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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: June 30, 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 August 1, 2003:
Common Stock, $2 par value 4,545,988 shares
1
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements.
Union Bankshares, Inc. and Subsidiary
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. 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
Item 1. Financial Statements
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands) (Unaudited)
June 30, December 31,
2003 2002
-------- ------------
Assets
Cash and due from banks $ 21,413 $ 16,035
Federal funds sold and overnight deposits 4,788 9,713
-------- --------
Cash and Cash Equivalents 26,201 25,748
Interest bearing deposits in banks 4,534 5,327
Securities available-for-sale 37,678 45,824
Federal Home Loan Bank stock 1,241 1,235
Loans held for sale 25,132 17,139
Loans 233,380 238,974
Allowance for loan losses (2,993) (2,908)
Unearned net loan fees (199) (206)
-------- --------
Net loans 230,188 235,860
-------- --------
Accrued interest receivable 1,627 1,890
Premises and equipment, net 4,554 4,612
Other real estate owned 119 784
Other assets 4,680 5,073
-------- --------
Total assets $335,954 $343,492
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest bearing $ 40,559 $ 40,976
Interest bearing 243,708 252,028
-------- --------
Total deposits 284,267 293,004
Borrowed funds 8,039 7,536
Accrued interest and other liabilities 3,461 3,783
-------- --------
Total liabilities 295,767 304,323
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $2 par value; 5,000,000 shares authorized;
4,906,936 shares issued at 6/30/03 (see Note 2) and
3,270,689 shares issued at 12/31/02 9,814 6,542
Paid-in capital 0 318
Retained earnings 31,011 33,357
Treasury stock at cost; 360,948 shares at 6/30/03 and
240,632 at 12/31/02 (1,722) (1,722)
Accumulated other comprehensive income 1,084 674
-------- --------
Total stockholders' equity 40,187 39,169
-------- --------
Total liabilities and stockholders' equity $335,954 $343,492
======== ========
See accompanying notes to the unaudited consolidated financial statements
3
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 4,573 $ 4,780 $ 9,102 $ 9,560
Interest on securities available for sale
Taxable 390 594 851 1,181
Tax Exempt 60 64 122 128
Dividends 15 19 34 40
Interest on federal funds sold and overnight deposits 25 24 48 54
Interest on interest bearing deposits in banks 46 48 93 102
--------- --------- --------- ---------
5,109 5,529 10,250 11,065
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,024 1,465 2,139 3,088
Interest on federal funds purchased 0 2 0 3
Interest on borrowed funds 87 126 172 257
--------- --------- --------- ---------
1,111 1,593 2,311 3,348
--------- --------- --------- ---------
Net interest income 3,998 3,936 7,939 7,717
Provision for loan losses 42 105 84 195
--------- --------- --------- ---------
Net interest income after provision for loan losses 3,956 3,831 7,855 7,522
--------- --------- --------- ---------
Other income:
Trust income 42 49 80 116
Service fees 665 610 1,322 1,194
Loss on sale of securities 0 0 0 (3)
Gain on sale of loans held for sale 45 9 227 36
Other income 38 93 77 165
--------- --------- --------- ---------
790 761 1,706 1,508
--------- --------- --------- ---------
Other expenses:
Salaries and wages 1,350 1,276 2,763 2,536
Pension and employee benefits 465 393 928 781
Occupancy expense, net 169 166 357 327
Equipment expense 217 218 447 416
Net operation of other real estate owned 10 249 79 333
Other expense 882 814 1,609 1,531
--------- --------- --------- ---------
3,093 3,116 6,183 5,924
--------- --------- --------- ---------
Income before income tax expense 1,653 1,476 3,378 3,106
Income tax expense 464 393 960 854
--------- --------- --------- ---------
Net income $ 1,189 $ 1,083 $ 2,418 $ 2,252
========= ========= ========= =========
Earnings per common share $ 0.26 $ 0.24 $ 0.53 $ 0.50
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,545,986 4,542,788 4,562,518 4,542,788
========= ========= ========= =========
Dividends declared per share $ 0.20 $ 0.19 $ 0.40 $ 0.37
========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements
4
Union Bankshares, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholder's Equity
(Unaudited)
(Dollars in Thousands)
Accumulated
Common Stock Paid-in Other
------------------- Capital Retained Treasury Comprehensive
Shares Amount & Surplus Earnings Stock Income Total
------ ------ --------- -------- -------- ------------- -----
Balance, December 31, 2002 3,030,057 $6,542 $ 318 $33,357 $(1,722) $ 674 $39,169
Stock Split effected in the form of
a stock dividend (3 for 2,
effective 8/8/03) 1,515,231 3,271 (330) (2,945) - - (4)
Comprehensive Income:
Net income - - - 2,418 - - 2,418
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment and
tax effects. - - - - - 410 410
Total Comprehensive income - - - - - - 2,828
Exercise of stock option 700 1 12 - - - 13
Cash dividends declared
($0.40 per share) - - - (1,819) - - (1,819)
-------------------------------------------------------------------------------------
Balance June 30, 2003 4,545,988 $9,814 $ 0 $31,011 $(1,722) $1,084 $40,187
=====================================================================================
See accompanying notes to the unaudited consolidated financial statements
5
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(UNAUDITED)
(Dollars in Thousands)
Six Months Ended
June 30, June 30,
2003 2002
-------- --------
Cash Flows From Operating Activities
Net Income $ 2,418 $ 2,252
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 328 304
Provision for loan losses 84 195
(Credit) provision for deferred income taxes (13) 150
Net amortization on securities available-for-sale 138 91
Equity in losses of limited partnerships 62 62
Write-downs of other real estate owned 53 250
Decrease in unamortized loan fees (7) (4)
Proceeds from sales of loans held for sale 9,098 4,426
Net loans made to customers and held for sale (16,864) (6,899)
Loss on sale of securities available-for-sale 0 3
Gain on sale of loans held for sale (227) (36)
(Gain) loss on sale of other real estate owned 2 (15)
Gain on disposal of fixed assets (6) (1)
Decrease in accrued interest receivable 263 72
(Increase) decrease in other assets 117 (433)
(Decrease) increase in income taxes (211) 18
Decrease in accrued interest payable (258) (463)
Increase in other liabilities 256 148
------- -------
Net cash provided by (used in) operating activities (4,767) 120
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 1,985 1,568
Purchases (1,192) (595)
Securities available-for-sale
Sales 351 506
Maturities, calls and paydowns 14,793 8,546
Purchases (6,515) (6,422)
Purchase of Federal Home Loan Bank Stock (6) (171)
Decrease (increase) in loans, net 5,397 (871)
Recoveries of loans charged off 64 60
Purchases of premises and equipment (275) (953)
6
Six Months Ended
June 30, June 30,
2003 2002
-------- --------
Investments in limited partnerships (109) (254)
Proceeds from sales of other real estate owned 719 0
Proceeds from sales of premises and equipment 11 2
Proceeds from sales of repossessed property 41 6
------- -------
Net cash provided by investing activities 15,264 1,422
Cash Flows From Financing Activities
Increase in borrowings, net outstanding 503 2,412
Proceeds from exercise of stock options 13 0
Net decrease in noninterest bearing deposits (417) (3,058)
Net decrease in interest bearing deposits (8,320) (3,595)
Proceeds paid out for fractional shares (4) 0
Dividends paid (1,819) (1,695)
------- -------
Net cash used in financing activities (10,044) (5,936)
Increase (decrease) in cash and cash equivalents $ 453 $(4,394)
Cash and cash equivalents
Beginning $25,748 $21,556
Ending $26,201 $17,162
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,568 $ 3,811
======= =======
Income taxes paid $ 1,180 $ 1,013
======= =======
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 109 $ 1,209
======= =======
Repossessed property acquired in settlement of loans $ 25 $ 32
======= =======
Loans originated to finance the sale of other real
estate owned $(1,265) $(1,044)
======= =======
Total change in unrealized gain on securities
available-for-sale $ 621 $ 134
======= =======
See accompanying notes to the unaudited consolidated financial statements
7
UNION BANKSHARES, INC.
