union's total assets decreased by $4.2 million or 1.2% to $333.3 million at
June 30, 2002 from $337.5 million at December 31, 2001. Historically, June
30th of each year is our low point in terms of total assets, net loans and
deposits. This is a one-day aberration as the Towns, Villages and School
Districts that we lend to must be out of debt one day during the year.
These loans totaled $10.6 million on December 31, 2001, $11.4 million on
June 27, 2002, $7.6 million on June 28, 2002 (last business day of the
month) and $9.3 million on July 1. In spite of this drop, total net loans
and loans held for sale increased by $2.9 million or 1.2% to $251.0 million
or 75.3% of total assets at June 30, 2002 as compared to $248.1 million or
73.5% of total assets at December 31, 2001. Cash and cash equivalents,
including federal funds sold and overnight deposits, decreased
approximately $4.4 million or 20.4% to $17.2 million at June 30, 2002 from
$21.6 million at December 31, 2001, which was attributable to the one day
decrease in liquidity caused by the municipal aberration discussed above,
and continuing loan demand.
Securities available for sale decreased from $49.6 million at December 31,
2001 to $47.0 million at June 30, 2002, a $2.6 million or 5.2% decrease.
Securities maturing have not been replaced dollar for dollar
17
and some securities have been sold in order to fund loan demand and our
decision to currently hold in portfolio a portion of loans available for
sale.
Deposits decreased $6.6 million or 2.3% to $279.1 million at June 30, 2002
from $285.7 million at December 31, 2001. A $3.0 million decrease in non-
interest bearing deposits and a $11.9 million drop in municipal
certificates of deposits (which are one day anomalies as discussed
previously) were partially offset by a $3.2 million increase in savings
accounts, a $2.3 million increase in money market accounts and a $1.8
million increase in Now accounts. Total borrowings increased $2.4 million
to $12.8 million at June 30, 2002 from $10.3 million at December 31, 2001.
The increase was in advances from the Federal Home Loan Bank under existing
lines of credit to fund loan demand.
Loan Portfolio. Union's loan portfolio (including loans held for sale)
primarily consists of adjustable- and fixed-rate mortgage loans secured by
one-to-four family, multi-family residential or commercial real estate. As
of June 30, 2002, Union's gross loan portfolio totaled $254.2 million, or
76.3%, of assets, of which $125.6 million, or 49.4% of gross loans,
consisted of residential mortgages and construction loans, and $87.6
million, or 34.5%, of total loans consisted of commercial real estate
loans. As of such date, Union's loan portfolio also included $21.9 million
of commercial loans, $7.6 million of municipal loans, and $11.5 million of
consumer loans representing, in order, 8.6%, 3.0% and 4.5% of total loans
outstanding on June 30, 2002.
The following table shows information on the composition of Union's loan
portfolio as of June 30, 2002 and December 31, 2001:
June 30, December 31,
Loan Type 2002 2001
- --------- -------- ------------
(dollars in thousands)
Real Estate $110,693 $112,564
Commercial real estate 83,943 78,898
Commercial 21,605 20,659
Consumer 11,510 12,201
Municipal loans 7,631 10,552
Loans held for sale 18,842 16,333
-----------------------
Total loans 254,224 251,207
Deduct:
Allowance for loan losses (2,920) (2,801)
Net deferred loan fees, premiums & discounts (259) (263)
-----------------------
$251,045 $248,143
=======================
Union originates and sells residential mortgages into the secondary market,
with most such sales made to the Federal Home Loan Mortgage Corporation
(FHLMC) and the Vermont Housing Finance Agency (VHFA). Union services an
$137.6 million residential mortgage portfolio, approximately $45.6 million
of which is serviced for unaffiliated third parties at June 30, 2002.
Additionally, Union originates commercial loans under various SBA programs
that provide an agency guarantee for a portion of the loan amount. Union
sometimes sells the guaranteed portion of the loan to other financial
concerns and will retain servicing rights, which generates fee income.
Union serviced $8.5 million of commercial and commercial real estate loans
for unaffiliated third parties as of June 30, 2002. Union capitalizes
mortgage servicing rights on these fees and recognizes gains and losses on
the sale of the principal portion of these notes as they occur.
