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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 000-28449
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year,
if changed since last report: Not applicable
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $2.00 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant on June 30, 2002 based on the last closing price on the
American Stock Exchange of $23.00 was $49,575,166. For purposes of this
calculation, all directors and executive officers of the Registrant are
assumed to be affiliates. Such assumptions, however, shall not be deemed
to be an admission of such status as to any such individual.
As of March 14, 2003, there were 3,030,557 shares of the registrant's $2
par value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically designated portions of the following documents, are
incorporated by reference in the indicated Part of this Annual Report on
Form 10-K:
Document Part
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Annual Report to Shareholders for the year ended December 31, 2002 I, II
Proxy Statement for the 2003 Annual Meeting of Shareholders III
1
UNION BANKSHARES, INC.
Table of Contents
Part I
Item 1 - Business 3
Item 2 - Properties 8
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters(a) 9
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations(a) 11
Item 7A - Quantitative and Qualitative Disclosures about Market Risk(a) 11
Item 8 - Financial Statements and Supplementary Data(a) 11
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 11
Part III
Item 10 - Directors and Executive Officers of Registrant(a)(b) 11
Item 11 - Executive Compensation(b) 11
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters(b) 12
Item 13 - Certain Relationships and Related Transactions(b) 12
Item 14 - Controls and Procedures(a) 12
Part IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K 13
Signatures 14
Certifications 15
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(a) The information required by Part II, Items 5, 7, 7A, 8 and 10 and
by Part III, Item 14 is incorporated herein by reference from the 2002
Annual Report to Shareholders
(b) The information required by Part III, Items 10, 11, 12 and 13 is
incorporated herein by reference from Union's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 21 , 2003. The
incorporation by reference herein of portions of the Proxy Statement
shall not be deemed to specificially incorporate by reference the
information referred to in Items 306(c), 306(d) and 402(a)(8) and (9) of
Regulation S-K.
2
Part I-Item 1 Business
General: Union Bankshares, Inc. ("Union" or the "Company") is a two-bank
holding company whose subsidiaries are Citizens Savings Bank & Trust Company
("Citizens") and Union Bank. It was incorporated in the State of Vermont in
1982. Citizens was chartered under Vermont law in 1887 as a State bank and
is headquartered in St. Johnsbury, Vermont. Citizens became a wholly owned
subsidiary of Union on November 30, 1999 through a transaction accounted
for as a pooling of interests but kept its separate name and banking
franchise. Union Bank was organized and chartered as a State bank in 1891
and became a wholly owned subsidiary of Union in 1982 upon its formation.
Union and Union Bank are headquartered in Morrisville, Vermont.
On February 18, 2003, Union announced the proposed merger of Union Bank and
Citizens. The merger, which is expected to be completed on or about May 1,
2003 (subject to regulatory approval), will not result in the closure of any
branch offices as the market areas of the two banks do not generally overlap.
During 2002, Union had two definable business segments, Citizens and Union
Bank, which both generally operate in the same line of business; commercial
banking, and in similar economic environments in Northern Vermont. Citizens
has 46 full time equivalent employees while Union Bank has 116. Union, itself,
does not have any paid employees.
Union's income is derived principally from interest on loans and earnings
on other investments. Its primary expenses arise from interest paid on
deposits and borrowings and general overhead expenses. The consolidated
assets of Union have grown from $ 273 million to $ 343 million over the
last five years or 25.7 % while our total consolidated deposits have grown
from $ 239 million to $ 293 million or 22.6 % during that same period.
Please refer to our schedule of Selected Financial Data, which has been
restated for all periods for the pooling of interest acquisition of
Citizens, at Item 6 of this annual report for further details.
The deposits of both banks are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") up to legal limits (generally
$100,000 per depositor).
In addition to its commercial banking business, Citizens offers a full line
of personal trust services to its customers. Previously Union Bank had
operated its own trust department, but those operations were transferred to
Citizens in late 2000. Union Bank will resume its fiduciary operations
upon completion of its merger with Citizens in 2003. Assets held in fiduciary
capacity by Citizens' trust department are not included in Union's
consolidated balance sheet for financial reporting purposes other than trust
cash on deposit.
Competition: Union and its two subsidiaries face substantial competition
for loans and deposits in their market areas from local commercial banks,
savings banks, credit unions, and financial services affiliates of bank
holding companies, as well as from national financial service providers
such as mutual funds, brokerage houses, consumer finance companies and
internet banks. Union anticipates continued strong competition from such
financial institutions for the foreseeable future. Within Union's market
area are branches of several commercial and savings banks that are
substantially larger than Union. Both the subsidiary banks focus on their
community banking niche and on providing convenient hours and modes of
delivery to provide superior customer service. Union competes for
checking, savings, money market accounts and other deposits by offering
depositors competitive rates, personal service, local area expertise,
convenient locations and access, and an array of financial services and
products.