NOTES TO 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 June 30,
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
operation 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.
On May 16, 2003, the two subsidiaries (Union Bank and Citizens Savings Bank
and Trust Company) of Union Bankshares, Inc. were successfully merged
together with the surviving, state chartered bank being Union Bank
headquartered in Morrisville, Vermont.
Note 2. Stock Split
On July 16, 2003, the Board of Directors of Union Bankshares, Inc. declared
a three-for-two stock split effected in the form of a 50% stock dividend to
shareholders of record on July 26, 2003, payable on August 8, 2003. The June
30, 2003 Balance Sheet and Statement of Changes in Stockholder's Equity have
been given retroactive effect for the stock split. Per share amounts presented
in the consolidated financial statements, including the earnings per share,
weighted average number of common shares outstanding, and the dividends
declared per share for all periods presented have been adjusted to
retroactively reflect the stock split.
Note 3. 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 4. 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 the stock split effected in the form of a stock
dividend) and reduced for shares held in Treasury. The assumed conversion
of available stock options does not result in material dilution.
Note 5. 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. There is no
material impact from this Statement on the Company's financial statements.
In May 2003, FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
The Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. The Statement is mainly effective for financial
instruments entered into or modified after May 31, 2003.
8
There is no material impact from this Statement on the Company's financial
statements.
Note 6. Stock Option Plan
The Company has an incentive 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 and six months ended June 30 would have approximated:
Three months ended Six months ended
------------------ ------------------
(Dollars in thousands, except for per share data) 6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
Net Income as reported $1,189 $1,083 $2,418 $2,252
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1) (1) (2) (2)
------ ------ ------ ------
Pro forma net income $1,888 $1,082 $2,416 $2,250
====== ====== ====== ======
Earnings per common share:
As reported $ .26 $. .24 $ .53 $ .50
Pro forma $ .26 $ .24 $ .53 $ .50
Note 7. Reportable Segments
Prior to May 16, 2003 the Company had two reportable operating segments,
Union Bank (Union) and Citizens Savings Bank and Trust Company (Citizens).
Citizens was merged into Union effective that date.
Note 8. Comprehensive income
The components of other comprehensive income and related tax effects for the
six month period ended June 30, are as follows:
2003
----
(dollars in thousands)
Unrealized holding gains on available-for sale securities $621
Reclassification adjustment for losses (gains) realized
in income -
----
Net unrealized gains 621
Tax effect 211
----
Net of tax amount $410
====
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 (the Company's) financial position as of June 30, 2003
and as of December 31, 2002, and its results of operations for the three
months and six months ended June 30, 2003 and 2002. This discussion should
be read in conjunction with (1) the information in this document under
Financial Statements and related notes and with other financial data
appearing elsewhere in this report and (2) the Company's 2002 Annual Report
to Shareholders, 2002 Annual Report on Form 10-K, and current reports on Form
8-K. In the opinion of the Company's management, the interim unaudited data
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the Company's consolidated financial position
and results of operations to be expected for the interim period. Management
is not aware of the occurrence of any events after June 30, 2003 except the
stock split referred to in Note 2 to the Financial Statements contained in
this report, which would materially affect the information presented.
On May 16, 2003, the two subsidiaries (Union Bank and Citizens Savings Bank
and Trust Company) of Union Bankshares, Inc. were successfully merged
together with the surviving, state chartered bank being Union Bank
headquartered in Morrisville, Vermont.
On July 16, 2003, the Board of Directors of Union Bankshares, Inc. declared
a three-for-two stock split effected in the form of a 50% stock dividend to
shareholders of record on July 26, 2003, payable on August 8, 2003. In the
discussion below, June 30, 2003 information relating to shareholders' equity,
as well as all current period and 2002 comparative period information
relating to earnings per share, weighted average number of common shares
outstanding and dividends declared per share have been adjusted to give
retroactive effect of the stock split.
Union Bankshares' common stock was listed on the American Stock Exchange on
July 13, 2000 with an opening price of $15.125 and it closed on June 30,
2003 at $30.55 and on August 1, 2003 at $34.10. These prices are based on
share prices prior to the split.
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
10
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
* 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 then 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 accounting policies and judgments that are most significant
to the Company. The judgments and assumptions used by management are based
on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments
and assumptions made by management, actual results could differ from 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 Note 1 to the financial statements
of the Company contained in its Annual Report on Form 10-K for 2002 and
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 June 30, 2003 was $1.19
million, compared with net income of $1.08 million for the second quarter
of 2002. Net income per share was $.26 for the second quarter of 2003
compared to $.24 for the same quarter of 2002.
