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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: March 31, 2003
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 May 9, 2003:
Common Stock, $2 par value 3,030,757 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 25
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 26
Item 2. Change in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28
2
Item 1. Financial Statements
Union Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
(Dollars in Thousands) 2003 2002
--------- ------------
(unaudited)
Assets
Cash and due from banks $ 15,956 $ 16,035
Federal funds sold and overnight deposits 6,498 9,713
-------- --------
Cash and Cash Equivalents 22,454 25,748
Interest bearing deposits in banks 4,734 5,327
Securities available-for-sale 39,431 45,824
Federal Home Loan Bank stock 1,241 1,235
Loans held for sale 18,701 17,139
Loans 239,596 238,974
Allowance for loan losses (2,955) (2,908)
Unearned net loan fees (201) (206)
-------- --------
Net loans 236,440 235,860
-------- --------
Accrued interest receivable 1,803 1,890
Premises and equipment, net 4,577 4,612
Other real estate owned 744 784
Other assets 5,060 5,073
-------- --------
Total assets $335,185 $343,492
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest bearing $ 38,080 $ 40,976
Interest bearing 245,692 252,028
-------- --------
Total Deposits 283,772 293,004
Borrowed funds 7,193 7,536
Accrued interest and other liabilities 4,630 3,783
-------- --------
Total liabilities 295,595 304,323
-------- --------
Stockholders' Equity:
Common stock, $2 par value; 5,000,000 shares authorized;
3,271,189 shares issued at 3/31/03 and 3,270,689 shares
issued at 12/31/02 6,542 6,542
Paid-in capital 326 318
Retained earnings 33,677 33,357
Treasury stock at cost; 240,632 shares at 3/31/03 and
12/31/02 (1,722) (1,722)
Accumulated other comprehensive income 767 674
-------- --------
Total stockholders' equity 39,590 39,169
-------- --------
Total liabilities and stockholders' equity $335,185 $343,492
======== ========
See accompanying notes to the unaudited consolidated financial statements
3
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
------------------
(Dollars in Thousands, except Per Share Data) 2003 2002
---- ----
(unaudited)
Interest income:
Interest and fees on loans $ 4,529 $ 4,780
Interest and dividends on securities available-for-sale 543 672
Interest on federal funds sold and overnight deposits 22 30
Interest on interest bearing deposits in banks 47 54
--------- ---------
5,141 5,536
--------- ---------
Interest expense:
Interest on deposits 1,114 1,623
Interest on federal funds purchased - 1
Interest on borrowed funds 85 131
--------- ---------
1,199 1,755
--------- ---------
Net interest income 3,942 3,781
Provision for loan losses 42 90
--------- ---------
Net interest income after provision for loan losses 3,900 3,691
--------- ---------
Other income:
Trust income 39 67
Service fees 660 603
Loss on sale of securities available-for-sale - (3)
Gain on sale of loans held for sale 182 27
Other income 23 33
--------- ---------
904 727
--------- ---------
Other expenses:
Salaries and wages 1,412 1,260
Pension and employee benefits 422 388
Occupancy expense, net 188 160
Equipment expense 232 200
Net operation of other real estate owned 70 85
Other expense 756 695
--------- ---------
3,080 2,788
--------- ---------
Income before income tax expense 1,724 1,630
Income tax expense 495 461
--------- ---------
Net income $ 1,229 $ 1,169
========= =========
Earnings per common share $ 0.41 $ 0.39
========= =========
Weighted average number of common
shares outstanding 3,030,329 3,027,557
========= =========
Dividends declared per share $ 0.30 $ 0.28
========= =========
See accompanying notes to the unaudited consolidated financial statements
4
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Paid-in Other
Common Capital Retained Treasury Comprehensive
Stock & Surplus Earnings Stock Income Total
------ --------- -------- -------- ------------- -----
(dollars in thousands)
Balance, December 31, 2002 $6,542 $318 $33,357 ($1,722) $674 $39,169
Comprehensive Income:
Net income - - 1,229 - - 1,229
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment and
tax effects. - - - - 93 93
-------
Total Comprehensive income - - - - - 1,322
Exercise of stock options - 8 - - - 8
Cash dividends declared
($0.30 per share) - - (909) - - (909)
----------------------------------------------------------------------------
Balance March 31, 2003 $6,542 $326 $33,677 ($1,722) $767 $39,590
============================================================================
See accompanying notes to the unaudited consolidated financial statements
5
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
March 31, March 31,
2003 2002
--------- ---------
(Dollars in Thousands)
Cash Flows From Operating Activities
Net Income $ 1,229 $ 1,169
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 167 147
Provision for loan losses 42 90
Provision for deferred income taxes 4 70
Net amortization on securities available-for-sale 74 46
Equity in losses of limited partnerships 31 30
Write-downs of other real estate owned 33 41
Decrease in unamortized loan fees (5) (1)
Proceeds from sales of loans held for sale 6,922 4,444
Net loans made to customers and held for sale (8,302) (7,418)
Loss on sale of securities available-for-sale - 3
Gain on sale of loans held for sale (182) (27)
Loss on sale of other real estate owned 2 -
Loss (gain)on disposal of fixed assets (6) 1