Gross loans and loans held for sale have been increased $3.0 million or
1.2% since December 31, 2001. An increase of $23.2 million or 29.3% in
commercial real estate loans, an increase of $1.0 million or 5.0% in
commercial loans and an increase in loans held for sale of $2.5 million or
15.4% was partially offset by a $20.6 million or 18.3% decrease in
residential real estate loans which is mainly due to the sale of loans
18
on the secondary market and where we are currently in the building cycle on
our construction loans, $204 thousand or 1.7% decrease in consumer loans
and a temporary, seasonal drop in municipal loans outstanding of $2.9
million or 27.7%.
Asset Quality. Union, like all financial institutions, is exposed to
certain credit risks including those related to the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors Union's loan and investment portfolios and
other real estate owned for potential problems on a periodic basis and
reports to Union's and the subsidiaries' Boards of Directors at regularly
scheduled meetings.
Union had loans on nonaccrual status totaling $1.6 million at June 30,
2002, $1.8 million at December 31, 2001 and $1.9 million at June 30, 2001.
Interest income not recognized on such loans amounted to approximately $317
thousand and $486 thousand as of June 30, 2002 and 2001, respectively and
$450 thousand as of December 31, 2001.
Union had $1.1 million and $3.0 million in loans past due 90 days or more
and still accruing at June 30, 2002 and December 31, 2001, respectively.
At June 30, 2002, Union had internally classified certain loans totaling
$1.7 million. In management's view, such loans represent a higher degree
of risk and could become nonperforming loans in the future. While still on
a performing status, in accordance with Union's credit policy, loans are
internally classified when a review indicates one or more of the following
conditions makes the likelihood of collection uncertain:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
At June 30, 2002, Union had acquired by foreclosure or through repossession
real estate worth $1.256 million consisting of 4 commercial properties, 1
piece of undeveloped land and 4 residential homes.
Allowance for Loan Losses. Some of Union's loan customers ultimately do
not make all of their contractually scheduled payments, requiring Union to
charge off a portion or all of the remaining principal balance due. Union
maintains an allowance for loan losses to absorb such losses. The
allowance for loan losses is maintained at a level, which in Management's
judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on Management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs,
net of recoveries. While Union allocates the allowance for loan losses
based on the percentage category to total loans, the portion of the
allowance for loan losses allocated to each category does not represent the
total available for future losses which may occur within the loan category
since the total allowance for possible loan losses is a valuation reserve
applicable to the entire portfolio.
19
The following table reflects activity in the allowance for loan losses for
the three and six months ended June 30, 2002 and 2001:
3 Months Ended, June 30 Six Months Ended, June 30,
----------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Balance at the beginning of period $2,834 $2,859 $2,801 $2,863
Charge-offs:
Real Estate 6 31 6 31
Commercial 16 133 63 171
Consumer and other 19 17 67 68
----------------------------------------------
Total charge-offs 41 181 136 270
----------------------------------------------
Recoveries:
Real Estate 1 1 7 1
Commercial 1 14 11 17
Consumer and other 20 20 42 46
----------------------------------------------
Total recoveries 22 35 60 64
----------------------------------------------
Net charge-offs (19) (146) (76) (206)
Provision for loan losses 105 57 195 113
----------------------------------------------
Balance at end of period $2,920 $2,770 $2,920 $2,770
==============================================
The following table shows the breakdown of Union's allowance for loan
losses by category of loan and the percentage of loans in each category to
total loans in the respective portfolios at the dates indicated:
June 30, December 31,
2002 2001
------------------ ------------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 598 41.3% $ 610 41.3%
Commercial 1,448 36.8% 1,342 34.1%
Construction 96 3.8% 116 4.6%
Other Loans
Commercial 408 8.9% 421 9.1%
Consumer installment 222 4.5% 253 4.9%
Home equity loans 29 1.5% 29 1.6%
Municipal, Other and
Unallocated 119 3.2% 30 4.4%
Total $2,920 100.0% $2,801 100.0%
=======================================
Ratio of Net Charge Offs to
Average Loans(1) .01% 0.16%
----- -----
Ratio of Allowance for Loan
Losses to Loans 1.15% 1.12%
----- -----
- --------------------
Annualized
20
Investment Activities. At June 30, 2002, the reported value of investment
securities available-for-sale was $47.0 million or 14.1% of total assets.