The competition in originating real estate and other loans comes
principally from commercial banks, mortgage banking companies and credit
unions. Union competes for loan originations primarily through the
interest rates and loan fees it charges, the types of loans it offers, and
the efficiency and quality of services it provides. In addition to
residential mortgage lending and municipal loans, Union also emphasizes
commercial real estate, construction, and both conventional and Small
Business Administration ("SBA") guaranteed commercial lending. Union Bank
is a preferred SBA Lender. Factors that affect Union's ability to compete
for loans include general and local economic conditions, prevailing interest
rates including the "prime" rate, and pricing volatility of the secondary loan
markets. Union attempts to promote an increased level of personal service
and expertise within the community to position itself as a lender to small
to middle market business and residential customers, which tend to be
under-served by larger institutions.
Union competes through Citizens for personal trust business with trust
companies, commercial banks having trust departments, investment advisory
firms, brokerage firms, mutual funds and insurance companies. It is the
intention of Union to continue this business strategy.
Management's operational strategy includes continued evaluation of changing
market needs and design and implementation of products and services to meet
those needs. The directors and management of Union intend to continue to
offer products and services that will allow Union to manage responsibly the
growth of its assets, while building and
3
enhancing stockholder value and preserve Citizens' and Union Bank's images
as premiere Vermont community banks.
The competitive environment for financial institutions has undergone
significant change in recent years and that trend is likely to continue in
light of changes in applicable law (see "Financial Services Modernization"
below) which permit the integration of the historically separate banking,
insurance and securities industries. Credit unions are becoming an
increasingly significant source of competition. Credit union common bond
requirements and the definition of a credit union "member" has been
interpreted liberally by federal and state credit union regulations, allowing
greater penetration into traditional banking markets. In February of 2003,
SBA expanded the eligibility of certain lenders programs to include all credit
unions. Competitive change is also occurring due to rapid technological
advances which increasingly permit the delivery of financial products and
services without the need for a physical presence in the market area served
and which also are likely to diminish the importance of financial
intermediaries, such as banks, in the transfer of funds between parties.
Regulation and Supervision: As Vermont-chartered commercial banks, each
subsidiary is subject to regulation, examination, and supervision by the
Vermont Banking Department and the FDIC. Regular examinations of Union
Bank and Citizens by the Vermont Banking Department and the FDIC include
examination of the banks' financial condition and operations, including but
not limited to their capital adequacy, loan reserves, loans, investments,
earnings, liquidity, compliance with laws and regulations, record of
performance under the federal Community Reinvestment Act of 1997 ("CRA"),
and the performance of their management.
In addition Union, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board. The regulations
of these authorities govern certain of the operations of Union and its
subsidiaries. The following discussion summarizes the material aspects of
various federal and state banking laws and regulations that apply to Union,
Citizens, and Union Bank.
Union is also under the jurisdiction of the Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of its
securities as well as investor reporting requirements. Union's common stock
is listed on the American Stock Exchange ("AMEX") under the trading symbol
"UNB" and is therefore subject to the rules of AMEX for listed companies.
Bank Holding Company Acquisitions and Activities. As a bank holding
company, Union is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under
the BHC Act, the activities of bank holding companies, such as Union, and
those of companies that they control, such as Union Bank and Citizens, or
in which they hold more than 5% of the voting stock, are limited to
banking, managing or controlling banks, furnishing services to or
performing services for their subsidiaries, or certain activities that the
Federal Reserve Board has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. As
described below, a bank holding company that has elected to become a
"financial holding company" under the federal Gramm-Leach-Bliley Financial
Modernization Act of 1999 ("Gramm-Leach-Bliley Act") may engage in certain
additional activities. Bank holding companies such as Union that have not
elected to become financial holding companies, are required to obtain the
prior approval of the Federal Reserve Board to engage in any new activity
or to acquire more than 5% of any class of voting stock of any bank or
other company.
The Federal Reserve Board has authority to issue cease and desist orders to
prevent or terminate unsafe or unsound banking practices or violations of
law or regulations and to assess civil money penalties against bank holding
companies and their subsidiaries and other affiliates. The Federal Reserve
Board also has the authority to remove officers, directors and other
institution-affiliated parties.
