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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: September 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 November 7, 2003:
Common Stock, $2 par value 4,549,938 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 Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
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 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
Item 1. Financial Statements
Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
September 30, December 31,
2003 2002
------------- ------------
Assets
Cash and due from banks $ 21,804 $ 16,035
Federal funds sold and overnight deposits 2,687 9,713
-------- --------
Cash and Cash Equivalents 24,491 25,748
Interest bearing deposits in banks 4,434 5,327
Securities available-for-sale 38,317 45,824
Federal Home Loan Bank stock 1,241 1,235
Loans held for sale 23,759 17,139
Loans 252,801 238,974
Allowance for loan losses (3,032) (2,908)
Unearned net loan fees (214) (206)
-------- --------
Net loans 249,555 235,860
-------- --------
Accrued interest receivable 1,720 1,890
Premises and equipment, net 4,487 4,612
Other real estate owned 126 784
Other assets 4,976 5,073
-------- --------
Total assets $353,106 $343,492
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest bearing $ 47,616 $ 40,976
Interest bearing 253,657 252,028
-------- --------
Total deposits 301,273 293,004
Borrowed funds 7,634 7,536
Accrued interest and other liabilities 3,815 3,783
-------- --------
Total liabilities 312,722 304,323
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $2 par value; 5,000,000 shares authorized;
4,910,386 shares issued at 9/30/03 (See Note 2) and
3,270,689 shares issued at 12/31/02 9,821 6,542
Paid-in capital 44 318
Retained earnings 31,465 33,357
Treasury stock at cost; 360,948 shares at 9/30/03
(See Note 2) and 240,632 at 12/31/02 (1,722) (1,722)
Accumulated other comprehensive income 776 674
-------- --------
Total stockholders' equity 40,384 39,169
-------- --------
Total liabilities and stockholders' equity $353,106 $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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 4,594 $ 4,863 $ 13,696 $ 14,423
Interest on securities available for sale
Taxable 363 560 1,214 1,741
Tax Exempt 57 65 179 193
Dividends 16 17 50 57
Interest on federal funds sold and overnight deposits 14 30 62 84
Interest on interest bearing deposits in banks 37 48 130 150
--------- --------- --------- ---------
5,081 5,583 15,331 16,648
--------- --------- --------- ---------
Interest expense:
Interest on deposits 892 1,428 3,031 4,516
Interest on federal funds purchased 0 0 0 3
Interest on borrowed funds 86 118 258 375
--------- --------- --------- ---------
978 1,546 3,289 4,894
--------- --------- --------- ---------
Net interest income 4,103 4,037 12,042 11,754
Provision for loan losses 30 95 114 290
--------- --------- --------- ---------
Net interest income after provision for loan losses 4,073 3,942 11,928 11,464
--------- --------- --------- ---------
Other income:
Trust income 40 7 120 123
Service fees 652 647 1,974 1,841
Loss on sale of securities 0 0 0 (3)
Gain on sale of loans held for sale 90 272 317 308
Other income 46 60 123 225
--------- --------- --------- ---------
828 986 2,534 2,494
--------- --------- --------- ---------
Other expenses:
Salaries and wages 1,298 1,299 4,061 3,835
Pension and employee benefits 506 381 1,434 1,231
Occupancy expense, net 149 165 506 492
Equipment expense 224 232 671 648
Net operation of other real estate owned 34 164 113 497
Other expense 754 725 2,363 2,187
--------- --------- --------- ---------
2,965 2,966 9,148 8,890
--------- --------- --------- ---------
Income before income tax expense 1,936 1,962 5,314 5,068
Income tax expense 574 566 1,534 1,420
--------- --------- --------- ---------
Net income $ 1,362 $ 1,396 $ 3,780 $ 3,648
========= ========= ========= =========
Earnings per common share (See Note 2) $ 0.30 $ 0.31 $ 0.83 $ 0.80
========= ========= ========= =========
Weighted average number of common
shares outstanding (See Note 2) 4,548,287 4,542,788 4,546,550 4,542,788
========= ========= ========= =========
Dividends declared per share (See Note 2) $ 0.20 $ 0.19 $ 0.60 $ 0.56
========= ========= ========= =========
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)
Common Stock
-------------------- Accumulated
Shares, Paid-in Other
Net of Capital Retained Treasury Comprehensive
Treasury Amount & Surplus Earnings Stock Income Total
-------- ------ --------- -------- -------- ------------- -----
