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: September 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of November 8, 2002:
Common Stock, $2 par value 3,027,757 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements.
Union Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements 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
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 28
Certifications 29
2
Union Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
(Dollars in Thousands) 2002 2001
------------- ------------
Assets
Cash and due from banks $ 15,787 $ 13,926
Federal funds sold and overnight deposits 6,237 7,630
--------------------------
Cash and Cash Equivalents 22,024 21,556
Interest bearing deposits 3,728 4,700
Securities available-for-sale 48,155 49,613
Federal Home Loan Bank stock 1,235 1,064
Loans held for sale 19,308 16,333
Loans 243,972 234,874
Unearned net loan fees (255) (263)
Allowance for loan losses (2,936) (2,801)
--------------------------
Loans, net 240,781 231,810
--------------------------
Accrued interest receivable 1,925 2,037
Premises and equipment, net 4,729 4,156
Other real estate owned, net 1,081 1,296
Other assets 5,148 4,910
--------------------------
Total assets $348,114 $337,475
==========================
Liabilities and Stockholders' equity:
Liabilities:
Deposits:
Non-interest bearing $ 40,614 $ 39,547
Interest bearing 253,179 246,175
--------------------------
Total Deposits 293,793 285,722
Borrowed funds 11,387 10,344
Accrued interest and other liabilities 4,401 4,194
--------------------------
Total liabilities 309,581 300,260
--------------------------
Stockholders' Equity:
Common stock, $2 par value; 5,000,000 shares authorized;
3,268,189 shares issued at 9/30/02 and 12/31/01 6,536 6,536
Paid-in capital 277 277
Retained earnings 32,734 31,629
Treasury stock at cost (240,632 shares at 9/30/02 and
12/31/01) (1,722) (1,722)
Accumulated other comprehensive income 708 495
--------------------------
Total stockholders' equity 38,533 37,215
--------------------------
Total liabilities and stockholders' equity $348,114 $337,475
==========================
The accompanying notes are an integral part of the consolidated unaudited
financial statements
3
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(Dollars in Thousands) 2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 4,863 $ 5,186 $ 14,423 $ 15,458
Interest and dividends on investment securities 642 760 1,991 2,369
Interest on federal funds sold and overnight
deposits 30 98 84 278
Interest on interest bearing deposits 48 41 150 101
---------------------------------------------------
5,583 6,085 16,648 18,206
---------------------------------------------------
Interest expense:
Interest on deposits 1,428 2,174 4,516 6,916
Interest on federal funds purchased 0 1 3 4
Interest on borrowed funds 118 156 375 399
---------------------------------------------------
1,546 2,331 4,894 7,319
---------------------------------------------------
Net interest income 4,037 3,754 11,754 10,887
Provision for loan losses 95 86 290 199
---------------------------------------------------
Net interest income after provision for loan losses 3,942 3,668 11,464 10,688
---------------------------------------------------
Other income:
Trust income 7 54 123 204
Service fees 647 600 1,841 1,786
Gain (loss) on sale of securities 0 5 (3) 79
Gain on sale of loans 272 1 308 74
Other 45 (9) 119 7
---------------------------------------------------
971 651 2,388 2,150
---------------------------------------------------
Other expenses:
Salaries and wages 1,299 1,210 3,835 3,510
Pension and employee benefits 382 332 1,187 1,007
Occupancy expense, net 165 149 492 487
Equipment expense 232 212 648 625
Net operation of Other Real Estate Owned 153 14 497 44
Other expense 720 661 2,125 2,043
---------------------------------------------------
2,951 2,578 8,784 7,716
---------------------------------------------------
Income before income tax expense 1,962 1,741 5,068 5,122
Income tax expense 566 519 1,420 1,487
---------------------------------------------------
Net income $ 1,396 $ 1,222 $ 3,648 $ 3,635
===================================================
Earnings per common share $ 0.46 $ 0.41 $ 1.20 $ 1.20
===================================================
Weighted average number of common
shares outstanding 3,027,557 3,033,842 3,027,557 3,031,133
===================================================
Dividends declared per share $ 0.28 $ 0.26 $ 0.84 $ 0.78
===================================================
The accompanying notes are an integral part of the consolidated unaudited
financial statements
4
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Other Total
Common Paid-in 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 - - 3,648 - - 3,648
Change in net unrealized gain on
securities available-for-sale, net of
reclassification adjustment and tax
effects. - - - - 213 213
-------
Comprehensive income - - - - - 3,861
-------
Cash dividends declared
($0.84 per share) - - (2,543) - - (2,543)
--------------------------------------------------------------------------------
Balance September 30, 2002 $6,536 $277 $32,734 $(1,722) $708 $38,533
================================================================================
The accompanying notes are an integral part of the consolidated unaudited
financial statements
5
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
Year to Date
-------------------------------
September 30, September 30,
2002 2001
------------- -------------
(Dollars in Thousands)
Cash Flows From Operating Activities
Net Income $ 3,648 $ 3,635
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 477 462
Provision for loan losses 290 199
Provision (credit) for deferred income taxes (132) (213)
Net amortization on securities 137 51
Equity in losses of limited partnerships 93 47
Write-downs of other real estate owned 275 0
Increase (decrease) in unamortized loan fees (8) 14
Increase in loans held for sale (2,667) (2,423)
Decrease in accrued interest receivable 112 484
Increase in other assets (291) (572)
Increase in income taxes 188 365
Decrease in accrued interest payable (357) (4)
Increase in other liabilities 630 253
Loss (gain) on sale of securities 3 (79)
Gain on sale of loans (308) (74)
(Gain) loss on sale of OREO (21) 16
Loss (gain)on disposal of fixed assets (1) 9
-------------------------
Net cash provided by operating activities 2,068 2,170
Cash Flows From Investing Activities
Interest bearing deposits
Sales and maturities 1,964 685
Purchases (992) (2,563)
Securities available for sale
Maturities and redemptions 12,733 22,943
Purchases (11,089) (16,781)
Purchase of Federal Home Loan Bank Stock (171) (47)
Increase in loans, net (9,406) (19,576)
Recoveries of loans charged off 82 81
Purchases of premises and equipment, net (1,049) (525)
Investment in limited partnerships (254) (136)
Proceeds from sale of OREO 0 106
6
Proceeds from sale of repossessed property 11 21
-------------------------
Net cash used in investing activities (8,171) (15,792)
Cash Flows From Financing Activities
Borrowings, net of repayments 1,043 3,342
Proceeds from exercise of stock options 0 41
Net increase in non-interest bearing deposits 1,067 15,422
Net increase in interest bearing deposits 7,004 5,163
Dividends paid (2,543) (2,364)
-------------------------
Net cash provided by financing activities 6,571 21,604
Increase in cash and cash equivalents $ 468 $ 7,982
Cash and cash equivalents
Beginning $21,556 $ 11,423
Ending $22,024 $ 19,405
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 5,251 $ 7,324
=========================
Income Taxes Paid $ 1,040 $ 1,335
=========================
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 $ 13
=========================
Loans Originated to Finance the Sale of Other Real
Estate Owned $(1,170) $ 0
=========================
Total Change in Unrealized Gain (Loss) on Securities
Available-For-Sale $ 326 $ 1,375
=========================
The accompanying notes are an integral part of the consolidated unaudited
financial statements
7
UNION BANKSHARES, INC.