4
Financial Services Modernization. The Gramm-Leach-Bliley Act permits
eligible bank holding companies to elect to become financial holding
companies and thereby engage in a broader range of activities than is
permitted to bank holding companies generally. Under the Gramm-Leach-
Bliley Act, a financial holding company may engage in activities that are
"financial in nature," which includes securities underwriting, dealing and
market making, sponsoring mutual funds and investment companies, insurance
underwriting, merchant banking and additional activities that the Federal
Reserve Board, in consultation with the Secretary of the Treasury,
determines to be financial in nature, or incident or complementary to such
financial activities, provided that such activities do not pose a
substantial risk to the safety and soundness of depository institutions or
the financial system generally. The Gramm-Leach-Bliley Act effectively
permits the integration, under a financial holding company umbrella, of
firms engaged in banking, insurance and securities activities, and preempts
state laws that purport to limit or prohibit such affiliations. No
regulatory approval is required for a financial holding company to acquire
a company, other than a bank or savings association, engaged in permitted
activities.
In order to become a financial holding company, all of the bank holding
company's bank subsidiaries must be well-capitalized and well-managed under
applicable regulatory guidelines, and each of such banks must have been
rated "Satisfactory" or better in its most recent evaluation under the
federal CRA. Once a bank holding company has elected to be treated as a
financial holding company, it may face significant consequences if it
subsequently fails to meet one or more of the criteria for eligibility.
For example, it may be required to enter into an agreement with the Federal
Reserve Board imposing limitations on its operations and requiring
divestitures. In addition, the need to maintain eligibility could hamper a
financial holding company's ability to expand or to acquire financial
institutions that do not meet the required criteria.
As of March 14, 2003, Union has not elected to become a financial holding
company.
Sarbanes-Oxley Act of 2002. In 2002, legislation known as the "Sarbanes-
Oxley Act of 2002" (the "Act") was enacted. This far reaching legislation was
generally intended to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the securities laws. Some
of the areas addressed by the Act include the establishment of a 5 member
accounting oversight board to be appointed by the SEC; the promulgation of
requirements relating to auditor independence, corporate governance, corporate
and criminal fraud accountability; and enhanced disclosure requirements
pertaining to corporate operations, internal controls and certification
of financial statements. Final rules under the Act are still being
promulgated, with varying effective dates.
Source of Strength. Under Federal Reserve Board policy, bank holding
companies, such as Union, are expected to act as a source of financial
strength to their subsidiary banks, such as Union Bank and Citizens, and to
commit resources to support them. This support may be called for at times
when a bank holding company may not have the required resources to do so.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 permits bank holding companies to acquire banks
based outside their home states, generally without regard to whether the
state's law would permit the acquisition. The Act also authorizes banks to
merge across state lines thereby creating interstate branches. In
addition, the Act permits banks to acquire existing interstate branches
(short of merger) or to establish new interstate branches. States were
given the right, exercisable before June 1, 1997, to prohibit altogether or
impose certain limitations on interstate mergers and the acquisition or
establishment of interstate branches. None of the states contiguous to
Vermont (New Hampshire, New York and Massachusetts) has in effect any
statute which would substantially impede the ability of a Vermont bank to
acquire or create interstate branches directly or through an interstate
merger. Similarly, Vermont law does not limit the ability of out-of-state
banks to acquire or create branches in Vermont. Although interstate
banking and branching may result in increased competitive pressures in the
markets in which Union operates, interstate branching may present
competitive opportunities for locally-owned and managed banks, such as
Union Bank and Citizens, that are familiar with the local markets and that
emphasize personal service and prompt, local decision-making.
Affiliate Restrictions. Bank holding companies and their affiliates are
subject to certain restrictions under the Federal Reserve Act in their
dealings with each other, such as in connection with extensions of credit,
transfers of assets, and purchase of services among affiliated parties.
Generally, loans or extensions of credit, investments or purchases of
assets by a subsidiary bank from a bank holding company or its affiliates
are limited to 10% of the bank's capital and surplus with respect to each
affiliate and to 20% in the aggregate for all affiliates, and borrowings
are also subject to certain collateral requirements. These transactions,
as well as other transactions between a subsidiary bank and its holding
company or other affiliates must generally be on arms-length terms, that
is, on terms comparable to those involving nonaffiliated companies.
Further, under the Federal Reserve Act and Federal Reserve Board
regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in-arrangements in connection with extensions
of credit or furnishing of property or services to third parties. Union,
Union Bank and Citizens are subject to these restrictions in their
intercompany transactions.