Decrease in accrued interest receivable 87 31
(Increase) decrease in other assets (58) 16
Increase in income taxes 461 445
Decrease in accrued interest payable (35) (100)
Increase in other liabilities 421 1
-------- --------
Net cash provided (used in) by operating activities 885 (1,012)
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 1,190 972
Purchases (597) (595)
Securities available-for-sale
Sales - 510
Maturities, calls and paydowns 9,592 6,211
Purchases (3,133) (4,869)
Purchase of Federal Home Loan Bank Stock (6) (124)
(Increase) decrease in loans, net (690) 1,199
Recoveries of loans charged off 33 38
Purchases of premises and equipment (136) (516)
6
March 31, March 31,
2003 2002
--------- ---------
(Dollars in Thousands)
Investment in limited partnerships - (45)
Proceeds from sales of other real estate owned 20 -
Proceeds from sales of premises and equipment 10 1
Proceeds from sales of repossessed property 14 5
-------- --------
Net cash provided by investing activities 6,297 2,787
Cash Flows From Financing Activities
(Decrease) increase in borrowings outstanding, net (343) 1,775
Proceeds from exercise of stock options 8 -
Net decrease in noninterest bearing deposits (2,896) (2,523)
Net decrease in interest bearing deposits (6,336) (2,278)
Dividends paid (909) (848)
-------- --------
Net cash used in financing activities (10,476) (3,874)
Decrease in cash and cash equivalents $ (3,294) $ (2,099)
Cash and cash equivalents
Beginning $ 25,748 $ 21,556
Ending $ 22,454 $ 19,457
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,235 $ 1,855
======== ========
Income taxes paid $ 30 $ -
======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 15 $ 163
======== ========
Repossessed property acquired in settlement of loans $ 25 $ 14
======== ========
Total change in unrealized gain on securities
available-for-sale $ 140 $ (335)
======== ========
See accompanying notes to the unaudited consolidated financial statements
7
UNION BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Note 1. Basis of Presentation
The accompanying interim unaudited consolidated financial statements of
Union Bankshares, Inc. (the Company) for the interim periods ended March 31,
2003 and 2002 and for the quarters then ended have been prepared in
accordance with U.S. generally accepted accounting principles, general
practices within the banking industry and the accounting policies described
in the Company's Annual Report to Shareholders and Annual Report on Form
10-K for the year ended December 31, 2002. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) and
disclosures 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 2002 Annual Report to Shareholders, 2002
Annual Report on Form 10-K, and current reports on Form 8-K. The results of
operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full fiscal year ended December
31, 2003 or any other interim period.
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 April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (Statement) No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities. The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement is mainly effective for
contracts entered into or modified after June 30, 2003. Management is
currently evaluating the impact of this Statement on the company's financial
statements but does not anticipate it will have a material impact.
Note 5. Stock Option Plan
The Company has a stock option plan and continues to apply the intrinsic
value based method of accounting in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all stock options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The Company has adopted the disclosure provision of FASB Statement No. 148,
Accounting for Stock Based Compensation-Transition and Disclosure. Had
compensation costs been determined on the basis of fair value pursuant to
FASB Statement No. 123, Accounting for Stock-Based Compensation, the effects
on net income and earnings per common share for the three months ended March
31 would have approximated:
(Dollars in thousands, except for per share data) 2003 2002
---- ----
Net income:
As reported $1,229 $1,169
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1) (1)
------ ------
Pro forma net income $1,228 $1,168
====== ======
Earnings per common share:
As reported $ 0.41 $ 0.39
Pro forma $ 0.41 $ 0.39
8
Note 6. 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. 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 March 31, 2003 and 2002 follows:
Union Intersegment Consolidated
2003 Bank Citizens Elimination Other Totals
- --------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest income $ 3,539 $ 1,602 $ 0 $ 0 $ 5,141
Interest expense 733 466 0 0 1,199
Provision for loan loss 21 21 0 0 42
Service fee income 540 120 0 0 660
Income tax expense (benefit) 430 89 0 (24) 495
Net income (loss) 1,085 188 0 (44) 1,229
Assets 231,677 103,130 (80) 458 335,185
Union Intersegment Consolidated
2002 Bank Citizens Elimination Other Totals
- --------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest income $ 3,797 $ 1,739 $ 0 $ 0 $ 5,536
Interest expense 1,142 613 0 0 1,755
Provision for loan loss 45 45 0 0 90
Service fee income 482 121 0 0 603
Income tax expense (benefit) 342 136 0 (17) 461
Net income (loss) 926 277 0 (34) 1,169
Assets 231,848 103,622 (45) 423 334,848
Amounts in the "Other" column encompass activity in Union Bankshares, Inc.,
the "parent company." Parent company assets are stated after intercompany
eliminations.