11
Net Interest Income. The largest component of the Company's operating
income is net interest income, which is the difference between interest and
dividend income received from interest-earning assets and the interest
expense paid on 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 June 30,
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 $ 9,669 $ 25 1.06% $ 5,901 $ 24 1.63%
Interest bearing deposits in banks 4,726 46 3.90% 3,932 48 4.94%
Investments (1), (2) 38,888 465 5.04% 48,820 677 5.79%
Loans, net (1), (3) 258,962 4,573 7.15% 249,381 4,780 7.76%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 312,245 5,109 6.65% 308,034 5,529 7.29%
Cash and due from banks 14,879 12,740
Premises and equipment 4,569 4,739
Other assets 6,175 7,851
-------- --------
Total assets $337,868 $333,364
======== ========
Average Liabilities and Stockholders' Equity:
Now accounts $ 42,141 $ 59 0.56% $ 37,608 $ 107 1.14%
Savings and money market accounts 107,159 274 1.03% 103,415 431 1.67%
Certificates of deposit 99,822 691 2.75% 101,418 927 3.67%
Borrowed funds 7,668 87 4.55% 13,476 128 3.81%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 256,790 1,111 1.74% 255,917 1,593 2.50%
Non-interest bearing deposits 39,853 36,047
Other liabilities 3,103 4,085
-------- --------
Total liabilities 299,746 296,049
Stockholders' equity 38,122 37,315
-------- --------
Total liabilities and
stockholders' equity $337,868 $333,364
======== ========
Net interest income $3,998 $3,936
====== ======
Net interest spread (1) 4.92% 4.79%
==== ====
Net interest margin (1) 5.22% 5.21%
==== ====
Average yield reported on a tax-equivalent basis.
The average balance of investments is calculated on the amortized
cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
12
Six months ended June 30,
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 $ 9,160 $ 48 1.05% $ 6,886 $ 54 1.58%
Interest bearing deposits in banks 4,890 93 3.82% 4,199 102 4.90%
Investments (1), (2) 41,875 1,007 5.06% 48,599 1,349 5.78%
Loans, net (1), (3) 256,146 9,102 7.23% 248,876 9,560 7.82%
-------- ------- ---- -------- ------- ----
Total interest-earning assets (1) 312,071 10,250 6.71% 308,560 11,065 7.32%
Cash and due from banks 14,600 12,672
Premises and equipment 4,604 4,557
Other assets 6,805 7,748
-------- --------
Total assets $338,080 $333,537
======== ========
Average Liabilities and Stockholders' Equity:
Now accounts $ 41,319 $ 122 0.59% $ 36,459 $ 211 1.17%
Savings and money market accounts 107,333 566 1.06% 103,930 914 1.77%
Certificates of deposit 100,577 1,451 2.91% 102,334 1,963 3.87%
Borrowed funds 7,491 172 4.63% 13,014 260 4.03%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 256,720 2,311 1.81% 255,737 3,348 2.64%
Non-interest bearing deposits 39,655 36,443
Other liabilities 3,333 4,002
-------- --------
Total liabilities 299,708 296,182
Stockholders' equity 38,372 37,355
-------- --------
Total liabilities and
stockholders' equity $338,080 $333,537
======== ========
Net interest income $ 7,939 $ 7,717
======= =======
Net interest spread (1) 4.89% 4.68%
==== ====
Net interest margin (1) 5.22% 5.13%
==== ====
Average yield reported on a tax-equivalent basis.
The average balance of investments is calculated on the amortized
cost basis.
Includes loans held for sale and is net of unearned income and
allowance for loan losses.
The Company's net interest income increased by $62 thousand, or 1.6%, to $4.00
million for the three months ended June 30, 2003, from $3.94 million for
the three months ended June 30, 2002. The net interest spread increased by
13 basis points to 4.92% for the three months ended June 30, 2003, from
4.79% for the three months ended June 30, 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 1 basis point to 5.22% from the 2002 period at 5.21%. A
decrease in the prime rate is not necessarily beneficial to the Company in
the near term, see Management's Discussion and Analysis "Other Financial
Considerations - Market Risk and Asset and Liability Management."
The Company's net interest income year to date was $7.94 million compared to
the prior year of $7.72 million or an increase of 2.9% between the two years.
This increase was due to the increase in average interest earning assets to
$312.1 million for 2003 from $308.6 million for 2002 partially offset by
the decrease in yield from 7.32% to 6.71%. And, while average interest
bearing liabilities grew $1.0 million, the rate paid dropped from 2.64% to
1.81% between years. The net interest spread increased by 21 basis points
to 4.89% for the six months ended June 30, 2003 from 4.68% for the six
months ended
13
June 30, 2002. The net interest margin for the 2003 period increased to 5.22%
from 5.13% for the 2002 period or an increase of 9 basis points.
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume); and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended June 30, 2003 Compared
to Three Months Ended June 30, 2002
Increase/(Decrease) Due to Change In
-----------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 15 $ (14) $ 1
Interest bearing deposits in banks 10 (12) (2)
Investments (140) (72) (212)
Loans, net 186 (393) (207)
----- ----- -----
Total interest-earning assets 71 (491) (420)
Interest-bearing liabilities:
Now accounts 13 (61) (48)
Savings and money market accounts 15 (172) (157)
Certificates of deposit (11) (225) (236)
Borrowed funds (55) 14 (41)
----- ----- -----
Total interest-bearing liabilities (38) (444) (482)
----- ----- -----
Net change in net interest income $ 109 $ (47) $ 62
===== ===== =====
Six Months Ended June 30, 2003 Compared
to Six Months Ended June 30, 2002
Increase/(Decrease) Due to Change In
---------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 18 $ (24) $ (6)
Interest bearing deposits in banks 17 (26) (9)
Investments (192) (150) (342)
Loans, net 286 (744) (458)
----- ----- -------
Total interest-earning assets 129 (944) (815)
Interest-bearing liabilities:
Now accounts 29 (118) (89)
Savings and money market accounts 30 (378) (348)
Certificates of deposit (34) (478) (512)
Borrowed funds (110) 22 (88)
----- ----- -------
Total interest-bearing liabilities (85) (952) (1,037)
----- ----- -------
Net change in net interest income $ 214 $ 8 $ 222
===== ===== =======
14
Quarter Ended June 30, 2003 compared to Quarter Ended June 30, 2002.