Union had no securities classified as held-to-maturity or trading
securities. The reported value of securities available-for-sale at June
30, 2002, reflects a positive valuation adjustment of $883 thousand. The
offset of this adjustment, net of income tax effect, was a $583 thousand
increase in Union's other comprehensive income component of shareholders'
equity and a decrease in net deferred tax assets of $300 thousand.
Deposits. The following table shows information concerning Union's
deposits by account type, and the weighted average nominal rates at which
interest was paid on such deposits as of June 30, 2002 and December 31,
2001:
Six Months Ended, June 30 Year Ended December 31,
2002 2001
--------------------------------- ---------------------------------
(dollars in thousands)
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
Non-certificate deposits:
Demand deposits $ 36,443 13.05% $ 35,251 13.07%
Now accounts 36,459 13.06% 1.17% 36,320 13.47% 1.63%
Money Markets 66,376 23.78% 2.02% 56,875 21.09% 3.50%
Savings 37,554 13.45% 1.34% 35,642 13.21% 2.13%
------------------- -------------------
Total non-certificate deposits: 176,832 63.34% 164,088 60.84%
------------------- -------------------
Certificates of deposit:
Less than $100,000 73,720 26.41% 3.65% 76,641 28.42% 5.03%
$100,000 and over 28,614 10.25% 4.45% 28,954 10.74% 5.53%
------------------- -------------------
Total certificates of deposit 102,334 36.66% 105,595 39.16%
------------------- -------------------
Total deposits 279,166 100.00% 2.23% $269,683 100.00% 3.26%
=====================================================================
The following table sets forth information regarding the amounts of Union's
certificates of deposit in amounts of $100,000 or more at June 30, 2002 and
December 31, 2001 that mature during the periods indicated:
June 30, 2002 December 31, 2001
------------- -----------------
(dollars in thousands)
Within 3 months $ 4,449 $ 6,288
3 to 6 months 4,995 13,681
6 to 12 months 8,547 3,189
Over 12 months 3,266 6,711
---------------------------
$21,255 $29,869
===========================
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were
$12.8 million at June 30, 2002 at a weighted average rate of 3.82%.
Borrowings from the Federal Home Loan Bank of Boston were $10.3 million at
December 31, 2001 at a weighted average rate of 5.06%. The change between
21
year end 2001 and the end of the second quarter of 2002 is a net increase
of $2.5 million to fund loan demand.
Other Financial Considerations
Market Risk and Asset and Liability Management. Market risk is the risk of
loss in a financial instrument arising from adverse changes in market
prices and interest rates, foreign currency exchange rates, commodity
prices and equity prices. Union's market risk arises primarily from
interest rate risk inherent in its lending, investing and deposit taking
activities. To that end, management actively monitors and manages its
interest rate risk exposure. Union does not have any market risk sensitive
instruments acquired for trading purposes. Union attempts to structure its
balance sheet to maximize net interest income while controlling its
exposure to interest rate risk. Union's Asset/Liability Committee
formulates strategies to manage interest rate risk by evaluating the impact
on earnings and capital of such factors as current interest rate forecasts
and economic indicators, potential changes in such forecasts and
indicators, liquidity, and various business strategies. Union's
Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of Union's interest-rate sensitivity "gap", which
provides a static analysis of the maturity and repricing characteristics of
Union's entire balance sheet, and a simulation analysis, which calculates
projected net interest income based on alternative balance sheet and
interest rate scenarios, including "rate shock" scenarios involving
immediate substantial increases or decreases in market rates of interest.
Union's Asset/Liability Committee meets at least weekly to set loan and
deposit rates, make investment decisions, monitor liquidity and evaluate
the loan demand pipeline. Deposit runoff is monitored daily and loan
prepayments evaluated monthly. Union historically has maintained a
substantial portion of its loan portfolio on a variable rate basis and
plans to continue this ALM strategy in the future. The investment
portfolio is classified as available for sale and the modified duration is
relatively short. Union does not utilize any derivative products or invest
in any "high risk" instruments.