Note 7. Comprehensive Income
The components of other comprehensive income and related tax effects at
March 31, are as follows:
2003
----
(dollars in thousands)
Unrealized holding gains on available-for-sale securities $140
Reclassification adjustment for losses (gains) realized in
income -
----
Net unrealized gains 140
Tax effect 47
----
Net of tax amount $ 93
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
March 31, 2003 and as of December 31, 2002, and its results of operations
for the three months ended March 31, 2003 and 2002. 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 and disclosures, 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 March 31, 2003, 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, it closed on March 31, 2003 at
$27.00 and on May 9, 2003 at $29.20.
On February 18, 2003 we publicly announced the planned merger of our two
subsidiary banks, Union Bank and Citizens Savings Bank and Trust Company
(Citizens) under the name and banking charter of Union Bank. Union
Bankshares had acquired Citizens in December of 1999 and since the
acquisition, each subsidiary bank has operated semi-autonomously under the
bank holding company. The purpose of merging the two banks is to provide a
higher quality of service to the communities served by each bank by
improving coordination of products and services as well as enhancing
efficiencies. The merger will be treated as a tax-free reorganization.
The regulatory approvals for this merger have been received and an
anticipated merger date, as of the close of business on May 16, 2003, has
been set. On February 18th, we also announced the resignation of Jerry
Rowe, President and CEO of Citizens and Vice President and Director of
Union Bankshares, Inc. which was effective February 15, 2003.
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.
Forward-looking statements reflect management's current expectations and
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," "intends," "plans,"
"seeks," "estimates" 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
10
* 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
* changes in technology including demands for greater automation
* acts of terrorism or war
* 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
* the amount that we invest in new business opportunities and the
timing of these investments
When evaluating forward-looking statements to make decisions with respect
to the Company, investors and others are cautioned to consider these and
other risks and uncertainties and are reminded not to place undue reliance
on such statements. Forward-looking statements speak only as of the date
they are made and the company undertakes no obligation to update them to
reflect new or changed information or events, except as may be required by
federal securities laws.
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 reported amount of
assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial statements
and related notes. The Securities and Exchange Commission ("SEC") has
defined a company's critical accounting policies as the ones that are most
important to the portrayal of the Company's financial condition and results
of operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, we have
identified the critical accounting policies and judgments. 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. We also have other key accounting policies, which involve the use
of estimates, judgments and assumptions that are significant to
understanding our results. For additional information see FINANCIAL
CONDITION - Allowance for Loan Losses below. Although we believe that our
estimates, assumptions and judgments are reasonable, they are based upon
information presently available. Actual results may differ significantly
from these estimates under different assumptions, judgment or conditions.
RESULTS OF OPERATIONS
The Company's net income for the quarter ended March 31, 2003 was $1.23
million, compared with net income of $1.17 million for the first quarter of
2002. Net income per share was $.41 for the first quarter of 2003 compared
to $.39 for the same quarter of 2002.
11
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 table shows, 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 March 31,
2003 2002
--------------------------------- ---------------------------------
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 $ 8,652 $ 22 1.04% $ 7,805 $ 30 1.54%
Interest bearing deposits in banks 5,054 47 3.74% 4,468 54 4.83%
Securities available-for-sale (1), (2) 44,684 543 5.10% 47,552 672 5.89%
Loans, net (1), (3) 253,329 4,529 7.32% 248,402 4,780 7.77%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 311,719 5,141 6.77% 308,227 5,536 7.28%
Cash and due from banks 14,322 12,566
Premises and equipment 4,638 4,375
Other assets 7,834 8,169
-------- --------
Total assets $338,513 $333,337
======== ========
Average Liabilities and
Stockholders' Equity:
Now accounts $ 40,497 $ 62 0.63% $ 35,324 $ 105 1.19%
Savings and money market accounts 107,507 292 1.10% 104,423 483 1.85%
Time deposits 101,333 760 3.04% 103,234 1,035 4.01%
Borrowed funds 7,315 85 4.70% 12,299 132 4.29%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 256,652 1,199 1.89% 255,280 1,755 2.75%
Non-interest bearing deposits 39,458 37,365
Other liabilities 3,820 3,810
-------- --------
Total liabilities 299,930 296,455
Stockholders' equity 38,583 36,882
-------- --------
Total liabilities and
stockholders' equity $338,513 $333,337
======== ========
Net interest income $3,942 $3,781
====== ======
Net interest spread (1) 4.87% 4.53%
==== ====
Net interest margin (1) 5.21% 5.00%
==== ====
Average yield reported on a tax-equivalent basis.