NOTES TO FINANCIAL STATEMENTS:
Note 1. The accompanying interim unaudited consolidated financial
statements of Union Bankshares, Inc. (the Company) for the interim periods
ended September 30, 2002 and 2001 and for the quarters then ended have been
prepared in accordance with U.S. generally accepted accounting principles
and the accounting policies described in the Company's Annual Report to
Shareholders and Annual Report on Form 10-K for the year ended December 31,
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 10-K, and current
reports on Form 8-K.
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. New Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain
Financial Institutions". SFAS No. 147 amends previously issued guidance
regarding the accounting and reporting for the acquisition of all or part
of a financial institution. The statement also provides guidance on the
accounting for the impairment or disposal of core deposits and is effective
for acquisitions after October 1, 2002. Management has determined there is
no current impact from this statement on the Company's financial statements.
8
Note 5. Reportable Segments
The Company has two reportable operating segments, Union Bank (Union) 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.
The Company accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
Information about reportable segments, and the reconciliation of such
information to the consolidated financial statements as of and for the
periods ended September 30, 2002 and 2001 follows:
(dollars in thousands)
Intersegment Consolidated
2002 Union Citizens Elimination Other Totals
- --------------------------------------------------------------------------------------------------
Interest income $ 11,412 $ 5,236 $ 0 $ 0 $ 16,648
Interest expense 3,131 1,762 0 1 4,894
Provision for loan loss 135 155 0 0 290
Service fee income 1,446 395 0 0 1,841
Income tax expense (benefit) 1,092 401 0 (73) 1,420
Net income (loss) 2,946 820 0 (118) 3,648
Assets 240,477 107,230 (33) 440 348,114
(dollars in thousands)
Intersegment Consolidated
2001 Union Citizens Elimination Other Totals
- --------------------------------------------------------------------------------------------------
Interest income $ 12,473 $ 5,733 $ 0 $ 0 $ 18,206
Interest expense 4,862 2,456 0 1 7,319
Provision for loan loss 30 169 0 0 199
Service fee income 1,388 398 0 0 1,786
Income tax expense (benefit) 1,157 381 0 (51) 1,487
Net income (loss) 2,938 776 0 (79) 3,635
Assets 224,862 104,699 (61) 401 329,901
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 or the Company's) financial position as of
September 30, 2002 and as of December 31, 2001, and its results of operations
for the three and nine months ended September 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 reflects 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 September 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 November 8, 2002 at
$22.25.
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 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," "intend," "plan," "seek",
"estimate" 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 fluctuations and perceptions, and
inflation and their effect on the Company or its customers
* changes in the competitive environment for financial services
organizations
* the Company's ability to retain key personnel
10
* 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
* the failure of assumptions underlying the establishment of reserves
for loan losses and estimations of values of collateral and various
financial assets and liabilities
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 September 30, 2002 was $1.4
million, compared with net income of $1.2 million for the third quarter of
2001. Net income per share was $.46 for the third quarter of 2002 compared
to $.41 for the same quarter of 2001. Net income for the first nine months
of 2002 and 2001 was $3.6 million. Net income per share was $1.20 for the
first nine months of 2002 and 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:
Three months ended September 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 $ 7,633 $ 30 1.55% $ 11,109 $ 98 3.53%
Interest bearing deposits 3,854 48 4.93% 3,247 41 5.05%
Investments (1), (2) 46,570 642 5.75% 50,500 760 6.23%
Loans, net (1), (3) 256,558 4,863 7.59% 238,288 5,186 8.78%
-------- ------- ----- -------- ------- ----
Total interest-earning assets (1) 314,615 5,583 7.14% 303,144 6,085 8.12%
Cash and due from banks 12,655 9,965
Premises and equipment 4,808 3,819
Other assets 8,824 6,544
-------- --------
Total assets $340,902 $323,472
======== ========
Average Liabilities and
Shareholders' Equity:
Now accounts $ 39,082 $ 105 1.07% $ 36,769 $ 144 1.57%
11
Savings and money market accounts 106,379 426 1.59% 92,977 678 2.92%
Certificates of deposit 104,150 897 3.42% 107,224 1,352 5.04%
Borrowed funds 11,761 118 3.94% 10,421 157 6.03%
-------- ------- ----- -------- ------- ----
Total interest-bearing liabilities 261,372 1,546 2.34% 247,391 2,331 3.77%
Non-interest bearing deposits 39,088 36,767
Other liabilities 3,534 3,569
-------- --------
Total liabilities 303,994 287,727
Shareholders' equity 36,908 35,745
-------- --------
Total liabilities and
shareholders' equity $340,902 $323,472
======== ========
Net interest income (1) $ 4,037 $ 3,754
======= =======
Net interest spread (1) 4.80% 4.35%
==== ====
Net interest margin (1) 5.19% 5.05%
==== ====
- --------------------
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.