Interest and Dividend Income. The Company's interest and dividend income
decreased by $420 thousand, or 7.6%, to $5.1 million for the three months
ended June 30, 2003, from $5.5 million for the three months ended June 30,
2002 reflecting the low interest rate environment. Average earning assets
increased by $4.2 million, or 1.4%, to $312.2 million for the three months
ended June 30, 2003, from $308.0 million for the three months ended June 30,
2002. Average loans approximated $259.0 million for the three months ended
June 30, 2003 up from $249.4 million for the three months ended June 30, 2002.
Construction loans grew by $4.5 million or 54.9%, which reflects favorably on
local economic conditions since the Company does not invest in properties built
on "spec". In addition, the $6.5 million or 5.2% increase in commercial loans
was partially offset by the $1.5 million or 13.0% decrease in personal loans.
The average balance of investment securities (including mortgage-backed
securities) decreased by $9.9 million, or 20.3%, to $38.9 million for the
three months ended June 30, 2003, from $48.8 million for the three months
ended June 30, 2002. The average level of federal funds sold and overnight
deposits increased by $3.8 million or 63.9%, to $9.7 million for the three
months ended June 30, 2003, from $5.9 million for the three months ended
June 30, 2002. The average balance in interest bearing deposits in banks
increased by $794 thousand to $4.7 million from $3.9 million, or 20.2%
increase. The net decrease in the investment portfolio, federal funds sold
and interest bearing deposits in banks during 2003 reflects the continuing
growth in our loan portfolio. Interest income from non-loan instruments was
$536 thousand for 2003 and $749 thousand for 2002 reflecting the decrease in
yields and the overall decrease in volume.
Interest Expense. The Company's interest expense decreased by $482
thousand, or 30.3%, to $1.1 million for the three months ended June 30,
2003 from $1.6 million for the three months ended June 30, 2002 reflecting
the low interest rate environment. Average interest-bearing liabilities
increased by $873 thousand, or 0.3%, to $256.8 million for the three months
ended June 30, 2003, from $255.9 million for the three months ended June 30,
2002. Average time deposits were $99.8 million for the three months ended
June 30, 2003 and $101.4 million for the three months ended June 30, 2002, or
a decrease of 1.6%. The average balances for money market and savings accounts
increased by $3.7 million, or 3.6% to $107.2 million for the three months
ended June 30, 2003, from $103.4 million for the three months ended June 30,
2002. The 12.0% increase in Now accounts brought the average balance up to
$42.1 million from $37.6 million. Customers have maintained very liquid
positions during the last 2 years as they anticipate interest rates paid
on deposit instruments will rise and as stock market volatility continues.
The average balance on funds borrowed has decreased from $13.5 million in
2002 to $7.7 million in 2003 as the Company paid off $3.5 million of high
rate advances in late 2002 and has continued to pay down amortizing Federal
Home Loan Bank advances.
Noninterest Income. The Company's noninterest income increased $29
thousand, or 3.8%, to $790 thousand for the three months ended June 30,
2003 from $761 thousand for the three months ended June 30, 2002. Trust
department income decreased to $42 thousand for the three months of 2003
from $49 thousand in the same period of 2002 or a 14.3% decrease primarily
due to the decline in interest rates and the stock market since the
majority of the fee income is based on the market value of the assets under
management. Gain on Sale of Loans increased $36 thousand to $45 thousand for
2003 from $9 thousand for 2002 as interest rates remained low during the
quarter which resulted in refinancings by our customers and the sale of some
of these lower rate loans into the secondary market to mitigate our interest
rate risk. Service fees (sources of which include, among others, deposit and
loan servicing fees, ATM fees, and safe deposit fees) increased by $55
thousand, or 9.0%, to $665 thousand for the three months ended June 30, 2003,
from $610 thousand for the three months ended June 30, 2002. Other income in
2003 is $38 thousand down from $93 thousand in 2002 due to a drop of $36
thousand in mortgage servicing rights, mainly due to the refinancings
discussed earlier and $19 thousand drop in income from the cash surrender
value of life insurance policies.
Noninterest Expense. The Company's noninterest expense decreased $23
thousand, or .7%, to $3.10 million for the three months ended June 30,
2003, from $3.12 million for the three months ended June 30, 2002. Salaries
increased $74 thousand, or 5.8%, to $1.4 million for the three months ended
June 30,
15
2003, from $1.3 million for the three months ended June 30, 2002, reflecting
normal salary activity and a non-recurring accrual under a reduction in force
agreement with three former Citizens employees. Pension and employee benefits
increased $72 thousand, or 18.3%, to $465 thousand for the three months ended
June 30, 2003, from $393 thousand for the three months ended June 30, 2002
mainly due to a $27 thousand increase in employee group insurance plan costs,
a $32 thousand increase in retirement plan costs, and a $9 thousand increase
in payroll taxes. Net operation of other real estate owned was $10 thousand
for the three months ended June 30, 2003 compared to $249 thousand for the
same period in 2002, as a large commercial property owned in 2002 was sold
during the second quarter of that year. Other operating expenses were $882
thousand for the first three months of 2003 compared to $814 thousand for the
same period in 2002. The increase of $68 thousand, or 8.4%, is mainly due to
merger related expenses of the subsidiaries.
Income Tax Expense. The Company's income tax expense increased by $71
thousand, or 18.1%, to $464 thousand for the three months ended June 30,
2003, from $393 thousand for the comparable period of 2002, mainly due to
increased income before taxes, and to a non-recurring low income housing
tax credit in 2002.
Year to Date June 30, 2003 compared to Year to Date June 30, 2002.
Interest and Dividend Income. The Company's interest and dividend income
decreased by $815 thousand, or 7.4%, to $10.3 million for the six months
ended June 30, 2003, from $11.1 million for the six months ended June 30,
2002 reflecting the low interest rate environment. Average earning assets
increased by $3.5 million, or 1.1%, to $312.1 million for the six months
ended June 30, 2003, from $308.6 million for the six months ended June 30,
2002. Average loans approximated $256.1 million for the six months ended
June 30, 2003 up from $248.9 million for the six months ended June 30, 2002.
The $5.3 million or 4.3% increase in commercial loans and the growth of
construction loans 41.4% from $9.0 million to $12.8 million was partially
offset by the $1.5 million or 12.9% decrease in personal loans. The local
economy continues to support both residential and commercial growth in 2003.