The average balance of securities available-for-sale is calculated on
the amortized cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
12
Union's net interest income increased by $161 thousand, or 4.26%, to $3.94
million for the three months ended March 31, 2003, from $3.78 million for
the three months ended March 31, 2002. The net interest spread increased
by 34 basis points to 4.87% for the three months ended March 31, 2003, from
4.53% for the three months ended March 31, 2002 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 2003
period increased 21 basis points to 5.21% from the 2002 period at 5.00%. A
decrease in prime rate is not necessarily beneficial to Union in the near
term, see "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 March 31, 2003 Compared
to Three Months Ended March 31, 2002
Increase/(Decrease) Due to Change In
------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 3 $ (11) $ (8)
Interest bearing deposits in banks 7 (14) (7)
Securities available-for-sale (42) (87) (129)
Loans, net 62 (313) (251)
---- ----- -----
Total interest-earning assets 30 (425) (395)
Interest-bearing liabilities:
Now accounts 14 (57) (43)
Savings and money market accounts 11 (202) (191)
Time deposits (26) (249) (275)
Borrowed funds (54) 7 (47)
---- ----- -----
Total interest-bearing liabilities (55) (501) (556)
---- ----- -----
Net change in net interest income $ 85 $ 76 $ 161
==== ===== =====
Quarter Ended March 31, 2003 compared to Quarter Ended March 31, 2002.
Interest and Dividend Income. Union's interest and dividend income
decreased by $395 thousand, or 7.13%, to $5.1 million for the three months
ended March 31, 2003, from $5.5 million for the three months ended March
31, 2002. Average earning assets increased by $3.5 million, or 1.1%, to
$311.7 million for the three months ended March 31, 2003, from $308.2
million for the three months ended March 31, 2002. Average loans
approximated $253.3 million for the three months ended March 31, 2003 up
from $248.4 million for the three months ended March 31, 2002. The $2.9
million or 30.0% increase in construction loans and the $4.0 million or
3.3% increase in commercial loans was partially offset by the $1.5 million
or 12.7% decrease in personal loans and a $1.7 million, or 2.0% decrease in
residential real estate secured loans.
The average balance of securities available-for-sale (including mortgage-
backed securities) decreased by $2.9 million, or 6.0%, to $44.7 million for
the three months ended March 31, 2003, from $47.6 million for the three
months ended March 31, 2002. The decrease in the investment portfolio in
2003 reflects the continuing growth in our loan portfolio. The average
level of federal funds sold and
13
overnight deposits increased by $847 thousand or 10.9%, to $8.7 million for
the three months ended March 31, 2003, from $7.8 million for the three
months ended March 31, 2002. The average balance in interest bearing
deposits in banks increased by $586 thousand to $5.1 million from $4.5
million, or 13.1% increase. Interest income from non-loan instruments was
$612 thousand for 2003 and $756 thousand for 2002 reflecting the decrease
in yields and the overall decrease in volume.
Interest Expense. Union's interest expense decreased by $556 thousand, or
31.7%, to $1.2 million for the three months ended March 31, 2003 from $1.76
million for the three months ended March 31, 2002. Average interest-
bearing liabilities increased by $1.4 million, or .5%, to $256.7 million
for the three months ended March 31, 2003, from $255.3 million for the
three months ended March 31, 2002. Average time deposits were $101.3
million for the three months ended March 31, 2003 and $103.2 million for
the three months ended March 31, 2002, or a decrease of 1.8%. The average
balances for money market and savings accounts increased by $3.1 million,
or 3.0% to $107.5 million for the three months ended March 31, 2003, from
$104.4 million for the three months ended March 31, 2002. The 14.9%
increase in Now accounts brought the average balance up to $40.5 million
from $35.3 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 decreased from $12.3 million in
2002 to $7.3 million in 2003 as Union's subsidiaries continued to pay down
amortizing Federal Home Loan Bank advances.
Noninterest Income. Union's noninterest income increased $177 thousand, or
24.3%, to $904 thousand for the three months ended March 31, 2003 from $727
thousand for the three months ended March 31, 2002. Trust department
income decreased to $39 thousand for the three months of 2003 from $67
thousand in the same period of 2002 or a 42.95% 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. Gain on Sale of Loans
increased $155 thousand to $182 thousand for 2003 from $27 thousand for
2002. Service fees (sources of which include, among others, deposit and
loan servicing fees, ATM fees, and safe deposit fees) increased by $57
thousand, or 9.5%, to $660 thousand for the three months ended March 31,
2003, from $603 thousand for the three months ended March 31, 2002. The
main component of other income in 2003 is $15 thousand representing net
servicing rights.
Noninterest Expense. Union's noninterest expense increased $292 thousand,
or 10.5%, to $3.08 million for the three months ended March 31, 2003, from
$2.79 million for the three months ended March 31, 2002. Salaries
increased $152 thousand, or 12.1%, to $1.41 million for the three months
ended March 31, 2003, from $1.26 million for the three months ended March
31, 2002, reflecting normal salary activity, an accrual under a separation
agreement with the former president of Citizens, growth and the addition of
the Fairfax, Vermont branch in April of 2002. Pension and employee
benefits increased $34 thousand, or 8.8%, to $422 thousand for the three
months ended March 31, 2003, from $388 thousand for the three months ended
March 31, 2002 mainly due to a $27 thousand increase in pension plan costs.