Nine months ended September 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 $ 7,093 $ 84 1.58% $ 8,821 $ 278 4.20%
Interest bearing deposits 4,126 150 4.87% 2,459 101 5.48%
Investments (1), (2) 46,679 1,991 5.92% 51,659 2,369 6.31%
Loans, net (1), (3) 251,439 14,423 7.74% 230,978 15,458 9.02%
-------- ------- ----- -------- ------- ----
Total interest-earning assets (1) 309,337 16,648 7.29% 293,917 18,206 8.37%
Cash and due from banks 12,667 9,941
Premises and equipment 4,641 3,908
Other assets 8,876 5,803
-------- --------
Total assets $335,521 $313,569
======== ========
Average Liabilities and
Shareholders' Equity:
Now accounts $ 37,333 $ 317 1.13% $ 34,985 $ 454 1.73%
Savings and money market accounts 104,746 1,340 1.71% 90,246 2,193 3.24%
Certificates of deposit 102,939 2,859 3.71% 105,965 4,269 5.37%
Borrowed funds 12,567 378 3.99% 9,187 403 5.85%
-------- ------- ----- -------- ------- ----
Total interest-bearing liabilities 257,585 4,894 2.54% 240,383 7,319 4.06%
Non-interest bearing deposits 37,325 34,394
Other liabilities 3,719 3,537
-------- --------
Total liabilities 298,629 278,314
Shareholders' equity 36,892 35,255
-------- --------
Total liabilities and
shareholders' equity $335,521 $313,569
======== ========
Net interest income (1) $11,754 $10,887
======= =======
12
Net interest spread (1) 4.75% 4.31%
==== ====
Net interest margin (1) 5.17% 5.05%
==== ====
- --------------------
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 $283 thousand, or 7.5%, to $4.04
million for the three months ended September 30, 2002, from $3.75 million
for the three months ended September 30, 2001. The net interest spread
increased by 45 basis points to 4.80% for the three months ended September
30, 2002, from 4.35% for the three months ended September 30, 2001 as
interest rates paid on most liabilities and earned on most assets moved
downward in response to earlier decreases in the prime rate. The net
interest margin for the 2002 period increased 14 basis points to 5.19% from
the 2001 period at 5.05%.
Union's net interest income year to date was $11.7 million compared to the
prior year of $10.9 million or an increase of 8.0% between the two years.
The net interest spread increased by 44 basis points to 4.75% for the nine
months ended September 30, 2002 from 4.31% for the nine months ended
September 30, 2001. This increase was fueled by the eight decreases in the
prime rate since January 1, 2001 which had taken it from 9.50% to 4.75% by
December, 2001. The net interest margin for the 2002 period increased to
5.17% from 5.05% for the 2001 period or an increase of 12 basis points. A
decrease in prime rate is not necessarily beneficial to Union in the near
term, see Management's Discussion and Analysis "Other Financial
Considerations - Market Risk and Asset and Liability Management."
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 September 30, 2002 Compared
to Three Months Ended September 30, 2001
----------------------------------------------
Increase/(Decrease) Due to Change In
----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (30) $ (38) $ (68)
Interest bearing deposits 8 (1) 7
Investments (62) (56) (118)
Loans, net 427 (750) (323)
--------------------------------
Total interest-earning assets 343 (845) (502)
Interest-bearing liabilities:
Now accounts 10 (49) (39)
Savings and money market accounts 102 (354) (252)
Certificates of deposit (35) (420) (455)
Borrowed funds 22 (61) (39)
--------------------------------
Total interest-bearing liabilities 99 (884) (785)
--------------------------------
Net change in net interest income $ 244 $ 39 $ 283
================================
13
Nine Months Ended September 30, 2002 Compared
to Nine Months Ended September 30, 2001
---------------------------------------------
Increase/(Decrease) Due to Change In
---------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (54) $ (140) $ (194)
Interest bearing deposits 68 (19) 49
Investments (239) (139) (378)
Loans, net 1,376 (2,411) (1,035)
--------------------------------
Total interest-earning assets 1,151 (2,709) (1,558)
Interest-bearing liabilities:
Now accounts 30 (167) (137)
Savings and money market accounts 348 (1,201) (853)
Certificates of deposit (127) (1,283) (1,410)
Borrowed funds 149 (174) (25)
--------------------------------
Total interest-bearing liabilities 400 (2,825) (2,425)
--------------------------------
Net change in net interest income $ 751 $ 116 $ 867
================================
Quarter Ended September 30, 2002 compared to Quarter Ended September 30,
2001.
Interest and Dividend Income. Union's interest and dividend income
decreased by $502 thousand or 8.2%, to $5.6 million for the three months
ended September 30, 2002, from $6.1 million for the three months ended
September 30, 2001. Average earning assets increased by $11.5 million, or
3.8%, to $314.6 million for the three months ended September 30, 2002, from
$303.1 million for the three months ended September 30, 2001. Average
loans approximated $256.6 million for the three months ended September 30,
2002 up from $238.3 million for the three months ended September 30, 2001.