Our interest rate sensitivity analysis (simulation) as of December 2001 for
a flat rate environment projected a Net Interest Income of $7.4 million for
the first six months of 2002 compared to actual results of $7.7 million in
a flat rate environment, or a 4.1% difference. The Prime rate has remained
constant throughout 2002 at 4.75%. Our results were stronger than
anticipated because of continuing strong loan demand. Net income was
projected to be $2.4 million in a flat rate environment compared to actual
results of $2.3 million, the difference is mainly due to the write down on
one commercial OREO property. Therefore, our results for the first six
months of 2002 were close to our projections in a flat rate environment.
Return on Assets was projected to be 1.43% in a flat rate environment and
actual results were 1.35%. Return on Equity was projected to be 13.27% in
a flat rate environment compared to actual of 12.06%.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of June 30, 2002, the contract
or notional amount of financial instruments whose contract amount
represents credit risk were as follows rounded to the nearest thousand:
Commitments to extend credit $28,019
-------
Standby letters of credit and commercial letters of credit $ 1,046
-------
Credit Card arrangements $ 2,038
-------
Home Equity Lines of Credit $ 3,362
-------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
22
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same
or similar maturities may react differently to changes in overall market
interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were
perfectly matched in each maturity category.
Union prepares its interest rate sensitivity "gap" analysis by scheduling
interest-earning assets and interest-bearing liabilities into periods based
upon the next date on which such assets and liabilities could mature or
reprice. The amounts of assets and liabilities shown within a particular
period were determined in accordance with the contractual terms of the
assets and liabilities, except that:
* adjustable-rate loans, securities, and FHLB advances are included in
the period when they are first scheduled to adjust and not in the
period in which they mature;
* fixed-rate mortgage-related securities and loans reflect estimated
prepayments, which were estimated based on analyses of broker
estimates, the results of a prepayment model utilized by Union, and
empirical data;
* other non-mortgage-related fixed-rate loans reflect scheduled
contractual amortization, with no estimated prepayments; and
* Now, money markets, and savings deposits, which do not have
contractual maturities, reflect estimated levels of attrition, which
are based on detailed studies by Union of the sensitivity of each
such category of deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience
and considers them reasonable. However, the interest rate sensitivity of
Union's assets and liabilities in the tables could vary substantially if
different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
23
The following tables show Union's rate sensitivity analysis as of June 30,
2002:
June 30, 2002
Cumulative repriced within
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Total Total
-------- ------- ------ ------ ------ -----
(dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold and
overnight deposits $ 2,821 $ 0 $ 0 $ 0 $ 0 $ 2,821
Interest bearing deposits 395 1,383 1,454 495 0 3,727
Investments available for sale (1) 2,524 7,088 17,233 8,294 11,130 46,269
FHLB Stock 0 0 0 0 1,235 1,235
Loans (fixed and
adjustable rate) 77,077 49,774 61,582 42,920 19,692 251,045
-----------------------------------------------------------------------
Total interest sensitive assets $82,817 $58,245 $80,269 $ 51,709 $ 32,057 $305,097
-----------------------------------------------------------------------
Interest sensitive liabilities:
Certificates of deposit $24,350 $48,381 $18,077 $ 2,417 $ 3 $ 93,288
Money markets 28,613 0 0 0 38,450 67,063
Regular savings 6,324 0 0 0 33,180 39,504
Now accounts 31,151 0 0 0 11,634 42,785
Borrowed funds 1,353 4,184 2,623 3,655 941 12,756
-----------------------------------------------------------------------
Total interest sensitive liabilities $91,791 $52,565 $20,700 $ 6,072 $ 84,208 $255,336
-----------------------------------------------------------------------
Net interest rate sensitivity gap (8,974) 5,680 59,569 45,637 (52,151)
Cumulative net interest rate
sensitivity gap (8,974) (3,294) 56,275 101,912 49,761
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (2.69%) (0.99%) 16.88% 30.57% 14.93%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-earning assets (2.94%) (1.08%) 18.44% 33.40% 16.31%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-bearing liabilities (3.51%) (1.29%) 22.04% 39.91% 19.49%
- --------------------
Investments available for sale exclude marketable equity securities
with a fair value of $ 757,000 which may be sold by Union at any
time.
Simulation Analysis. In its simulation analysis, Union uses computer
software to simulate the estimated impact on net interest income and
capital under various interest rate scenarios, balance sheet trends, and
strategies. These simulations incorporate assumptions about balance sheet
dynamics such as loans and deposit growth, product pricing, changes in
funding mix, and asset and liability repricing and maturity
characteristics. Based on the results of these simulations, Union is able
to quantify its interest rate risk and develop and implement appropriate
strategies.