The average balance of investment securities (including mortgage-backed
securities) decreased by $6.7 million, or 13.8%, to $41.9 million for the
six months ended June 30, 2003, from $48.6 million for the six months ended
June 30, 2002. The average level of federal funds sold and overnight
deposits increased by $2.3 million or 33.0%, to $9.2 million for the six
months ended June 30, 2003, from $6.9 million for the six months ended June
30, 2002. The average balance in interest bearing deposits in banks increased
by $691 thousand to $4.9 million from $4.2 million, or 16.5% increase. The net
decrease in the investment portfolio, federal funds sold and interest
bearing deposits in banks during 2003 reflects the continuing growth in our
loan portfolio. Interest income from non-loan instruments was $1.1 million for
2003 and $1.5 million for 2002 reflecting the decrease in yields and the
overall decrease in volume.
Interest Expense. The Company's interest expense decreased by $1.0 million,
or 31.0%, to $2.3 million for the six months ended June 30, 2003 from $3.3
million for the six months ended June 30, 2002 reflecting the low interest
rate environment. Average interest-bearing liabilities increased by $1.0
million, or 0.4%, to $256.7 million for the six months ended June 30, 2003,
from $255.7 million for the six months ended June 30, 2002. Average time
deposits were $100.6 million for the six months ended June 30, 2003 and $102.3
million for the six months ended June 30, 2002, or a decrease of 1.7%. The
average balances for money market and savings accounts increased by $3.4
million, or 3.3% to $107.3 million for the six months ended June 30, 2003,
from $103.9 million for the six months ended June 30, 2002. The 13.3% increase
in NOW accounts brought the average balance up to $41.3 million from $36.4
million. Customers have maintained very liquid positions during the last 2
years as they anticipate interest rates paid on deposit instruments
will rise and as stock market volatility continues.
The average balance on funds borrowed has decreased from $13.0 million in
2002 to $7.5 million in 2003 as the Company paid off $3.5 million of high
rate advances in late 2002 and has continued to pay down amortizing Federal
Home Loan Bank Advances.
Noninterest Income. The Company's noninterest income increased $198
thousand, or 13.1%, to $1.7 million for the six months ended June 30, 2003
from $1.5 million for the six months ended June 30, 2002. The results for
the period reflected a net gain of $227 thousand from the sale of loans
compared to a $36
16
thousand gain from sales during 2002 which resulted from refinancings buy our
customers and the sale of some of these lower rate loans into the secondary
market mitigate our interest rate risk. Trust department income decreased to
$80 thousand for the six months of 2003 from $116 thousand in the same period
of 2002 or a 31.0% decrease primarily due to the decline in interest rates and
the stock market since the majority of the fee income is based on the market
value of the assets under management. Service fees (sources of which include,
among others, deposit and loan servicing fees, ATM fees, and safe deposit fees)
increased by $128 thousand, or 10.7%, to $1.3 million for the six months
ended June 30, 2003, from $1.2 million for the six months ended June 30, 2002.
Other income in 2003 was $77 thousand, down 53.3% from $165 thousand in 2002.
The decrease reflects a $35 thousand decrease between years in net servicing
rights mainly due to the refinancings discussed earlier and a decrease of $29
thousand in income from the cash surrender value of life insurance.
Noninterest Expense. The Company's noninterest expense increased $ 259
thousand, or 4.4%, to $6.2 million for the six months ended June 30, 2003,
from $5.9 million for the six months ended June 30, 2002. Salaries
increased $227 thousand, or 9.0%, to $2.8 million for the six months ended
June 30, 2003, from $2.5 million for the six months ended June 30, 2002,
reflecting normal salary activity and an $186 thousand non-recurring accrual
for separation or reduction in force agreements with four former employees at
Citizens. Pension and employee benefits increased $147 thousand, or 18.8%,
to $928 thousand for the six months ended June 30, 2003, from $781 thousand
for the six months ended June 30, 2002 mainly due to an $34 thousand
increase in employee group insurance plans costs, a $55 thousand increase
in retirement plan costs due mainly to the increasing cost of the defined
benefit pension plan, and a $12 thousand increase in payroll taxes
principally attributable to a non-recurring accrual for separation agreements.
Net occupancy expense increased $30 thousand, or 9.2%, to $ 357 thousand for
the six months ended June 30, 2003, from $327 thousand for the six months
ended June 30, 2002 due mainly to the addition and renovation of some
administration space in Morrisville and the new Fairfax branch location.
Equipment expense increased $31 thousand or 7.5% to $447 thousand for the
six months ended June 30, 2003, from $416 thousand for the same period in
2002 due mainly to the increase in depreciation expense as older equipment
has been replaced. Net operation of other real estate owned was $79
thousand for the six months ended June 30, 2003 compared to $333 thousand
for the same period in 2002, as a large commercial property owned was sold
during the second quarter of 2002. Other operating expenses were $1.6
million for the first six months of 2003 compared to $1.5 million for the
same period in 2002. The increase of $78 thousand, or 5.1%, is mainly due
to merger related expenses of the subsidiaries.
Income Tax Expense. The Company's income tax expense increased by $106
thousand, or 12.4%, to $960 thousand for the six months ended June 30,
2003, from $854 thousand for the comparable period of 2002, mainly due to
increased income before taxes and a higher effective tax rate because of
decreased tax-exempt income resulting from the low interest rate
environment.
FINANCIAL CONDITION
At June 30, 2003, the Company had total consolidated assets of $336.0
million, including net loans and loans held for sale of $255.3 million,
deposits of $284.3 million and stockholders' equity of $40.2 million. Based
on the most recent information published by the Vermont Banking
Commissioner, in terms of total assets at December 31, 2002, Union Bank
ranked as the 7th largest institution of the 20 commercial banks and
savings institutions headquartered in Vermont and Citizens ranked as 17th.
If the two banks had been merged as of December 2002, the combined bank
would have ranked as the fourth largest institution.
The Company's total assets decreased by $7.5 million or 2.2% to $336.0
million at June 30, 2003 from $343.5 million at December 31, 2002.
Historically, June 30th of each year is our low point in terms of total
assets, net loans and deposits. This is a one-day aberration as the Towns,
Villages and School Districts that we lend to must be out of debt one day
during the year. These loans totaled $12.9 million on December 31, 2002,
$14.2 million on Friday, June 27th 2003, $6.2 million on June 30th, 2003
and $14.3 million on July 3, 2003. Total net loans and loans held for sale
increased by $2.3 million or 0.9 % to $255.3 million or 76.0% of total
assets at June 30, 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
17
deposits, increased $453 thousand or 1.8% to $26.2 million at June 30, 2003
from $25.7 million at December 31, 2002.