Net occupancy expense increased $28 thousand, or 17.5%, to $188 thousand
for the three months ended March 31, 2003, from $160 thousand for the three
months ended March 31, 2002. Equipment expense increased $32 thousand or
16.0% to $232 thousand for the three months ended March 31, 2003, from $200
thousand for the same period in 2002. Net operation of other real estate
owned was $70 thousand for the three months ended March 31, 2003 compared
to $85 thousand for the same period in 2002. Other operating expenses were
$756 thousand for the first three months of 2003 compared to $695 thousand
for the same period in 2002. The increase of $61 thousand, or 8.8%, is
mainly due to the costs associated with assimilating Citizens Savings Bank
& Trust Company into Union Bank and increased professional and legal fees.
Income Tax Expense. Union's income tax expense increased by $34 thousand,
or 7.4%, to $495 thousand for the three months ended March 31, 2003, from
$461 thousand for the comparable period of 2002, mainly due to increased
income before taxes.
14
FINANCIAL CONDITION
At March 31, 2003, Union had total consolidated assets of $335.2 million,
including net loans and loans held for sale of $255.1 million, deposits of
$283.8 million and stockholders' equity of $39.6 million. Union's total
assets decreased by $8.3 million or 2.4% to $335.2 million at March 31, 2003
from $343.5 million at December 31, 2002. Total net loans and loans held for
sale increased by $2.1 million or .8% to $255.1 million or 76.1% of total
assets at March 31, 2003 as compared to $253.0 million or 73.7% of total
assets at December 31, 2002. Cash and cash equivalents, including federal
funds sold and overnight deposits, decreased $3.3 million or 12.8% to $22.4
million at March 31, 2003 from $25.7 million at December 31, 2002.
Securities available for sale decreased from $45.8 million at December 31,
2002 to $39.4 million at March 31, 2003, a $6.4 million or 14.0% decrease.
Securities maturing have not been replaced dollar for dollar in order to
fund loan demand, our decision to currently hold in portfolio a portion of
loans available for sale, and a decrease in our non-core deposits.
Deposits decreased $9.2 million or 3.1% to $283.8 million at March 31, 2003
from $293.0 million at December 31, 2002, which is a seasonal fluctuation (see
average balances in Yields Earned and Rates Paid on Page 12). Total
borrowings decreased $343 thousand to $7.2 million at March 31, 2003 from
$7.5 million at December 31, 2002 due to pay downs of amortizing Federal Home
Loan Bank advances.
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 March 31, 2003, Union's gross loan portfolio totaled $258.3 million, or
77.1%, of assets, of which $108.2 million, or 41.9% of gross loans,
consisted of residential mortgages and construction loans, and $88.1
million, or 34.1%, of total loans consisted of commercial real estate
loans. As of such date, Union's loan portfolio also included $20.0 million
of commercial loans, $12.7 million of municipal loans, and $10.5 million of
consumer loans representing, in order, 7.8%, 4.9% and 4.1% of total loans
outstanding on March 31, 2003.
The following table shows information on the composition of Union's loan
portfolio as of March 31, 2003 and December 31, 2002:
March 31, December 31,
Loan Type 2003 2002
- --------- --------- ------------
(dollars in thousands)
Real estate $108,232 $109,347
Commercial real estate 88,138 86,081
Commercial 20,039 19,919
Consumer 10,462 10,758
Municipal loans 12,725 12,869
Loans held for sale 18,701 17,139
-------- --------
Total loans 258,297 256,113
Deduct:
Allowance for loan losses 2,955 2,908
Net deferred loan fees, premiums & discounts 201 206
-------- --------
$255,141 $252,999
======== ========
15
The banks originate and sell 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 a $165.1 million residential mortgage portfolio, approximately
$56.9 million of which is serviced for unaffiliated third parties at March
31, 2003. 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 occasionally sells the
guaranteed portion of the loan to other financial concerns and will retain
servicing rights, which generates fee income. Union serviced $8.0 million
of commercial and commercial real estate loans for unaffiliated third
parties as of March 31, 2003. Union capitalizes servicing rights on these
fees and recognizes gains and losses on the sale of the principal portion
of these notes as they occur. The unamortized balance of servicing rights
on loans sold with servicing retained was not material at March 31, 2003.
Gross loans and loans held for sale have increased $2.2 million or .9%
since December 31, 2002. An increase of $2.1 million or 2.4% in commercial
real estate loans, an increase of $120 thousand or .6% in commercial loans,
and an increase in loans held for sale of $1.6 million or 9.1% was
partially offset by a decrease of $1.1 million or 1.0% in residential real
estate loans, a decrease of $144 thousand or 1.1% in municipal loans and a
$296 thousand or 2.8% 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 former 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 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 $1.8 million or 0.75% of gross
loans at March 31, 2003, $1.5 million or 0.63% at December 31, 2002 and $1.9
million or 0.81% at March 31, 2002. The aggregate interest income not
recognized on such nonaccrual loans amounted to approximately $380 thousand
and $432 thousand as of March 31, 2003 and 2002, respectively and $316
thousand as of December 31, 2002.