5
Banks. The various laws and regulations applicable to Citizens and Union Bank
that are administered by the FDIC and the Vermont Banking Commissioner
affect the banks' corporate practices, such as payment of dividends,
incurring of debt and acquisition of financial institutions and other
companies. These laws also affect their business practices, such as
payment of interest on deposits, the charging of interest on loans, privacy
issues and the location of offices. There are no outstanding regulatory
orders resulting from regulatory examinations of Union, Union Bank or
Citizens.
Dividend Limitations. As a holding company, Union's ability to pay
dividends to its stockholders is largely dependent on the ability of its
subsidiaries to pay dividends to it. Payment of dividends by Vermont-
chartered banks, such as Union Bank and Citizens, is subject to applicable
state and federal laws. Under Vermont banking laws, a Vermont-chartered
bank may not authorize dividends or other distributions which would reduce the
bank's capital below the amount of capital required in the bank's
Certificate of General Good or under any capital or surplus standards
established by the Vermont Banking Commissioner. Union Bank and Citizens
do not have any capital restrictions in their Certificates of General Good
and, to date, the Vermont Banking Commissioner has not adopted capital or
surplus standards. Nevertheless, the capital standards established by the
FDIC, described below under "Capital Requirements," apply to both Union
Bank and Citizens, and the capital standards of the Federal Reserve Board
apply to Union on a consolidated basis. In addition, the Federal Reserve
Board, the FDIC and the Vermont Banking Commissioner are authorized under
applicable federal and state laws to prohibit payment of dividends that
they determine would be an unsafe or unsound practice. Payment of
dividends that deplete the capital of a bank or a bank holding company, or
render it illiquid, could be found to be an unsafe or unsound practice.
Capital Requirements. The Federal Reserve Board, the FDIC and other
federal banking regulators have issued substantially similar risk-based and
leverage capital guidelines for United States Banking organizations. Those
regulatory agencies are also authorized to require that a banking
organization maintain capital above the minimum levels, whether because of
its financial condition or actual or anticipated growth. The Federal
Reserve Board's risk-based capital guidelines define a three-tier capital
framework and specify three relevant capital ratios: Tier 1 Capital Ratio,
a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of
common and qualifying preferred stockholders' equity, less certain
intangibles and other adjustments. The remainder (Tier 2 and Tier 3
Capital) consists of subordinate and other qualifying debt, preferred stock
that does not qualify as Tier 1 Capital, and the allowance of credit losses
up to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 Capital, less investments in
unconsolidated subsidiaries, represents qualifying "Total Capital," at
least 50% of which must consist of Tier 1 Capital. Risk-based capital
ratios are calculated by dividing Tier 1 Capital and Total Capital by risk-
weighted assets. Assets and off-balance sheet exposures are assigned to
one of four categories or risk weights, based primarily on relative credit
risk. The minimum Tier 1 Capital Ratio is 4% and the minimum Total Capital
Ratio is 8%. The Leverage Ratio is determined by dividing Tier 1 Capital
by adjusted average total assets. Although the minimum Leverage Ratio is
3%, most banking organizations are required to maintain Leverage Ratios of
at least 1 to 2 percentage points above 3%.
Federal bank regulatory agencies require banking organizations that engage
in significant trading activity to calculate a capital charge for market
risk. Significant trading activity means trading activity of at least 10%
of total assets or $1 billion, whichever is smaller, calculated on a
consolidated basis for bank holding companies. Federal bank regulators may
apply the market risk measure to other bank holding companies, as the
agency deems necessary or appropriate for safe and sound banking practices.
Each agency may exclude organizations that it supervises that otherwise
meet the criteria under certain circumstances. The market risk charge will
be included in the calculation of an organization's risk-based capital
ratio. Neither Union, Union Bank, nor Citizens is currently subject to
this special capital charge.
Federal Reserve Board policy provides that banking organizations generally,
and, in particular, those that are experiencing internal growth or actively
making acquisitions, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets, such as goodwill. Furthermore, the capital
guidelines indicate that the Federal Reserve Board will continue to
consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for
expansion or new activities. The Tangible Tier 1 Leverage Ratio is
calculated by dividing a banking organization's Tier 1 Capital less all
intangible assets by its total consolidated quarterly average assets less
all intangible assets.
6
The Federal Reserve Board's capital adequacy guidelines generally provide
that bank holding companies with a ratio of intangible assets to tangible
Tier 1 Capital in excess of 25% will be subject to close scrutiny for
certain purposes, including the Federal Reserve Board's evaluation of
acquisition proposals. Union does not have a material amount of
intangibles in its capital base.