Balance, December 31, 2002 3,030,057 $6,542 $ 318 $33,357 $(1,722) $674 $39,169
Stock Split effected in the form of
a stock dividend (3 for 2,
effective 8/8/03) 1,515,231 3,271 (330) (2,945) - - (4)
Comprehensive Income:
Net income - - 3,780 - - 3,780
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment and
tax effects. - - - - 102 102
-------
Total Comprehensive income - - - - - 3,882
-------
Exercise of stock options 4,150 8 56 - - - 64
Cash dividends declared
($.60 per share) - - (2,727) - - (2,727)
------------------------------------------------------------------------------------
Balance September 30, 2003 4,549,438 $9,821 $ 44 $31,465 $(1,722) $776 $40,384
====================================================================================
See accompanying notes to the unaudited consolidated financial statements
5
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine months ended
September 30, September 30,
2003 2002
------------- -------------
Cash Flows From Operating Activities
Net Income $ 3,780 $ 3,648
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 489 477
Provision for loan losses 114 290
Credit for deferred income taxes (146) (132)
Net amortization on securities available-for-sale 202 137
Equity in losses of limited partnerships 94 93
Write-downs of other real estate owned 53 275
Increase (decrease) in unamortized loan fees 8 (8)
Proceeds from sales of loans held for sale 19,127 10,732
Net loans made to customers and held for sale (25,430) (13,399)
Loss on sale of securities available-for-sale 0 3
Gain on sale of loans held for sale (317) (308)
Gain on sale of other real estate owned 0 (21)
Gain on disposal of premises and equipment (6) (1)
Decrease in accrued interest receivable 170 112
(Increase) decrease in other assets 80 (291)
(Decrease) increase in income taxes (212) 188
Decrease in accrued interest payable (224) (357)
Increase in other liabilities 577 630
-------- --------
Net cash provided by (used in) operating activities (1,641) 2,068
-------- --------
Cash Flows From Investing Activities
Interest bearing deposits in banks
Maturities and redemptions 2,671 1,964
Purchases (1,778) (992)
Securities available-for-sale
Sales 351 506
Maturities, calls and paydowns 19,424 12,227
Purchases (12,315) (11,089)
Purchase of Federal Home Loan Bank Stock (6) (171)
Increase in loans, net (14,063) (9,406)
Recoveries of loans charged off 80 82
Purchases of premises and equipment (370) (1,052)
6
Nine months ended
September 30, September 30,
2003 2002
------------- -------------
Investments in limited partnerships (109) (254)
Proceeds from sales of other real estate owned 746 0
Proceeds from sales of premises and equipment 12 3
Proceeds from sales of repossessed property 41 11
-------- --------
Net cash used in investing activities (5,316) (8,171)
-------- --------
Cash Flows From Financing Activities
Increase in borrowings outstanding, net 98 1,043
Proceeds from exercise of stock options 64 0
Net increase in noninterest bearing deposits 6,640 1,067
Net increase in interest bearing deposits 1,629 7,004
Proceeds paid out for fractional shares (4) 0
Dividends paid (2,727) (2,543)
-------- --------
Net cash provided by financing activities 5,700 6,571
-------- --------
Increase (decrease) in cash and cash equivalents $ (1,257) $ 468
Cash and cash equivalents
Beginning $ 25,748 $ 21,556
-------- --------
Ending $ 24,491 $ 22,024
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,514 $ 5,251
======== ========
Income taxes paid $ 1,871 $ 1,040
======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 141 $ 1,209
======== ========
Repossessed property acquired in settlement of loans $ 25 $ 32
======== ========
Loans originated to finance the sale of other real
estate owned $ (1,376) $ (1,070)
======== ========
Total change in unrealized gain on securities
available-for-sale $ 155 $ 326
======== ========
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
September 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 operations for the interim periods are
not necessarily indicative of the results of operations to be expected for
the full fiscal year ended December 31, 2003 or any other interim period.
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
stock split resulted in the issuance of 1,515,231 additional shares of the
Company's common stock net of fractional shares settled in cash. Per
share amounts presented in the consolidated financial statements, including
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. There is no
material impact from this Statement on the Company's financial statements.