16
Union had $307 thousand and $778 thousand in loans past due 90 days or more
and still accruing at March 31, 2003 and December 31, 2002, respectively.
At March 31, 2003, Union had internally classified certain loans totaling
$1.8 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 March 31, 2003, Union had acquired by foreclosure or through
repossession real estate worth $744 thousand, consisting of three
commercial properties and one piece of undeveloped land. Two of the
commercial properties have subsequently been sold. The balance at December
31, 2002 was $784 thousand.
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 March 31, 2003, 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, 2002 and there was no material change in the lending
programs or terms during the quarter.
17
The following table reflects activity in the allowance for loan losses for
the three months ended March 31, 2003 and 2002:
3 Months Ended, March 31,
-------------------------
2003 2002
---- ----
(dollars in thousands)
Balance at the beginning of period $2,908 $2,801
Charge-offs:
Real Estate - -
Commercial 10 47
Consumer and other 18 48
------ ------
Total charge-offs 28 95
------ ------
Recoveries:
Real Estate - 6
Commercial 16 10
Consumer and other 17 22
------ ------
Total recoveries 33 38
------ ------
Net (charge-offs) recoveries 5 (57)
Provision for loan losses 42 90
------ ------
Balance at end of period $2,955 $2,834
====== ======
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:
March 31, December 31,
2003 2002
------------------ ------------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 572 38.7% $ 580 39.2%
Commercial 1,472 36.6% 1,428 35.6%
Construction 143 5.5% 144 5.6%
Other Loans
Commercial 395 8.0% 412 8.7%
Consumer installment 193 4.0% 208 4.3%
Home equity loans 26 1.3% 28 1.5%
Municipal, Other and
Unallocated 154 5.9% 108 5.1%
------ ----- ------ -----
Total $2,955 100.0% $2,908 100.0%
====== ===== ====== =====
Ratio of Net Charge Offs to
Average Loans not held for
sale (1) 0.00% 0.11%
----- -----
Ratio of Allowance for Loan
Losses to Loans not held
for sale 1.23% 1.22%
----- -----
Annualized
Management of the Company believes that the allowance for loan losses at
March 31, 2003 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 March 31, 2003. See CRITICAL ACCOUNTING
POLICIES.
18
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.
Investment Activities At March 31, 2003, the reported value of investment
securities available-for-sale was $39.4 million or 11.8% of its assets.
Union had no securities classified as held-to-maturity or trading
securities. The reported value of securities available-for-sale at March
31, 2003, reflects a positive valuation adjustment of $1.2 million. The
offset of this adjustment, net of income tax effect, was a $767 thousand
increase in Union's other comprehensive income component of stockholders'
equity and a decrease in net deferred tax assets of $395 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 March 31, 2003 and
December 31, 2002:
Three Months Ended, March 31, Year Ended December 31,
2003 2002
--------------------------------- ---------------------------------
(dollars in thousands)
Percent Percent
Average Of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
Non-time deposits:
Demand deposits $ 39,458 13.66% $ 37,932 13.28%
Now accounts 40,497 14.02% 0.63% 39,143 13.70% 1.07%
Money Markets 64,458 22.32% 1.24% 66,562 23.30% 1.85%
Savings 43,049 14.91% 0.89% 39,296 13.75% 1.27%
-------- ------ -------- ------
Total non-time deposits: 187,462 64.91% 182,933 64.03%
-------- ------ -------- ------
Time deposits:
Less than $100,000 72,204 25.00% 2.98% 75,021 26.26% 3.18%
$100,000 and over 29,129 10.09% 3.19% 27,736 9.71% 4.71%
-------- ------ -------- ------
Total time deposits 101,333 35.09% 102,757 35.97%
-------- ------ -------- ------
Total deposits $288,795 100.00% 1.56% $285,690 100.00% 2.05%
======== ====== ==== ======== ====== ====
The following table sets forth information regarding the amounts of Union's
time deposits in amounts of $100,000 or more at March 31, 2003 and December
31, 2002 that mature during the periods indicated:
March 31, 2003 December 31, 2002
-------------- -----------------
(dollars in thousands)
Within 3 months $13,799 $ 9,629
3 to 6 months 3,034 13,090
6 to 12 months 3,315 3,113
Over 12 months 4,656 4,217
------- -------
$24,804 $30,049
======= =======
19
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $7.2
million at March 31, 2003 at a weighted average rate of 4.66%. Borrowings
from the Federal Home Loan Bank of Boston were $7.5 million at December 31,
2002 at a weighted average rate of 4.62%. The change between year end 2002
and the end of the first quarter of 2003 is a net decrease of $300
thousand.