Prompt Corrective Action. At December 31, 2002, Union's consolidated
Total and Tier I Risk-Based Capital Ratios were 17.99 % and 16.74 %,
respectively, and its Leverage Capital Ratio was 11.03 %, and is considered
well-capitalized under the above regulatory guidelines. In addition, both
Union Bank and Citizens are considered well-capitalized under such
guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and requires the respective federal banking agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements. FDICIA imposes
progressively more restrictive constraints on operations, management and
capital distributions, depending on the category in which an institution is
classified. Failure to meet the capital guidelines could also subject a
banking institution to capital raising requirements. An "undercapitalized"
bank must develop a capital restoration plan and its parent holding company
must guarantee that bank's compliance with the plan. The liability of the
parent holding company under any such guarantee is limited to the lesser of
5% of the bank's assets at the time it became undercapitalized or the
amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take
priority over the parent's general unsecured creditors. In addition,
FDICIA requires the various federal banking agencies to prescribe certain
noncapital standards for safety and soundness related generally to
operations and management, asset quality and executive compensation, and
permits regulatory action against a financial institution that does not
meet such standards.
The various federal banking agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA,
using the Total Capital, Tier 1 Ratio and the Leverage Ratio as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution
must have a Tier 1 capital ratio of at least 6%, a total capital ratio of
at least 10% and a leverage ratio of at least 5% and not be subject to a
capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8%
and a leverage ratio of at least 4%, or 3% in some cases.
Community Reinvestment Act. Union Bank and Citizens are subject to
the federal CRA, which requires banks to demonstrate their commitment to
serving the credit needs of low and moderate income residents of their
communities. Both banks participate in a variety of direct and indirect
lending programs and other investments for the benefit of the low and
moderate income residents in our communities. The FDIC conducts
examinations of insured banks' compliance with CRA requirements and rates
institutions as "Outstanding," "Satisfactory," "Needs to Improve," and
"Substantial Non-Compliance." Failure of an institution to receive at
least a "Satisfactory" CRA rating could adversely affect its ability to
undertake certain activities, such as acquisitions of other financial
institutions, which require regulatory approval based, in part, on the
institution's record of CRA compliance. In addition, failure of a bank
subsidiary to receive at least a "Satisfactory" rating would disqualify a
bank holding company from eligibility to become or remain a financial
holding company under the Gramm-Leach-Bliley Act. (See "Financial
Modernization" above.) At their last CRA compliance examinations by the
FDIC, Union Bank received a rating of "Outstanding" and Citizens received a
rating of "Satisfactory."
Deposit Insurance Premium Assessments. Under applicable federal laws and
regulations, deposit insurance premium assessments to the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are based
on a supervisory risk rating system, with the most favorably rated
institutions paying the lowest premiums. The deposits of Union Bank and
Citizens are insured under the BIF. As "well capitalized" institutions,
both banks are presently in the most favorable deposit insurance assessment
category, and pay the minimum deposit premium assessment.
FDICIA Cross-Guarantees. Under the cross-guarantee provisions of FDICIA,
in some circumstances in the event of a loss suffered or anticipated by the
FDIC-either as a result of a bank's insolvency or FDIC assistance provided
to
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a bank in danger of default-the FDIC may assess other banks within the
holding company family to recoup its losses to the deposit insurance fund.
Brokered Deposits. FDICIA restricts the ability of an FDIC-insured bank to
accept brokered deposits unless it is a well-capitalized institution under
FDICIA's prompt corrective action guidelines. Although eligible to do so,
neither Union Bank nor Citizens have accepted brokered deposits.
Consumer Protection Laws. In connection with their lending activities,
both Union Bank and Citizens are subject to a variety of federal and state
laws designed to protect borrowers and to promote lending to various
sectors of the economy and population. In addition to the provisions of
the CRA (discussed above), Union Bank and Citizens are subject to, among
other laws, the federal Home Mortgage Disclosure Act, the federal Real
Estate Settlement Procedures Act, the federal Truth-in-Lending Act, the
federal and Vermont Equal Credit Opportunity Acts, and the federal and
Vermont Fair Credit Reporting Acts.
Both Union Bank and Citizens are subject to the provisions of Title V of
the Gramm-Leach-Bliley Act, which require each of them to notify their consumer
customers of their information collection and sharing practices and
restrict those practices in certain respects. In addition, both banks are
subject to similar, but more restrictive requirements of the Vermont
Banking Department. Generally those Vermont requirements prohibit the
disclosure of consumer information to nonaffiliated third parties without
the express written consent of the consumer, except for disclosures
permitted under specified regulatory exceptions.
The deposit taking activities of Union Bank and Citizens are subject to
various federal and state requirements, including those mandating uniform
disclosures to depositors with respect to rates of interest, fees and other
terms of consumer deposit accounts, and disclosure of their policies on
the availability of deposited funds.