The $8.1 million, or 9.0% increase in residential real estate secured
loans, the $10.8 million, or 9.3% increase in commercial and commercial
real estate loans, and the $2.1 million increase in municipal loans was
partially offset by the $1.7 million, or 13.3% decrease in personal loans
and the $527 thousand, or 4.6% decrease in construction loans. A conscious
decision to retain a number of loans underwritten 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 $3.9 million, or 7.8%, to $46.6 million for the
three months ended September 30, 2002, from $50.5 million for the three
months ended September 30, 2001. The average balance in interest bearing
deposits increased by $.6 million to $3.8 million from $3.2 million or
18.7%. The average level of federal funds sold and overnight deposits
decreased by $3.5 million or 31.3%, to $7.6 million for the three months
ended September 30, 2002, from $11.1 million for the three months ended
September 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 from
non-loan instruments was $.7 million in 2002 compared to $.9 million for
2001, which is explained by the $6.8 million decrease in volume and the drop
in interest rates.
Interest Expense. Union's interest expense decreased by $785 thousand, or
33.7%, to $1.5 million for the three months ended September 30, 2002 from
$2.3 million for the three months ended September 30, 2001. Average
interest-bearing liabilities increased by $14.0 million, or 5.7% to $261.4
million for the three months ended September 30, 2002, from $247.4 million
for the three months ended September 30, 2001. Average time deposits
decreased $3.0 million, or 2.8%, to $104.2 million for the three months
ended September 30, 2002, from $107.2 million for the three months ended
September 30, 2001. The average balances for money market and saving
accounts increased by $13.4 million, or 14.4% to $106.4 million for the
three months ended September 30, 2002, from $93.0 million for the three
months ended.
September 30, 2001. The average balance in Now accounts rose $2.3 million
or 6.3% from $36.8 million
14
to $39.1 million. Customers have maintained very liquid positions during
the last 2 years as they anticipate that interest rates paid on all deposit
instruments will rise.
The average balance on funds borrowed has increased from $10.4 million on
average in 2001 to $11.8 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 increased $320 thousand, or
49.2%, to $971 thousand for the three months ended September 30, 2002, from
$651 thousand for the three months ended September 30, 2001. Trust
department income decreased to $7 thousand in the third quarter of 2002
from $54 thousand in the same period of 2001 or an 87% decrease primarily
due to the decline in interest rates and the stock market as the majority of
fee income is based on the asset's market value. There was a $272 thousand
gain on Sale of Loans for 2002 versus $1 thousand for 2001 as Union chose
to sell low rate, long term loans on the secondary market during the third
quarter of 2002. Service fees (sources of which include, among others,
deposit and loan servicing fees, ATM fees, and safe deposit fees) increased
by $47 thousand, or 7.8%, to $647 thousand for the three months ended
September 30, 2002, from $600 thousand for the three months ended September
30, 2001.
Noninterest Expense. Union's noninterest expense increased $373 thousand,
or 14.5%, to $3.0 million for the three months ended September 30, 2002,
from $2.6 million for the three months ended September 30, 2001. Salaries
increased $89 thousand, or 7.4%, to $1.3 million for the three months ended
September 30, 2002, from $1.2 million for the three months ended September
30, 2001, reflecting normal salary activity, growth and the addition of the
new Fairfax, Vermont branch. Pension and employee benefits increased $50
thousand or 15.1% to $382 thousand for the three months ended September 30,
2002, from $332 thousand for the three months ended September 30, 2001
mainly due to a $51 thousand increase in employee insurance plans expense,
mainly health insurance costs. Occupancy expense for the quarter was $165
thousand, up $16 thousand or 10.7% from $149 thousand in the third quarter
of 2001. The increase was across the majority of individual line items
between quarters. Equipment expense increased $20 thousand, or 9.4% to $232
thousand for the three months ended September 30, 2002, from $212 thousand
for the same period in 2001 primarily resulting from increased depreciation
cost on computer equipment and software which are depreciated as an expense
over a time period of three to five years. Net operation of other real
estate owned was $153 thousand for the quarter up from $14 thousand for the
corresponding quarter in 2001. This increase of $139 thousand is principally
due to the cost of remediating one property for $80 thousand and a $25
thousand writedown on an Other Real Estate Owned (OREO) property. Other
operating expense for the quarter was $720 thousand up from $661 thousand for
the same quarter in 2001. The increase of $59 thousand, or 8.9%, is mainly
due to the increase in legal fees from $15 thousand to $28 thousand, increase
in amortization of low income housing investments from $16 thousand to $31
thousand and a $9 thousand increase in checking accounts charged off.
Income Tax Expense. Union's income tax expense increased by $47 thousand,
or 9.1%, to $566 thousand for the three months ended September 30, 2002,
from $519 thousand for the comparable period of 2001 because of increased
income before taxes partially offset by the increased federal income tax
credits available to us in 2002 due to investments in low income housing
projects.
Year to Date September 30, 2002 compared to Year to Date September 30,
2001.
Interest and Dividend Income. Union's interest and dividend income
decreased by $1.5 million, or 8.6%, to $16.6 million for the nine months
ended September 30, 2002, from $18.2 million for the nine months ended
September 30, 2001. Average earning assets increased by $15.4 million, or
5.2%, to $309.3 million for the nine months ended September 30, 2002, from
$293.9 million for the nine months ended September 30, 2001. Average loans
approximated $251.4 million for the nine months ended September 30, 2002 up
from $231.0 million for the nine months ended September 30, 2001. The $9.3
million or 10.6% increase in residential real estate secured loans and the
$14.3 million or 13.0% increase in commercial loans was partially offset by
the $1.9 million or 13.7% decrease in personal loans and a $732 thousand,
or 7.0% decrease in construction loans to $9.7 million. A conscious
decision to retain a portion
15
of loans underwritten for sale in our portfolio accounts for the majority 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 $5.0 million, or 9.6%, to $46.7 million for the
nine months ended September 30, 2002, from $51.7 million for the nine
months ended September 30, 2001. The average level of federal funds sold
and overnight deposits decreased by $1.7 million or 19.6%, to $7.1 million
for the nine months ended September 30, 2002, from $8.8 million for the
nine months ended September 30, 2001. The average balance in interest
bearing deposits increased by $1.6 million to $4.1 million from $2.5
million, or 67.8% increase. The decrease in the investment portfolio,
federal funds sold and interest bearing deposits in 2002 reflects the
continuing growth in our loan portfolio. Interest income from non-loan
instruments was $2.2 million for 2002 and $2.7 million for 2001 reflecting
the decrease in yields and the overall decrease in volume.