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 all 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 2002 for
a flat rate environment projected a Net Interest Income of $3.930 million
for the first three months of 2003 compared to actual results of $3.942
million in a flat rate environment, or an .3% difference. Net income was
projected to be $1.095 million in a flat rate environment compared to
actual results of $1.229 million. The $134 thousand increase in Net Income
from projections is mainly due to the Gain on Sale of Loans and net mortgage
servicing rights offset by merger expenses and the accrual under the
separation agreement. Return on Assets was projected to be 1.32% in a flat
rate environment and actual results were 1.47%. Return on Equity was
projected to be 11.87% in a flat rate environment compared to actual of
12.66%.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of March 31, 2003, 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 $28,020
-------
Standby letters of credit and commercial letters of credit $ 1,239
-------
Credit Card arrangements $ 2,200
=======
Home Equity Lines of Credit $ 3,879
-------
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.
20
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.
21
The following tables show Union's rate sensitivity analysis as of March 31,
2003:
March 31, 2003
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 $ 5,478 $ - $ - $ - $ - $ 5,478
Interest bearing deposits in banks 796 2,080 1,359 499 - 4,734
Securities available-for-sale (1) 3,362 7,145 12,424 6,484 9,489 38,904
FHLB Stock - - - - 1,241 1,241
Loans (2) 94,776 59,949 51,728 35,859 15,784 258,096
-------- ------- ------- ------- ------- --------
Total interest sensitive assets $104,412 $69,174 $65,511 $42,842 $26,514 $308,453
======== ======= ======= ======= ======= ========
Interest sensitive liabilities:
Time deposits $ 34,054 $38,013 $21,684 $ 3,062 $ 2 $ 96,815
Money markets 21,113 - - - 43,836 64,949
Regular savings 14,327 - - - 30,795 45,122
NOW accounts 19,361 - - - 19,445 38,806
Borrowed funds (3) 318 997 3,033 2,845 - 7,193
-------- ------- ------- ------- ------- --------
Total interest sensitive liabilities $ 89,173 $39,010 $24,717 $ 5,907 $94,078 $252,885
======== ======= ======= ======= ======= ========
Net interest rate sensitivity gap 15,239 30,164 40,794 36,935 (67,564) 55,568
Cumulative net interest rate
sensitivity gap 15,239 45,403 86,197 123,132 55,568
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 4.55% 13.55% 25.72% 36.74% 16.58%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive assets 4.94% 14.72% 27.94% 39.92% 18.02%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-sensitive liabilities 6.03% 17.95% 34.09% 48.69% 21.97%
Securities available-for-sale exclude marketable equity securities
with a fair value of $527 thousand that may be sold by Union at any
time.
Balances shown net of unearned income of $201 thousand.
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 to Asset Ratio. The
projection utilizes a rate shock of 300 basis points from the current prime
rate of 4.25%, 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.
22
UNION BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
MARCH 31, 2003
(in thousands)
Return Return
on on Capital
Year Prime Net Interest Change Net Assets Equity to Asset
Ending Rate Income % Income % % Ratio
------ ----- ------------ ------ ------ ------ ------ --------
December-03 7.25 17,528 11.84 6,513 1.92 16.48 12.02
4.25 15,672 0.00 5,272 1.56 13.50 11.70
1.25 13,661 (12.83) 3,927 1.16 10.17 11.35
December-04 7.25 20,628 27.73 8,629 2.44 19.89 12.78
4.25 16,150 0.00 5,616 1.60 13.80 11.74
1.25 11,182 (30.76) 2,278 .65 6.03 10.51
Liquidity. Managing liquidity risk is essential to maintaining both
depositor confidence and stability in earnings. 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 both subsidiary banks are members of the FHLB, Union's
subsidiaries have access to preapproved lines of credit up to 15.2% of
total assets. Union Bank maintains a $4 million pre-approved Federal Fund
line of credit with an upstream correspondent bank 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.
23
Union's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 74.1% of Union's time deposits 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. However, any projections of future cash need and
flows are subject to substantial uncertainty. We continually evaluate
opportunities to buy/sell securities and loans available for sale, obtain
credit facilities from lenders, or restructure our debt for strategic
reasons or to further strengthen our financial position.
Capital Resources. Our capital management is designed to maintain an
optimum level of capital in a cost-effective structure that: meets our
target regulatory ratios; supports our internal assessment of economic
capital; funds our business strategies; and builds long-term stockholder
value.
The total dollar value of Union's stockholders' equity was $39.6 million at
March 31, 2003 reflecting net income of $1.2 million for the first three
months of 2003, less dividends paid of $909 thousand, compared to $39.2
million of stockholders' equity at year end 2002. Union has 5 million shares
of $2.00 par value common stock authorized. As of March 31, 2003, Union had
3,271,189 shares issued, of which 3,030,557 were outstanding and 240,632 were
held in Treasury. Also as of March 31, 2003, there were outstanding employee
incentive stock options with respect to 10,400 shares of Union's common stock,
granted pursuant to Union's 1998 Incentive Stock Option Plan. Of the 50,000
shares authorized for issuance under the 1998 Plan, 38,800 shares remain
available for future option grants.