Bank Secrecy Act Compliance. Union Bank and Citizens are subject to
federal laws establishing certain record keeping, customer identification,
and reporting requirements pertaining to large cash transactions, sales
of travelers checks and other monetary instruments, and the international
transfer of cash or monetary instruments. New provisions, designed to help
combat international terrorism, were added in 2001 to the Bank Secrecy Act
by the USA Patriot Act. These provisions impose due diligence standards on
banks in opening correspondent accounts of foreign off-shore banks and
banks in jurisdictions that have been found to fall significantly below
international anti-money laundering standards. In addition, U.S. banks are
prohibited from opening correspondent accounts for off-shore shell banks,
defined as banks that have no physical presence and that are not part of a
regulated and recognized banking company. The USA Patriot Act requires all
financial institutions to adopt money laundering programs. In addition,
the USA Patriot Act amended certain provisions of the federal Right to
Financial Privacy Act to facilitate the access of law enforcement to bank
customer records in connection with investigating international terrorism.
Part I-Item 2 Properties
As of December 31, 2002, Union's subsidiaries operated 12 community-banking
locations which are in Lamoille, Caledonia and Franklin counties of Vermont.
Eight of these branch locations are Union Bank's and four are Citizens'.
Citizens opened a loan production office in Littleton, New Hampshire in May
of 2001. Together they also operate 28 automated teller machines (ATM's)
in northern Vermont. The Company owns nine of its branch locations and
leases the other branches, the Littleton Loan Center and certain ATM premises
from third parties under terms and conditions considered by management to be
favorable to the Company.
Additional information relating to the Company's properties is set forth in
Note 8 to the consolidated financial statements and incorporated herein by
reference.
Part I-Item 3 Legal Proceedings
There are no known pending legal proceedings to which Union or any of its
subsidiaries is a party, or to which any of their properties is subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion
8
of management, based upon the opinion of counsel, any such liability will
not have a material effect on the consolidated financial position of Union
and its subsidiaries.
Part I-Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.
Part II-Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
Please refer to page 57 of the Company's 2002 Annual Report to
Shareholders, which information is incorporated herein by reference.
9
Part II-Item 6 Selected Financial Data
At or For The Years Ended December 31(4)
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2002 2001 2000 1999 1998
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Balance Sheet Data: (Dollars in thousands except per share data)
Total Assets $ 343,492 $ 337,475 $ 303,394 $ 295,476 $ 290,129
Investment Securities 45,824 49,610 56,642 60,441 58,585
Loans, net of unearned income 255,907 250,943 224,796 209,353 202,468
Allowance for loan losses (2,908) (2,801) (2,863) (2,870) (2,845)
Total nonperforming loans 2,272 4,864 4,398 4,123 2,407
Total nonperforming assets 3,074 6,160 4,514 4,150 2,932
Other real estate owned 784 1,296 116 27 525
Deposits 293,004 285,722 258,737 257,593 248,919
Borrowed funds 7,536 10,344 6,382 2,872 6,084
Stockholders' equity (1) 39,169 37,215 35,157 32,220 31,762
Income Statement Data:
Net interest and dividend income $ 15,805 $ 14,559 $ 14,249 $ 13,747 $ 13,374
Provision for loan losses 356 320 250 359 400
Noninterest income 3,560 3,073 2,569 2,568 2,911
Noninterest expense 11,761 10,496 9,944 10,065 9,278
Net income 5,180 4,832 4,799 4,075 4,551
Per Common Share Data:
Net income (2) $ 1.71 $ 1.59 $ 1.58 $ 1.35 $ 1.51
Cash dividends paid 1.14 1.06 0.98 0.90 0.82
Book value (1) 12.93 12.29 11.60 10.64 10.50
Selected Ratios:
Return on average assets 1.52% 1.51% 1.61% 1.39% 1.65%
Return on average equity 13.74% 13.34% 14.54% 12.70% 14.95%
Dividend payout (3) 66.67% 66.67% 62.03% 66.67% 54.30%
Interest rate spread 4.75% 4.29% 4.40% 4.41% 4.61%
Net interest margin 5.14% 4.99% 5.19% 5.13% 5.34%
Operating expenses to average assets 3.46% 3.29% 3.32% 3.42% 3.36%
Average interest earning assets to
average interest bearing liabilities 120.59% 122.11% 122.26% 121.58% 120.42%
Average Stockholders' equity to
average assets 11.10% 11.35% 11.01% 10.92% 11.03%
Tier 1 leverage capital ratio 11.03% 11.06% 11.74% 11.35% 10.87%
Tier 1 risk-based capital ratio 16.74% 15.59% 16.27% 17.27% 16.24%
Total risk-based capital ratio 17.99% 16.83% 17.62% 18.55% 17.57%
Asset Quality Ratios:
Nonperforming loans to total loans .89% 1.94% 1.96% 1.97% 1.19%
Nonperforming assets to total assets .89% 1.83% 1.49% 1.40% 1.01%
Allowance for loan losses
to nonperforming loans 127.99% 57.59% 65.10% 69.61% 118.20%
Allowance for loan losses
to loans 1.14% 1.12% 1.27% 1.37% 1.41%
- --------------------
(F1) Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available for sale."