Interest Expense. Union's interest expense decreased by $2.4 million, or
33.1%, to $4.9 million for the nine months ended September 30, 2002 from
$7.3 million for the nine months ended September 30, 2001. Average
interest-bearing liabilities increased by $17.2 million, or 7.2%, to $257.6
million for the nine months ended September 30, 2002, from $240.4 million
for the nine months ended September 30, 2001. Average time deposits were
$102.9 million for the nine months ended September 30, 2002 and $106.0
million for the nine months ended September 30, 2001, or a decrease of
2.9%. The average balances for money market and savings accounts increased
by $14.5 million, or 16.1% to $104.7 million for the nine months ended
September 30, 2002, from $90.2 million for the nine months ended September
30, 2001. The 6.7% increase in Now accounts brought the average balance up
to $37.3 million from $35.0 million. Customers have maintained very liquid
positions during the last 2 years as they anticipate the interest rates
paid on all deposit instruments will rise.
The average balance on funds borrowed has increased from $9.2 million in
2001 to $12.6 million in 2002 as Union's subsidiaries took some short-term
Federal Home Loan Bank advances during the second quarter of 2002 to fund
loan demand.
Noninterest Income. Union's noninterest income increased $238 thousand, or
11.1%, to $2.4 million for the nine months ended September 30, 2002 from
$2.2 million for the nine months ended September 30, 2001. The results for
the period reflected a net loss of $3 thousand from the sale of securities
compared to a $79 thousand gain from sales during 2001. Trust department
income decreased to $123 thousand for the nine months of 2002 from $204
thousand in the same period of 2001 or a 39.7% decrease primarily due to
the decline in interest rates and the stock market since the majority of the
fee income is based on the asset's market value. We also had a fewer number
of estate settlements in 2002. Gain on Sale of Loans increased $234 thousand
to $308 thousand for 2002 from $74 thousand for 2001. Service fees (sources
of which include, among others, deposit and loan servicing fees, ATM fees,
and safe deposit fees) increased by $55 thousand, or 3.0%, to $1.84 million
for the nine months ended September 30, 2002, from $1.79 million for the nine
months ended September 30, 2001. The main component of other income in 2002
is $78 thousand representing net servicing rights.
Noninterest Expense. Union's noninterest expense increased $1.1 million,
or 13.8%, to $8.8 million for the nine months ended September 30, 2002,
from $7.7 million for the nine months ended September 30, 2001. Salaries
increased $325 thousand, or 9.3%, to $3.8 million for the nine months ended
September 30, 2002, from $3.5 million for the nine months ended September
30, 2001, reflecting normal salary activity, growth and the addition of the
Littleton Loan Production Office in May of 2001 and the Fairfax, Vermont
branch in April of 2002. Pension and employee benefits increased $180
thousand, or 17.9%, to $1.2 million for the nine months ended September 30,
2002, from $1.0 million for the nine months ended September 30, 2001 mainly
due to an $127 thousand increase in employee group insurance health plan
costs and a $27 thousand increase in payroll taxes. Net occupancy expense
increased $5 thousand, or 1.0%, to $492 thousand for the nine months ended
September 30, 2002, from $487 thousand for the nine months ended September
30, 2001. Equipment expense increased $23 thousand or 3.7% to $648
thousand for the nine months ended September 30, 2002, from $625 thousand
for the same period in 2001. Net operation of other real estate owned was
$497 thousand for the nine months ended
16
September 30, 2002 compared to $44 thousand for the same period in 2001.
This increase of $453 thousand was mainly due to $275 thousand in two
writedowns on OREO and an increase of $199 thousand in expenses to carry
these OREO properties from $44 thousand to $243 thousand. The impact of
these expenses were partially off-set by a gain of $21 thousand on the sale
of OREO properties. Other operating expenses were $2.1 million
for the first nine months of 2002 compared to $2.0 million for the same
period in 2001. The increase of $82 thousand, or 4.0%, is mainly due to
the increase in trust department expenses growing from $37 thousand to $61
thousand due to the outsourcing of trust accounting, increase in amortization
of low income housing investments from $47 thousand to $93 thousand and an
$18 thousand increase in checking accounts charged off.
Income Tax Expense. Union's income tax expense decreased by $67 thousand,
or 4.5%, to $1.42 million for the nine months ended September 30, 2002,
from $1.49 million for the comparable period of 2001, mainly due to
increased federal tax credits available in 2002 resulting from investments
in low income housing projects.
FINANCIAL CONDITION
At September 30, 2002, Union had total consolidated assets of $348.1
million, including net loans and loans held for sale of $260.1 million,
deposits of $293.8 million and shareholders' equity of $38.5 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 increased by $10.6 million or 3.2% to $348.1 million
at September 30, 2002 from $337.5 million at December 31, 2001. Total net
loans and loans held for sale increased by $12.0 million or 4.8% to $260.1
million or 74.7% of total assets at September 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,
increased $468 thousand or 2.2% to $22.0 million at September 30, 2002 from
$21.6 million at December 31, 2001.