The following chart reflects the results of our latest simulation analysis
for the next two year ends on Net Interest Income, Net Income, Return on
Assets, Return on Equity and Capital Value. The projection utilizes a rate
shock of 300 basis points from the current prime rate of 4.75%, this is the
highest internal slope monitored and shows the best and worse scenarios
analyzed. This slope range was determined to be the most relevant during
this economic cycle.
24
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
JUNE 30, 2002
(dollars in thousands)
Return Return
on on
Year Prime Net Interest Change Net Assets Equity Capital Change
Ending Rate Income % Income % % Value %
------ ----- ------------ ------ ------ ------ ------ ------- ------
December-02 7.75 16,073 4.61 5,458 1.60 14.58 24,253 -43.02
4.75 15,365 0.00 4,977 1.46 13.36 42,565 00.00
1.75 14,519 -5.50 4,406 1.30 11.88 58,512 37.46
December-03 7.75 18,690 15.62 6,948 1.99 17.37 21,841 -50.13
4.75 16,164 0.00 5,252 1.51 13.56 43,799 00.00
1.75 12,625 -21.90 2,887 .83 7.78 69,226 58.05
Liquidity. Liquidity is a measurement of Union's ability to meet potential
cash requirements, including ongoing commitments to fund deposit
withdrawals, repay borrowings, fund investment and lending activities, and
for other general business purposes. Union's principal sources of funds
are deposits, amortization and prepayment of loans and securities,
maturities of investment securities and other short-term investments, sales
of securities available-for-sale, and earnings and funds provided from
operations. In addition, as members of the FHLB, Union's subsidiaries have
access to preapproved lines of credit up to 16.52% of total assets.
In addition, subsidiaries maintain Federal Fund lines of credit with
upstream correspondent banks and repurchase agreement lines with selected
brokerage houses.
While scheduled loan and securities payments and FHLB advances are
relatively predictable sources of funds, deposit flows and prepayments on
loans and mortgage-backed securities are greatly influenced by general
interest rates, economic conditions, and competition. Union's liquidity is
actively managed on a daily basis, monitored by the Asset/Liability
Committee, and reviewed periodically with the Board of Directors. Union's
Asset/Liability Committee sets liquidity targets based on Union's financial
condition and existing and projected economic and market conditions. The
committee measures Union's marketable assets and credit available to fund
liquidity requirements and compares the adequacy of that aggregate amount
against the aggregate amount of Union's sensitive or volatile liabilities,
such as core deposits and time deposits in excess of $100,000, term
deposits with short maturities, and credit commitments outstanding. The
committee's primary objective is to manage Union's liquidity position and
funding sources in order to ensure that it has the ability to meet its
ongoing commitment to its depositors, to fund loan commitments, and to
maintain a portfolio of investment securities. Since many of the loan
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Union's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 78% of Union's certificates of deposit will mature within
twelve months, management believes, based upon past experience, that Union
will retain a
25
substantial portion of these deposits. Management will continue to offer a
competitive but prudent pricing strategy to facilitate retention of such
deposits. Any reduction in total deposits could be offset by purchases of
federal funds, short-term FHLB borrowings, or liquidation of investment
securities or loans held for sale. Such steps could result in an increase
in Union's cost of funds and adversely impact the net interest margin.
Capital Resources. The total dollar value of Union's shareholders' equity
is $37.9 million at June 30, 2002, compared to $37.2 million at year-end
2001. Union has 5 million shares of $2.00 par value common stock
authorized. As of June 30, 2002, Union had 3,268,189 shares issued, of which
3,027,557 were outstanding and 240,632 shares were held in Treasury. Also as
of June 30, 2002, there were outstanding employee incentive stock options
with respect to 10,200 shares of Union's common stock, granted pursuant to
Union's 1998 Incentive Stock Option Plan and a predecessor plan. Of the
50,000 shares authorized for issuance under the 1998 Plan, 42,000 shares
remain available for future option grants. On October 17, 2001, the Company
announced a stock repurchase plan. The Board of Directors has authorized the
repurchase of up to 100,000 shares of common stock, or approximately 3.3% of
the Company's outstanding shares. Shares are repurchased from time to time
in the open market or in negotiated transactions as, in the judgement of
management, market conditions warrant. The repurchase program is open for an
unspecified period of time. To date we have repurchased 6,672 shares under
this program.