Securities available for sale decreased from $45.8 million at December 31,
2002 to $37.7 million at June 30, 2003, a $8.1 million or 17.8% decrease.
Securities maturing have been utilized in part to fund loan demand and our
decision to currently hold in portfolio a portion of loans available for sale.
Deposits decreased $8.7 million or 3.0% to $284.3 million at June 30, 2003
from $293.0 million at December 31, 2002 due to the one day aberration each
June 30th caused by the municipalities using their deposits to pay off their
loans as discussed above. Total borrowings increased $503 thousand to $8.0
million at June 30, 2003 from $7.5 million at December 31, 2002 as the
Company drew down additional funds from the Federal Home Loan Bank of Boston,
which was partially off-set by the pay downs of amortizing Federal Home Loan
Bank advances.
Loan Portfolio. The Company's loan portfolio (including loans held for sale)
primarily consists of adjustable- and fixed-rate mortgage loans secured by
one-to-four family, multi-family residential or commercial real estate. As
of June 30, 2003, the gross loan portfolio totaled $258.5 million, or
76.9%, of assets. The following table shows information on the composition
of the Company's loan portfolio (dollars in thousands) as of June 30, 2003
and December 31, 2002:
Loan Type June 30, 2003 December 31, 2002
- --------- ------------------ -------------------
Real estate $106,995 41.4% $109,347 42.7%
Commercial real estate 89,942 34.8% 86,081 33.6%
Commercial 20,033 7.7% 19,919 7.8%
Consumer 10,222 4.0% 10,758 4.2%
Municipal loans 6,188 2.4% 12,869 5.0%
Loans held for sale 25,132 9.7% 17,139 6.7%
-------- ----- -------- -----
Total loans $258,512 100.0% 256,113 100.0%
Deduct:
Allowance for loan losses 2,993 2,908
Net deferred loan fees, premiums & discounts 199 206
-------- --------
$255,320 $252,999
======== ========
The Bank 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). The Company
services a $159.0 million residential mortgage portfolio, approximately
$52.0 million of which is serviced for unaffiliated third parties at June
30, 2003. Additionally, the Company originates commercial real estate and
commercial loans under various SBA programs that provide an agency
guarantee for a portion of the loan amount. The Company occasionally sells the
guaranteed portion of the loan to other financial concerns and will retain
servicing rights, which generates fee income. The Company serviced $6.8 million
of commercial and commercial real estate loans for unaffiliated third
parties as of June 30, 2003. The Company 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 June 30, 2003.
Gross loans and loans held for sale have increased $2.4 million or 0.9%
since December 31, 2002. An increase of $3.9 million or 4.5% in commercial
real estate loans, and an increase in loans held for sale of $8.0 million
or 46.6% was partially offset by a $0.5 million or 5.0% decrease in
consumer loans, a decrease of $2.4 million or 2.2% in real estate loans and
the $6.7 million seasonal drop in municipal loans as discussed earlier.
Asset Quality. Union Bankshares Inc., 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 the loan and investment portfolios
and other real estate
18
owned for potential problems on a periodic basis and reports to the
Company's and the subsidiary's Board 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. The Company had loans on nonaccrual
status totaling $959 thousand at June 30, 2003, $1.5 million at December
31, 2002 and $1.9 million at June 30, 2002. The aggregate interest income
not recognized on such nonaccrual loans amounted to approximately $406
thousand and $432 thousand as of June 30, 2003 and 2002, respectively and
$316 thousand as of December 31, 2002.
The Company had $1.1 million and $1.5 million in loans past due 90 days or
more and still accruing at June 30, 2003 and December 31, 2002,
respectively. In addition, at June 30, 2003, the Company had internally
classified certain loans totaling $1.3 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 the
Company'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 June 30, 2003, the Company had acquired by foreclosure or through
in-substance foreclosure real estate worth $119 thousand, consisting of two
commercial properties and one piece of undeveloped land. The balance at
December 31, 2002 was $784 thousand.
Allowance for Loan Losses. Some of the Company's loan customers ultimately
do not make all of their contractually scheduled payments, requiring the
Company to charge off a portion or all of the remaining principal balance due.
The Company 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,
19
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
the Company 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 June 30, 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.
The following table reflects activity (dollars in thousands) in the allowance
for loan losses for the three and six months ended June 30, 2003 and 2002:
Three Months Ended, June 30, Six Months Ended, June 30,
---------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Balance at the beginning of period $2,955 $2,834 $2,908 $2,801
Charge-offs:
Real Estate 17 6 17 6
Commercial 0 16 10 63
Consumer and other 18 19 36 67
------ ------ ------ ------
Total charge-offs 35 41 63 136
------ ------ ------ ------
Recoveries:
Real Estate 0 1 0 7
Commercial 9 1 25 11
Consumer and other 22 20 39 42
------ ------ ------ ------
Total recoveries 31 22 64 60
------ ------ ------ ------
Net charge-offs (4) (19) 1 (76)
Provision for loan losses 42 105 84 195
------ ------ ------ ------
Balance at end of period $2,993 $2,920 $2,993 $2,920
====== ====== ====== ======
The following table shows the breakdown of the Company's allowance for loan
loss by category of loan (dollars in thousands) and the percentage of loans
in each category to total loans in the respective portfolios at the dates
indicated:
June 30, 2003 December 31, 2002
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 596 39.9% $ 580 39.2%
Commercial 1,459 38.6% 1,428 35.6%
Construction 157 6.1% 144 5.6%
Other Loans
Commercial 393 7.8% 412 8.7%
Consumer installment 151 3.9% 208 4.3%
Home equity loans 24 1.2% 28 1.5%
Municipal, Other and
Unallocated 213 2.5% 108 5.1%
------ ----- ------ -----
Total $2,993 100.0% $2,908 100.0%
====== ===== ====== =====
Ratio of Net Charge Offs to
Average Loans (1) 0.00% 0.10%
----- -----
Ratio of Allowance for Loan
Losses to Average Loans 1.17% 1.14%
----- -----
Annualized
20
Management of the Company believes that the allowance for loan losses at
June 30, 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 June 30, 2003. See CRITICAL ACCOUNTING
POLICIES
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 June 30, 2003, the reported value of investment
securities available-for-sale was $37.7 million or 11.2% of its assets. The
Company had no securities classified as held-to-maturity or trading
securities. The reported value of securities available-for-sale at June 30,
2003, reflects a positive valuation adjustment of $1.6 million. The offset
of this adjustment, net of income tax effect, was a $1.1 million increase
in the Company's other comprehensive income component of stockholders'
equity and a decrease in net deferred tax assets of $.5 million.