Securities available for sale decreased from $49.6 million at December 31,
2001 to $48.2 million at September 30, 2002, a $1.4 million or 2.9%
decrease. Securities maturing have not been replaced dollar for dollar 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 increased $8.1 million or 2.8% to $293.8 million at September 30,
2002 from $285.7 million at December 31, 2001. Total borrowings increased
$1.1 million to $11.4 million at September 30, 2002 from $10.3 million at
December 31, 2001. The increase was in short-term borrowing 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 September 30, 2002, Union's gross loan portfolio totaled $263.3 million,
or 75.6%, of assets, of which $130.5 million, or 49.6% of gross loans,
consisted of residential mortgages and construction loans, and $86.5 million,
or 32.8%, of total loans consisted of commercial real estate loans. As of
such date, Union's loan portfolio also included $21.8 million of commercial
loans, $13.2 million of municipal loans, and $11.3 million of consumer loans
representing, in order, 8.3%, 5.0% and 4.3% of total loans outstanding on
September 30, 2002.
The following table shows information on the composition of Union's loan
portfolio as of September 30, 2002 and December 31, 2001:
17
September 30, December 31,
Loan Type 2002 2001
- --------- ------------- ------------
Real estate $113,985 $112,564
Commercial real estate 84,030 78,898
Commercial 21,519 20,659
Consumer 11,261 12,201
Municipal loans 13,177 10,552
Loans held for sale 19,308 16,333
--------------------------
Total loans 263,280 251,207
Deduct:
Allowance for loan losses (2,936) (2,801)
Net deferred loan fees, premiums & discounts (255) (263)
--------------------------
$260,089 $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
$177.2 million residential mortgage portfolio, approximately $46.7 million
of which is serviced for unaffiliated third parties at September 30, 2002.
Additionally, Union originates commercial real estate and 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 $8.1 million of commercial and commercial real
estate loans for unaffiliated third parties as of September 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 increased $12.1 million or 4.8%
since December 31, 2001. An increase of $1.4 million or 1.3% in residential
real estate loans net of loans sold year to date, an increase of $5.1 million
or 6.5% in commercial real estate loans, an increase of $.9 million or 4.2%
in commercial loans, an increase of $2.6 million or 24.9% in municipal loans
and an increase in loans held for sale of $3.0 million or 18.2% was partially
offset by a $.9 million or 7.7% decrease in consumer loans.
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.
The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, a loan review department staffed by
experienced regulatory personnel, low individual lending limits for
officers, Board approval for large credit relationships and a quality
control process for loan documentation. The Company also maintains a
monitoring process for credit extensions. The Company performs periodic
concentration analyses based on various factors such as industries,
collateral types, large credit sizes and officer portfolio loads. The
Company has established underwriting guidelines to be followed by its
officers. The Company monitors its delinquency levels for any negative or
adverse trends. The Company continues to invest in its loan portfolio
monitoring system to enhance its risk management capabilities. There can
be no assurance, however, the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general or local economic conditions.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Loans are designated as nonaccrual when reasonable
doubt exists as to the full collection of interest and principal. Normally,
when a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income
on such loans is then recognized only to the extent that cash is received
and where the future collection of interest and principal is
18
probable. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as
to both principal and interest. Union had loans on nonaccrual status
totaling $1.3 million at September 30, 2002, $1.8 million at December 31,
2001 and $2.1 million at September 30, 2001. Interest income not
recognized on such nonaccrual loans amounted to approximately $325 thousand
and $472 thousand as of September 30, 2002 and 2001, respectively and $450
thousand as of December 31, 2001.
Union had $0.9 million and $3.0 million in loans past due 90 days or more
and still accruing at September 30, 2002 and December 31, 2001,
respectively. At September 30, 2002, Union had internally classified
certain loans totaling $2.0 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 any
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 September 30, 2002, Union had acquired by foreclosure or through
repossession real estate worth $1.1, consisting of 4 commercial properties,
1 piece of undeveloped land and 1 residential home.
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; however, actual loan losses may vary from current estimates.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the composition of the
portfolio, growth of the portfolio, credit concentrations, trends in
historical loss experience, delinquency and past due trends, 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. The provision for loan losses represents the current period
credit cost associated with maintaining an appropriate allowance for loan
losses. 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. Based on an evaluation of the loan portfolio, management
presents a quarterly analysis of the allowance for loan losses to the Board
of Directors, indicating any changes in the allowance since the last review
and any recommendations as to adjustments in the allowance.
For the quarter ended September 30, 2002, the methodology used to determine
the provision for loan losses was unchanged from the prior year. The
composition of the Company's loan portfolio remained relatively unchanged
from December 31, 2001 and there was no material change in the lending
programs or terms during the quarter.
The following table reflects activity in the allowance for loan losses for
the quarter and nine months ended September 30, 2002 and 2001:
19
3 Months Ended, September 30, 9 Months Ended, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Balance at the beginning of period $2,920 $2,770 $2,801 $2,863
Charge-offs:
Real Estate 32 8 38 39
Commercial 28 20 91 191
Consumer and other 41 51 108 119
---------------------------------------------------
Total charge-offs 101 79 237 349
---------------------------------------------------
Recoveries:
Real Estate 0 0 7 1
Commercial 2 1 13 18
Consumer and other 20 16 62 62
---------------------------------------------------
Total recoveries 22 17 82 81
---------------------------------------------------
Net charge-offs (79) (62) (155) (268)
Provision for loan losses 95 86 290 199
---------------------------------------------------
Balance at end of period $2,936 $2,794 $2,936 $2,794
===================================================
The following table shows the breakdown of Union's allowance for loan loss
by category of loan and the percentage of loans in each category to total
loans in the respective portfolios at the dates indicated:
September 30, December 31,
2002 2001
------------------ ------------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 623 40.3% $ 610 41.3%
Commercial 1,391 34.0% 1,342 34.1%
Construction 145 5.5% 116 4.6%
Other Loans
Commercial 426 9.3% 421 9.1%
Consumer installment 214 4.3% 253 4.9%
Home equity loans 29 1.5% 29 1.6%
Municipal, Other and
Unallocated 108 5.1% 30 4.4%
---------------------------------------
Total $2,936 100.0% $2,801 100.0%
=======================================
Ratio of Net Charge Offs to
Average Loans (1) 0.8% 0.15%
----- -----
Ratio of Allowance for Loan
Losses to Average Loans 1.17% 1.21%
----- -----
- --------------------
Annualized
Management of the Company believes that the allowance for loan losses at
September 30, 2002 is adequate to cover losses inherent in the Company's
loan portfolio as of such date. However, there can be no assurance that the
Company will not sustain losses in future periods, which could be greater
than the size of the allowance at September 30, 2002.