(F2) Computed using the weighted average number of shares outstanding for
the period.
(F3) Cash dividend declared and paid per share for the holding company
divided by consolidated net income per share.
(F4) Restated for 1999 and 1998 to reflect the acquisition of Citizens
accounted for as a pooling of interest.
10
Part II-Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Please refer to pages 41 to 50 of the Company's 2002 Annual Report to
Shareholders section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which information is
incorporated herein by reference.
Part II-Item 7A Quantitative and Qualitative Disclosures About Market Risk
Please refer to pages 51 to 56 of the Company's 2002 Annual Report to
Shareholders section entitled "Other Financial Considerations," which
Information is incorporated herein by reference.
Part II-Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of Union Bankshares, Inc. as of December
31, 2002 and 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2002, together with related notes and the
report of Urbach Kahn & Werlin LLP, independent public accountants, all as
contained on pages 12 to 40 of the Company's 2002 Annual Report to
Shareholders, are incorporated herein by reference. The opinion of the
Company's former independent accountants, A.M. Peisch & Company, LLP, on
the Company's audited consolidated financial statements for the year ended
December 31, 2000 is set forth in Part IV, Item 15.A2 of this report and is
incorporated herein by reference.
Part II-Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in accountants, nor were there any disagreements with
the accountants on accounting or financial disclosures.
Part III-Item 10 Directors and Executive Officers of Registrant
The following information from the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders is hereby incorporated by reference:
Listing of the names, ages, principal occupations and business experience
of the directors under the caption "PROPOSAL I: TO ELECT DIRECTORS"
Listing of the names, ages, titles and business experience of the executive
officers under the caption "EXECUTIVE OFFICERS"
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 under the caption "SHARE OWNERSHIP INFORMATION -
Section 16(a) Beneficial Ownership Reporting Compliance"
Part III-Item 11 Executive Compensation
The following information from the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding compensation of directors under the caption "PROPOSAL
I: TO ELECT DIRECTORS - Directors' Compensation"
Information regarding executive compensation and benefit plans under the
caption "EXECUTIVE OFFICERS - Executive Compensation and Benefit Plans"
Information regarding management interlocks and certain transactions under
the caption "PROPOSAL I: TO ELECT DIRECTORS - Compensation Committee
Interlocks and Insider Participation"
Information set forth under the caption "COMPENSATION COMMITTEE REPORT"
11
Part III-Item 12 Security Ownership of Certain Beneficial Owners and
Management
The following information from the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding the share ownership of management and principal
shareholders under the caption "SHARE OWNERSHIP INFORMATION - Share
Ownership of Management and Principal holders"
The following table summarizes equity compensation under the Company's
Incentive Stock Option Plan, the only equity compensation plan of the
Company.
Equity Compensation Plan Information:
Number of securities
remaining available
Number of securities Weighted average for future issuance
to be issued upon exercise price of under equity
exercise of outstanding outstanding options compensation plans
options, warrants warrants and (excluding securities
and rights rights reflected in column (A)
----------------------- ------------------- -----------------------
Plan Category Column A Column B Column C
- ------------- ----------------------- ------------------- -----------------------
Equity Compensation
plans approved by
security holders 10,900 $21.30 38,800
Equity compensation
plans not approved
by security holders - - -
------ ------ ------
Total 10,900 $21.30 38,800
Part III-Item 13 Certain Relationships and Related Party Transactions
The following information from the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders is hereby incorporated by reference:
Information regarding transactions with management under the caption
"PROPOSAL I: TO ELECT DIRECTORS - Transactions with Management and Directors"
Part III-Item 14 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.
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 the 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.
12
Part IV-Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
A. Documents Filed as Part of this Report:
(1) The following consolidated financial statements, as included in
the 2002 Annual Report to Shareholders, are incorporated herein
by reference.
1) Consolidated Balance Sheets at December 31, 2002 and 2001
2) Consolidated Income Statements for the years ended December
31, 2002, 2001 and 2000
3) Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000
4) Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
5) Notes to the Consolidated Financial Statements
(2) Report of Former Accountant filed herewith as Exhibit 13.2.