On October 17, 2001, the Company announced a stock repurchase program. 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. No repurchases have been
made since 2001.
Union Bank and Citizens (the Banks) are subject to various regulatory
capital requirements administered by the federal banking agencies.
Management believes, as of March 31, 2003 that the Banks meet all capital
adequacy requirements to which they are subject.
As of March 31, 2003, both Banks and the Company are considered well
capitalized under the regulatory framework. To be categorized as well
capitalized, the Banks and the Company 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 or the Company's category.
24
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 March 31, 2003:
Total capital to risk weighted assets
Union Bank $29,155 19.17% $12,167 8.0% $15,209 10.0%
Citizens 11,570 16.77% 5,519 8.0% 6,899 10.0%
Consolidated 41,531 18.75% 17,720 8.0% 22,150 10.0%
Tier I capital to risk weighted assets
Union Bank $27,333 17.97% $ 6,084 4.0% $ 9,126 6.0%
Citizens 10,704 15.52% 2,759 4.0% 4,138 6.0%
Consolidated 38,759 17.49% 8,864 4.0% 13,296 6.0%
Tier I capital to average assets
Union Bank $27,333 11.61% $ 9,417 4.0% $11,771 5.0%
Citizens 10,704 10.45% 4,097 4.0% 5,122 5.0%
Consolidated 38,759 11.45% 13,540 4.0% N/A N/A
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 and because of the uneven
nature of the expansion of the U.S. economy, the Federal Reserve has kept
overnight rates at 40 year lows. 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 20
through 25 in this Form 10-Q.
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer have
evaluated the effectiveness of the design and operation of 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.
25
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 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.
There are no known pending legal proceedings to which Union or either of its
subsidiaries is a party, or to which any of their properties is subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, based
upon the opinion of counsel, any such liability will not have a material
effect on the consolidated financial position of Union and its
subsidiaries.
Item 2. Changes in Securities and use of Proceeds
Between January 1, 2000 and March 31, 2003, Union granted to certain
executive officers of Union or it's subsidiary, Union Bank, incentive stock
options with respect to an aggregate of 6,200 shares of its common stock,
pursuant to its 1998 Incentive Stock Option Plan. The exercise price of
all such options represented the fair market value of the shares on the
date of grant. Participation in Union's 1998 Incentive Stock Option Plan
is limited to those (currently 6 active participants) selected by the
Board.
During that same period, incentive stock options granted pursuant to the
1998 plan and a predecessor incentive stock option plan were exercised by
certain executive officers with respect to an aggregate 7,700 shares, at a
cumulative exercise price of $103,100, including 500 shares at a cumulative
exercise price of $9,500, during the first quarter of 2003.
The shares issued to the participants upon exercise of such incentive stock
options have not been registered with the Securities and Exchange
Commission. The shares are restricted securities, issued under statutory
exemptions available under the Securities Act of 1933, including section
4(2) thereof, and not involving a public offering.
Item 6: Exhibit and Reports on Form 8-K.
(a) Exhibits
10.1 Separation Agreement and General Release between Jerry Rowe and
Citizens Savings Bank and Trust Co..
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
26
(b) Current Reports on Form 8-K
1. Union Bankshares, Inc. Company Overview date December 31, 2002
filed on May 9, 2003.
2. Report to Stockholders on First Quarter Results for 2003 filed on
April 30, 2003
3. Press Release announcing dividend declaration and first quarter
earnings for 2003 filed on April 17, 2003.
4. Press Release of February 18, 2003 announcing the planned merger
of our two subsidiary banks, Union Bank and Citizens Savings Bank
and Trust Company under the name and banking charter of Union Bank
as well as the resignation of Jerry Rowe, President and CEO of
Citizens and Vice President and Director of Union Bankshares.
Letter to stockholders announcing the same information.
5. Report to Stockholders on Fourth Quarter Results for 2002 filed
on January 28, 2003.
6. Press Release announcing dividend declaration and fourth
quarter earnings for 2002 filed on January 17, 2003.
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.
May 14, 2003 Union Bankshares, Inc.
s/ Kenneth D. Gibbons
---------------------
Kenneth D. Gibbons
Director, President and Chief
Executive Officer
s/ Marsha A. Mongeon
--------------------
Marsha A. Mongeon
Chief Financial Officer and Treasurer
(Principal Financial Officer)
27
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Kenneth D. Gibbons, President and Chief Executive Officer of Union
Bankshares, Inc., 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: May 14, 2003
/s/ Kenneth D. Gibbons
_______________________
Kenneth D. Gibbons
President and Chief Executive Officer
28
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Marsha A. Mongeon, Treasurer and Chief Financial Officer of Union
Bankshares, Inc., 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: May 14, 2003
/s/ Marsha A. Mongeon
_______________________
Marsha A. Mongeon
Treasurer and Chief Financial Officer
EXHIBIT INDEX
10.1 Separation Agreement and General Release between Jerry Rowe and
Citizens Savings Bank and Trust Co.
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
29