While the Company recognizes that the current economic slowdown may adversely
impact its borrowers' financial performance and ultimately their ability to
repay their loans, management continues to be cautiously optimistic about
the key credit indicators from the Company's loan portfolio.
20
Investment Activities At September 30, 2002, the reported value of
investment securities available-for-sale was $48.2 million or 13.8% of its
assets. Union had no securities classified as held-to-maturity or trading
securities. The reported value of securities available-for-sale at
September 30, 2002, reflects a positive valuation adjustment of $1.1
million. The offset of this adjustment, net of income tax effect, was a
$708 thousand increase in Union's other comprehensive income component of
shareholders' equity and a decrease in net deferred tax assets of $365
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 for the period ending September 30, 2002
and December 31, 2001:
Nine Months Ended, September 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 $ 37,325 13.22% $ 35,251 13.07%
Now accounts 37,333 13.22% 1.13% 36,320 13.47% 1.63%
Money Markets 66,103 23.41% 1.94% 56,875 21.09% 3.50%
Savings 38,643 13.69% 1.32% 35,642 13.21% 2.13%
------------------- --------------------
Total non-certificate deposits: 179,404 63.54% 164,088 60.84%
------------------- --------------------
Certificates of deposit:
Less than $100,000 73,181 25.92% 3.54% 76,641 28.42% 5.03%
$100,000 and over 29,758 10.54% 4.15% 28,954 10.74% 5.53%
------------------- --------------------
Total certificates of deposit 102,939 36.46% 105,595 39.16%
------------------- --------------------
Total deposits $282,343 100.00% 2.46% $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 September 30,
2002 and December 31, 2001 that mature during the periods indicated:
September 30, 2002 December 31, 2001
------------------ -----------------
(dollars in thousands)
Within 3 months $ 4,514 $ 6,288
3 to 6 months 10,906 13,681
6 to 12 months 12,531 3,189
Over 12 months 4,235 6,711
------------------------------
$32,186 $29,869
==============================
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were
$11.4 million at September 30, 2002 at a weighted average rate of 4.00%.
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
year end 2001 and the end of the third quarter of 2002 is a net increase of
$1.1 million in short-term borrowings to fund loan demand.
21
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 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 Asset/Liability Management (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 $11.21 million
for the first nine months of 2002 compared to actual results of $11.75
million in a flat rate environment, or an 8.9% difference. The prime rate
had remained constant throughout 2002 at 4.75% until November 7, 2002 when
it dropped to 4.25%. Our results were stronger than anticipated because of
stronger loan demand than forecasted even though we had anticipated rate
increases during 2002 which would have benefited us positively as well.
Net income was projected to be $3.7 million in a flat rate environment
compared to actual results of $3.6 million. The $17 thousand decrease in
Net Income from projections is mainly due to expenses and writedowns
incurred during the first nine months of the year on Other Real Estate
Owned offset by the increase in Net Interest Income and the Gain on Sale of
Loans. Return on Assets was projected to be 1.41% in a flat rate environment
and actual results were 1.45%. Return on Equity was projected to be 13.29%
in a flat rate environment compared to actual of 13.18%.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of September 30, 2002, the
contract or notional amount of financial instruments whose contract or
notional amount represents credit risk were as follows rounded to the
nearest thousand:
Commitments to extend credit $30,506
-------
Standby letters of credit and commercial letters of credit $ 1,216
-------
Credit Card arrangements $ 2,119
-------
Home Equity Lines of Credit $ 3,478
-------
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.
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
22
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 September
30, 2002:
September 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
overnight deposits $ 6,237 $ 0 $ 0 $ 0 $ 0 $ 6,237
Interest bearing deposits 297 1,375 1,365 691 0 3,728
Investments available for sale (1) 809 9,967 15,418 10,135 11,192 47,521
FHLB Stock 0 0 0 0 1,235 1,235
Loans (fixed and
adjustable rate) (2) 77,457 63,590 55,165 42,089 24,724 263,025
-----------------------------------------------------------------------
Total interest sensitive assets $84,800 $74,932 $71,948 $ 52,915 $ 37,151 $321,746
-----------------------------------------------------------------------
Interest sensitive liabilities:
Certificates of deposit $24,188 $58,186 $18,961 $ 2,676 $ 2 $104,013
Money markets 30,982 0 0 0 35,672 66,654
Regular savings 8,926 0 0 0 32,105 41,031
Now accounts 29,286 0 0 0 12,195 41,481
Borrowed funds (3) 1,370 3,121 3,362 3,534 0 11,387
-----------------------------------------------------------------------
Total interest sensitive liabilities $94,752 $61,307 $22,323 $ 6,210 $ 79,974 $264,566
-----------------------------------------------------------------------
Net interest rate sensitivity gap (9,952) 13,625 49,625 46,705 (42,823) 57,180
Cumulative net interest rate
sensitivity gap (9,952) 3,673 53,298 100,003 57,180
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (2.86%) 1.06% 15.31% 28.73% 16.43%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-earning assets (3.09%) 1.14% 16.57% 31.08% 17.77%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-bearing liabilities (3.76%) 1.39% 20.15% 37.80% 21.61%
- --------------------
Investments available for sale exclude marketable equity securities
with a fair value of $634 thousand that may be sold by Union at any time.