Deposits. The following table shows information concerning the Company's
deposits (dollars in thousands) by account type, and the weighted average
nominal rates at which interest was paid on such deposits for the period
ending June 30, 2003 and December 31, 2002:
Six Months Ended, June 30, Year Ended December 31,
2003 2002
--------------------------------- ---------------------------------
Percent Percent
Average Of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
Non-certificate deposits:
Demand deposits $ 39,655 13.72% $ 37,932 13.28%
Now accounts 41,319 14.30% 0.59% 39,143 13.70% 1.07%
Money Markets 63,580 22.01% 1.20% 66,562 23.30% 1.85%
Savings 43,753 15.15% 0.86% 39,296 13.75% 1.27%
-------- ------ -------- ------
Total non-certificate deposits: 188,307 65.18% 182,933 64.03%
-------- ------ -------- ------
Certificates of deposit:
Less than $100,000 78,077 27.03% 2.92% 75,021 26.26% 3.18%
$100,000 and over 22,500 7.79% 2.88% 27,736 9.71% 4.71%
-------- ------ -------- ------
Total certificates of deposit 100,577 34.82% 102,757 35.97%
-------- ------ -------- ------
Total deposits $288,884 100.00% 1.49% $285,690 100.00% 2.05%
======== ====== ==== ======== ====== ====
The following table sets forth information regarding the amounts of the
Company's certificates of deposit in amounts of $100,000 or more at June
30, 2003 and December 31, 2002 that mature during the periods indicated:
June 30, 2003 December 31, 2002
------------- -----------------
(dollars in thousands)
Within 3 months $ 5,089 $ 9,629
3 to 6 months 8,213 13,090
6 to 12 months 2,205 3,113
Over 12 months 5,157 4,217
------- -------
$20,664 $30,049
======= =======
21
The drop in the dollar value of Certificates of Deposit in amounts of
$100,000 or more from December 31, 2002 to June 30, 2003 is explained by
the municipalities utilizing their maturing certificates to pay-off their
outstanding loans. This is a normal one day aberration with both deposits
and loans being renewed within the first few days of July.
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $8.0
million at June 30, 2003 at a weighted average rate of 4.34%. 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 second quarter of 2003 is a net increase of $500
thousand which consisted of new borrowings of $1.2 million partially off-
set by pay downs of amortizing advances.
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. The Company'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. The Company does not have any market risk sensitive
instruments acquired for trading purposes. The Company attempts to
structure its balance sheet to maximize net interest income while
controlling its exposure to interest rate risk. The 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. The
Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest-rate sensitivity "gap", which
provides a static analysis of the maturity and repricing characteristics of
the Company'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.
The 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. The Company 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. The Company 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 $7.940 million
for the first six months of 2003 compared to actual results of $7.939
million in a flat rate environment. Net income was projected to be $2.262
million in a flat rate environment compared to actual results of $2.418
million. The $156 thousand increase in Net Income from projections is
mainly due to the Gain on Sale of Loans. Return on Assets was projected to
be 1.33% in a flat rate environment and actual results were 1.43%. Return
on Equity was projected to be 12.05% in a flat rate environment compared to
actual of 12.68%.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of June 30, 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 $31,330
-------
Standby letters of credit and commercial letters of credit $ 1,185
-------
Credit Card arrangements $ 2,178
=======
Home Equity Lines of Credit $ 4,486
-------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
22
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates,
a negative gap would tend to result in an increase in net interest income,
while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market interest
rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly
matched in each maturity category.
The Company 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 the Company,
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 the Company 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
the Company'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 table shows The Company's rate sensitivity analysis as of
June 30, 2003:
June 30, 2003
Cumulative repriced within
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Years Total
-------- ------- ------ ------ ------ -----
(dollars in thousands, by repricing date)
Interest sensitive assets:
Federal funds sold
overnight deposits $ 4,788 $ 0 $ 0 $ 0 $ 0 $ 4,788
Interest bearing deposits 686 1,983 1,468 397 0 4,534
Investments available for sale (1) 4,158 5,752 12,880 6,452 7,754 36,996
FHLB Stock 0 0 0 0 1,241 1,241
Loans (fixed and
adjustable rate) (2) 53,292 57,543 56,351 50,246 40,881 258,313
------- ------- ------- ------- -------- --------
Total interest sensitive assets $62,924 $65,278 $70,699 $57,095 $ 49,876 $305,872
------- ------- ------- ------- -------- --------
Interest sensitive liabilities:
Certificates of deposit $22,494 $40,664 $25,278 $ 3,567 $ 4 $ 92,007
Money markets 13,977 0 0 0 48,000 61,977
Regular savings 11,496 0 0 0 33,651 45,147
Now accounts 19,034 0 0 0 25,543 44,577
Borrowed funds (3) 326 809 2,650 4,254 0 8,039
------- ------- ------- ------- -------- --------
Total interest sensitive liabilities $67,327 $41,473 $27,928 $ 7,821 $107,198 $251,747
------- ------- ------- ------- -------- --------
Net interest rate sensitivity gap (4,403) 23,805 42,771 49,274 (57,322)
Cumulative net interest rate
sensitivity gap (4,403) 19,402 62,173 111,447 54,125
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (1.31%) 5.77% 18.51% 33.17% 16.11%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-earning assets (1.44%) 6.34% 20.33% 36.44% 17.70%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-bearing liabilities (1.75%) 7.71% 24.70% 44.27% 21.50%
Investments available for sale exclude marketable equity securities
with a fair value of $682 thousand that may be sold by the Company at
any time.
Balances shown net of unearned income of $199 thousand.
Estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, the Company 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, the Company is
able to quantify its interest rate risk and develop and implement
appropriate strategies.