Union Bank and Citizens (the Banks) are subject to various regulatory capital
requirements administered by the federal banking agencies. Management
believes, as of June 30, 2002 that the Banks meet all capital adequacy
requirements to which they are subject.
As of June 30, 2002, the most recent notification from the FDIC categorized
the Banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since the notification that management believes have changed either Bank's
category.
The Banks' and the Company's actual capital amounts and ratios are presented
in the table:
Minimums
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
As of June 30, 2002:
Total capital to risk weighted assets
Union Bank $27,725 16.75% $13,242 8.0% $16,552 10.0%
Citizens 11,814 16.71% 5,656 8.0% 7,070 10.0%
Consolidated 40,712 17.20% 18,936 8.0% 23,670 10.0%
Tier I capital to risk weighted assets
Union Bank $25,815 15.60% $ 6,619 4.0% $ 9,929 6.0%
Citizens 10,928 15.46% 2,827 4.0% 4,241 6.0%
Consolidated 37,727 15.94% 9,467 4.0% 14,201 6.0%
Tier I capital to average assets
Union Bank $25,815 11.23% $ 9,195 4.0% $11,494 5.0%
Citizens 10,928 10.61% 4,120 4.0% 5,150 5.0%
Consolidated 37,727 11.32% 13,331 4.0% 16,664 5.0%
Impact of Inflation and Changing Prices. Union's consolidated financial
statements, included in this document, have been prepared in accordance
with U.S. generally accepted accounting principles, which require the
measurements of financial position and results of operations in terms of
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Banks have asset and liability
structures that are essentially monetary in nature, and their general and
administrative costs constitute relatively small percentages of total
expenses. Thus, increases in the general price levels for goods and
services have a relatively minor effect on Union's total expenses.
Interest rates have a more significant impact on Union's financial
performance than the effect of general inflation. Interest rates do not
necessarily move in the same direction or change in the same magnitude as
the prices of goods and services, although periods of increased inflation
may accompany a rising interest rate environment.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information called for by this item is incorporated by reference in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the titlement "Other Financial Considerations" on pages 22
through 26 in this Form 10-Q.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company's bank subsidiaries are
involved in various legal proceedings incidental to their business, none of
which management deems to be material to the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual shareholders meeting was held on May 15, 2002. The only matter
submitted to a vote by the shareholders was as follows:
a) To fix the number of directors at ten for the ensuring year and
to elect the following individuals as directors for the ensuing
year:
Votes Votes Votes Broker
Nominee For Withheld Abstained Non-votes
------- ----- -------- --------- ---------
Cynthia D. Borck 2,948,482 1,238 1,169 0
William T. Costa 2,948,416 1,304 1,169 0
Kenneth D. Gibbons 2,948,677 1,043 1,169 0
Franklin G. Hovey, II 2,946,291 3,429 1,169 0
Richard C. Marron 2,947,320 2,400 1,169 0
Robert P. Rollins 2,949,720 0 1,169 0
Jerry S. Rowe 2,949,720 0 1,169 0
Richard C. Sargent 2,947,601 2,119 1,169 0
W. Arlen Smith 2,948,677 1,043 1,169 0
John H. Steel 2,949,720 0 1,169 0
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer and the Chief
Financial Officer
(b) Current Reports on Form 8-K
1. Report to Shareholders on Second Quarter Results filed on
July 19, 2002
2. Press Releases announcing dividend declaration and second quarter
earnings filed on July 8, 2002
SIGNATURES
Pursuant to the requirements 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.
August 14, 2002 Union Bankshares, Inc.
s/ Kenneth D. Gibbons
------------------------------------
Kenneth D. Gibbons
Director and Chief Executive Officer
s/ Marsha A. Mongeon
------------------------------------
Marsha A. Mongeon
Chief Financial Officer and
Treasurer
(Principal Accounting Officer)
27
EXHIBIT INDEX
99.1 Certification of the Chief Executive Officer and the Chief
Financial Officer
28