Balances shown net of unearned income.
Estimated repayment assumptions considered in Asset/Liability model.
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 each of 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
UNION BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
SEPTEMBER 30, 2002
(in thousands)
Return Return Capital
on on to
Year Prime Net Interest Change Net Assets Equity Asset
Ending Rate Income % Income % % Ratio
------ ----- ------------ ------ ------ ------ ------ -------
December-02 7.75 15,393 0.31 5,115 1.50 13.76 10.84
4.75 15,345 0.00 5,086 1.49 13.68 10.83
1.75 15,234 (0.73) 5,015 1.47 13.50 10.82
December-03 7.75 18,596 14.13 7,024 1.99 17.71 11.61
4.75 16,294 0.00 5,495 1.56 14.10 11.22
1.75 13,312 (18.31) 3,516 1.00 9.24 10.71
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 and loans available-for-sale, and earnings and funds provided
from operations. Maintaining a relatively stable funding base, which is
achieved by diversifying funding sources, competitively pricing deposit
products, and extending the contractual maturity of liabilities, reduces
the Company's exposure to roll over risk on deposits and limits reliance on
volatile short-term purchased funds. Short-term funding needs arise from
declines in deposits or other funding sources, funding of loan commitments
and request for new loans. The Company's strategy is to fund assets to the
maximum extent possible with core deposits that provide a sizable source of
relatively stable and low-cost funds.
In addition, as members of the FHLB, Union's subsidiaries have access to
preapproved lines of credit up to 17.5% of total assets and 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 subsidiaries' 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.
25
Union's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 79% of Union's certificates of deposit will mature within
twelve months, management believes, based upon past experience, that Union
will retain a substantial portion of these deposits. Management will
continue to offer a competitive but prudent pricing strategy to facilitate
retention of such deposits. 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. Management believes the Company has sufficient
liquidity to meet all reasonable borrower, depositor, and creditor needs in
the present economic environment.
Capital Resources. The total dollar value of Union's shareholders' equity
was $38.5 million at September 30, 2002, reflecting net income of $3.6
million for the first nine months of 2002, less dividends paid of $2.5
million, compared to $37.2 at year end 2001. Union has 5 million shares
of $2.00 par value common stock authorized. As of September 30, 2002, Union
had 3,268,189 shares issued, of which 3,027,557 were outstanding and 240,632
were held in Treasury. Also as of September 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 judgment 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, for a total cost of
$129.5 thousand.
Union Bank and Citizens (the Banks) are subject to various regulatory
capital requirements administered by the federal banking agencies.
Management believes, as of September 30, 2002 that the Banks meet all
capital adequacy requirements to which they are subject.
As of September 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 September 30, 2002:
Total capital to risk weighted assets
Union Bank $28,170 17.18% $13,118 8.0% $16,397 10.0%
Citizens 11,765 16.68% 5,643 8.0% 7,053 10.0%
Consolidated 40,761 17.33% 18,816 8.0% 23,520 10.0%
Tier I capital to risk weighted assets
Union Bank $26,346 16.07% $ 6,558 4.0% $ 9,837 6.0%
Citizens 10,881 15.43% 2,821 4.0% 4,231 6.0%
Consolidated 37,815 16.08% 9,407 4.0% 14,110 6.0%
26
Tier I capital to average assets
Union Bank $26,346 11.25% $ 9,367 4.0% $11,709 5.0%
Citizens 10,881 10.18% 4,275 4.0% 5,344 5.0%
Consolidated 37,815 11.07% 13,664 4.0% 17,080 5.0%
Critical Accounting Policies. The Company has established various
accounting policies which govern the application of accounting principles
generally accepted in the United States of America in the preparation of
the Company's financial statements. Certain accounting policies involve
significant judgments and assumptions by management which have a material
impact on the carrying value of assets and liabilities; management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions made
by management, actual results could differ from these judgments and
estimates that could have a material impact on the carrying values of
assets and liabilities and the results of operations of the Company. The
Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
the preparation of its consolidated financial statements. In estimating
the allowance for loan losses, management utilizes historical experience as
well as other factors including the effect of changes in the local real
estate market on collateral values, the effect on the loan portfolio of
current economic indicators and their probable impact on borrowers and
changes in delinquent, nonperforming or impaired loans. Changes in these
factors may cause management's estimate of the allowance to increase or
decrease and result in adjustments to the Company's provision for loan
losses.
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.
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 27 in this Form 10-Q.
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of a date
within 90 days of the filing of this report and concluded that those
disclosure controls and procedures are effective in alerting them in a timely
manner to material information about the Company and its consolidated
subsidiaries required to be disclosed in the Company's periodic reports filed
with the Securities and Exchange Commission.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation. While the Company believes that its existing
disclosure controls and procedures have been effective to accomplish these
27
objectives, the Company intends to continue to examine, refine and formalize
its disclosure controls and procedures and to monitor ongoing developments in
this area.
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 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
(b) Current Reports on Form 8-K
1. Report to Shareholders on Third Quarter Results filed on October
18, 2002
2. Press Releases announcing dividend declaration and third quarter
earnings filed on October 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.
November 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)
28
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Kenneth D. Gibbons, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
- -------------------------
[Signature]
President and Chief Executive Officer
29
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Marsha Mongeon, Treasurer and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
- -------------------------
[Signature]
Treasurer and Chief Financial Officer
30
EXHIBIT INDEX
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
31