The following chart reflects the results (dollars in thousands) 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 4.00%, 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
JUNE 30, 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 7.00 16,603 2.91 5,528 1.53 13.51 11.33
4.00 16,133 0.00 4,952 1.44 12.75 11.26
1.00 15,649 (3.00) 4,636 1.35 11.96 11.18
December-04 7.00 19,727 20.42 7,166 2.02 17.39 11.96
4.00 16,382 0.00 4,956 1.41 12.42 11.35
1.00 12,995 (20.67) 2,716 .77 7.03 10.71
Liquidity. Managing liquidity risk is essential to maintaining both
depositor confidence and stability in earnings. Liquidity is a measurement
of the Company'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.
The Company'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 the subsidiary bank is a member of the FHLB, it has access
to preapproved lines of credit up to 5.0% 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. There were no balances outstanding on June 30, 2003.
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. The Company's
liquidity is actively managed on a daily basis, monitored by the
Asset/Liability Committee, and reviewed periodically with the subsidiary's
Board of Directors. The Asset/Liability Committee sets liquidity
targets based on the Company's financial condition and existing and projected
economic and market conditions. The committee measures the Company's marketable
assets and credit available to fund liquidity requirements and compares the
adequacy of that aggregate amount against the aggregate amount of the Company'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
the Company'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.
The Company's Union's management monitors current and projected cash flows
and adjusts positions as necessary to maintain adequate levels of
liquidity. Although approximately 68.6% of the Company's time deposits
will mature within twelve months, management believes, based upon past
experience, that the Company 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 the Company's cost
25
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. In support of these goals, as previously discussed, a three-for-two
stock split was declared, effected in the form of a stock dividend payable
August 8, 2003. The information presented in the following paragraphs
regarding our capital have been retroactively adjusted to reflect the split
with the exception of the information regarding the stock repurchase plan.
The total dollar value of the Company's stockholders' equity was $40.2
million at June 30, 2003 reflecting net income of $2.4 million for the
first six months of 2003, less dividends paid of $1.8 million, compared to
$39.2 at year end 2002. Union Bankshares, Inc. has 5,000,000 shares of
$2.00 par value common stock authorized. As of June 30, 2003, the Company
had 4,906,936 shares issued, of which 4,545,988 were outstanding and
360,948 were held in Treasury. Also as of June 30, 2003, there were
outstanding employee incentive stock options with respect to 15,300 shares
of the Company's common stock, granted pursuant to Union Bankshares's 1998
Incentive Stock Option Plan. Of the 75,000 shares authorized for issuance
under the 1998 Plan, 58,200 shares remain available for future option
grants.
On October 17, 2001, the Company announced a stock repurchase plan that has
not been amended to reflect the stock split. The Board of Directors has
authorized the repurchase of up to 100,000 shares of common stock, or
approximately 2.2% 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 Union Bankshares are subject to various regulatory capital
requirements administered by the federal banking agencies. Management
believes, as of June 30, 2003 that they both meet all capital adequacy
requirements to which they are subject. As of June 30, 2003, the most recent
calculations categorize both as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
companies must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios. There are no conditions or events since the notification
that management believes have changed either company's category.
The Company's actual capital amounts and ratios as of June 30, 2003 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)
Total capital to risk weighted assets $41,912 18.86% $17,778 8.0% $22,223 10.0%
Tier I capital to risk weighted assets $39,102 17.59% $ 8,892 4.0% $13,338 6.0%
Tier I capital to average assets $39,102 11.57% $13,518 4.0% N/A N/A
26
Impact of Inflation and Changing Prices. The Company'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 the Company's total expenses.
Interest rates have a more significant impact on the Company'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 caption "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 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 the report date 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. 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.
There were no changes during the Companys last fiscal quarter in the Company's
internal control over financial reporting identified in connection with the
evaluation referred to above of the Company's disclosure controls and
procedures that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There are no known pending legal proceedings to which the Company or its
subsidiary 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 the Company and its
subsidiary.
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended June 30, 2003, incentive stock options previously
granted pursuant to the Company's 1998 Incentive Stock Option Plan ("Plan")
were exercised by one participant, with respect to an aggregate of 300 shares
(adjusted to reflect the three-for-two stock split effective August 8, 2003),
at an aggregate exercise price of $3,800. Participation in the Plan is limited
to those senior officers (currently six active participants) selected by the
Board of Directors in its discretion. The exercise price of all options granted
under the Plan represents the fair market value of the shares on the date of
grant. No options were granted under the Plan during the first or second
quarters of 2003.
27
The shares issued to Plan participants upon exercise of incentive stock options
have not been registered with the Securities and Exchange Commission. Such
shares are restricted securities, issued under statutory exemptions available
under the Securities Act of 1933, including Section 4(2) thereof, for offers
and sales not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 21, 2003. Of
3,030,557 shares outstanding on the record date for the meeting (April 1,
2003) 2,531,483 shares were represented in person or by proxy. The only
matter voted on by the shareholders at the meeting was to fix the number
of directors at nine and to elect the following individuals as directors
(each of which was an incumbent director) for the ensuing year.
Votes Votes Votes Broker
Nominees For Withheld Abstained Non-votes
- ------------------------------------------------------------------------
Cynthia D. Borck 2,523,396 7,115 907 0
William T. Costa 2,526,688 3,823 907 0
Kenneth D. Gibbons 2,523,396 7,115 907 0
Franklin G. Hovey, II 2,530,111 400 907 0
Richard C. Marron 2,528,111 2,400 907 0
Robert P. Rollins 2,530,111 400 907 0
Richard C. Sargent 2,528,392 2,119 907 0
W. Arlen Smith 2,530,511 0 907 0
John H. Steel 2,530,311 200 907 0
Historical share information disclosed above in this Item 4 does not reflect
the effect of a three-for-two stock split effected in the form of a 50% stock
dividend that took effect on August 8, 2003.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of the Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act
32.1 Certification of the Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act
(b) Current Reports on Form 8-K
1. Second Quarter Report to Shareholders filed on July 29, 2003
2. Press Release announcing quarterly dividend declaration, three
for two stock split, and second quarter earnings filed on
July 16, 2003.
3. Announcement of the completed merger of the two subsidiaries
(Union Bank and Citizens Savings Bank & Trust Company) of Union
Bankshares, Inc. filed on May 20, 2003
4. Union Bankshares, Inc., Company Overview filed on May 16, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 2003 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)
EXHIBIT INDEX
31.1 Certification of the Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act
32.1 Certification of the Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 906 of the
the Sarbanes-Oxley Act
29