(3) The following exhibits are either filed herewith as part of
this report, or are incorporated herein by reference:
Item No:
3.1 Amended and Restated Articles of Incorporation of Union Bankshares,
Inc. (as of May 7, 1997), previously filed with the Commission as
Exhibit 3.1 to the Company's Registration Statement on Form S-4
(#333-82709) and incorporated herein by reference.
3.2 Amendment filed May 19, 1998 to Amended and Restated Articles of
Association of Union Bankshares, Inc., adding new sections 8 and 9,
previously filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (#333-82709) and incorporated
herein by reference.
3.3 Amendment filed November 24, 1999 to Amended and Restated Articles of
Association of Union Bankshares, Inc. increasing the authorized
common shares to 5,000,000, previously filed with the Commission on
December 10, 1999 as Exhibit 3.3 to the Company's Current Report on
Form 8-K 12g3, and incorporated herein by reference.
3.4 Bylaws of Union Bankshares, Inc., as amended, , previously filed with
the Commission as Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (#333-82709) and incorporated herein by reference.
10.1 Stock Registration Agreement dated as of February 16, 1999, among
Union Bankshares, Inc., Genevieve L. Hovey, individually and as
Trustee of the Genevieve L. Hovey Trust (U.A. dated 8/22/89), and
Franklin G. Hovey, II, individually, previously filed with the
Commission as Exhibit 3.1 to the Company's Registration Statement on
Form S-4 (#333-82709) and incorporated herein by reference.
10.2 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary, previously filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.*
10.3 Form of Union Bankshares, Inc. Deferred Compensation Plan and Agreement,
previously filed with the Commission as Exhibit 10.3 to the Company's
2001 Form 10-K and incorporated herein by reference.*
10.4 Employment Agreement, dated December 10, 1998, between Citizens
Savings Bank & Trust Company and Jerry S. Rowe, previously filed with
the Commission as Exhibit 10.6 to the Company's 1999 Form 10-K and
incorporated herein by reference.*
11 Statement re: Computation of per share earnings: See Note 1 to the
consolidated financial statements for details on earnings per share
computations for 2002, 2001 and 2000.
13.1 The following specifically designated portions of Union's 2002 Annual
Report to Shareholders have been incorporated by reference in this
Report on Form 10-K, is filed herewith: pages 11 to 56.
13.2 Report of Former Accountant, A.M. Peisch & Company, LLP for the year
ended December 31, 2000.
21 Subsidiaries of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont
Citizens Savings Bank & Trust Company, St. Johnsbury, Vermont
(3) Reports on Form 8-K
a) Form 8-K filed on October 8, 2002 to report third quarter and
year-to-date earnings and the declaration of a dividend.
b) Form 8-K filed on October 18, 2002 to report we mailed our
internal, unaudited Third Quarter 2002 Report to our
shareholders.
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.
- --------------------
* denotes management contract or compensatory plan.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized, as of
March 31, 2003.
Union Bankshares, Inc.
By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon
---------------------- ---------------------
Kenneth D. Gibbons Marsha A. Mongeon
President and Chief Treasurer and Chief
Executive Officer Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 31, 2003
Name Title
---- -----
/s/ W. Arlen Smith Director, Chairman of the Board
W. Arlen Smith
/s/ Kenneth D. Gibbons Director, President and Chief Executive Officer
Kenneth D. Gibbons (Principal Executive Officer)
/s/ Marsha A. Mongeon Treasurer and Chief Financial Officer
Marsha A. Mongeon (Principal Financial Officer)
/s/ Cynthia D. Borck Director and Vice President
Cynthia D. Borck
/s/ William T. Costa Jr. Director
William T. Costa Jr.
/s/ Franklin G. Hovey II Director
Franklin G. Hovey II
/s/ Richard C. Marron Director
Richard C. Marron
/s/ Robert P. Rollins Director
Robert P. Rollins
/s/ Richard C. Sargent Director
Richard C. Sargent
/s/ John H. Steele Director
John H. Steele
14
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 annual report on Form 10-K of Union
Bankshares, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 annual 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: March 31, 2003
/s/ Kenneth D. Gibbons
- -------------------------
[Signature]
President and Chief Executive Officer
15
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Marsha Mongeon, Treasurer and Chief Financial Officer of Union
Bankshares, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Union Bankshares,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 annual 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: March 31, 2003
/s/ Marsha A. Mongeon
- -------------------------
[Signature]
Treasurer and Chief Financial Officer
16