8
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 provisions 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 nine months ended September 30 would have
approximated:
Three months ended Nine months ended
------------------ ------------------
(Dollars in thousands, except for per share data) 9/30/03 9/30/02 9/30/03 9/30/02
------- ------- ------- -------
Net Income as reported $1,362 $1,396 $3,780 $3,648
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1) (1) (3) (3)
------ ------ ------ ------
Pro forma net income $1,361 $1,395 $3,777 $3,645
====== ====== ====== ======
Earnings per common share:
As reported $ 0.30 $ 0.31 $ 0.83 $ 0.80
Pro forma $ 0.30 $ 0.31 $ 0.83 $ 0.80
Note 7. Comprehensive income
The components of other comprehensive income and related tax effects
(dollars in thousands) for the three and nine month periods ended September
30, 2003 and 2002 are as follows:
Three months Nine months
------------------- -------------------
9/30/03 9/30/02 9/30/03 9/30/02
------- ------- ------- -------
Unrealized holding gains (losses) on available-for
sale securities $(467) $189 $155 $ 323
Reclassification adjustment for (gains) losses realized
in income - - - -
----- ---- ---- -----
Net unrealized gains (losses) (467) 189 155 323
Tax effect (159) (64) (53) (110)
----- ---- ---- -----
Net of tax amount $(308) $125 $102 $ 213
===== ==== ==== =====
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 September 30,
2003 and as of December 31, 2002, and its results of operations for the
three months and nine months ended September 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 for the interim
period. Management is not aware of the occurrence of any events after
September 30, 2003, 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. The stock
split resulted in the issuance of 1,515,231 additional shares of the
Company's common stock net of fractional shares settled in cash. In the
discussion below, September 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 to 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 (pre-split) and it closed on
September 30, 2003 at $29.85 and on November 7, 2003 at $27.49.
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 them to
reflect new or changed information or events, except as may be required by
federal securities laws.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United
States of America in the preparation of the Company's financial statements.
Certain accounting policies involve significant judgments and assumptions
by management which have a material impact on the reported amount of
assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial statements
and related notes. The Securities and Exchange Commission ("SEC") has
defined a company's critical accounting policies as the ones that are most
important to the portrayal of the company's financial condition and results
of operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, we have
identified the 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 September 30, 2003 was $1.36
million, compared with net income of $1.40 million for the third quarter of
2002. Net income per share was $.30 for the third quarter of 2003 compared
to $.31 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 September 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 $ 6,890 $ 14 0.83% $ 7,633 $ 30 1.55%
Interest bearing deposits in banks 4,386 37 3.42% 3,854 48 4.93%
Investments (1), (2) 36,894 436 4.99% 46,570 642 5.75%
Loans, net (1), (3) 269,130 4,594 6.83% 256,558 4,863 7.59%
-------- ------ ---- -------- ------ ----
Total interest-earning assets (1) 317,300 5,081 6.44% 314,615 5,583 7.14%
Cash and due from banks 17,872 12,655
Premises and equipment 4,540 4,808
Other assets 6,724 8,824
-------- --------
Total assets $346,436 $340,902
======== ========
Average Liabilities and
Stockholders' Equity:
Now accounts $ 43,670 $ 53 0.48% $ 39,082 $ 105 1.07%
Savings and money market accounts 108,545 232 0.85% 106,379 426 1.59%
Certificates of deposit 99,700 607 2.41% 104,150 897 3.42%
Borrowed funds 7,794 86 4.38% 11,761 118 3.94%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 259,709 978 1.49% 261,372 1,546 2.34%
Non-interest bearing deposits 44,026 39,088
Other liabilities 3,757 3,534
-------- --------
Total liabilities 307,492 303,994
Stockholders' equity 38,944 36,908
-------- --------
Total liabilities and
stockholders' equity $346,436 $340,902
======== ========
Net interest income $4,103 $4,037
====== ======
Net interest spread (1) 4.95% 4.80%
==== ====
Net interest margin (1) 5.22% 5.19%
==== ====
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
Nine months ended September 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 $ 8,402 $ 62 0.99% $ 7,093 $ 84 1.58%
Interest bearing deposits in banks 4,719 130 3.69% 4,126 150 4.87%
Investments (1), (2) 40,155 1,443 5.06% 46,679 1,991 5.92%
Loans, net (1), (3) 260,542 13,696 7.09% 251,439 14,423 7.74%
-------- ------- ---- -------- ------- ----
Total interest-earning assets (1) 313,818 15,331 6.62% 309,337 16,648 7.29%
Cash and due from banks 15,713 12,667
Premises and equipment 4,582 4,641
Other assets 7,184 8,876
-------- --------
Total assets $341,297 $335,521
======== ========
Average Liabilities and
Stockholders' Equity:
Now accounts $ 42,128 $ 175 0.55% $ 37,333 $ 317 1.13%
Savings and money market accounts 107,749 798 0.99% 104,746 1,340 1.71%
Certificates of deposit 100,275 2,058 2.74% 102,939 2,859 3.71%
Borrowed funds 7,612 258 4.54% 12,567 378 3.99%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 257,764 3,289 1.71% 257,585 4,894 2.54%
Non-interest bearing deposits 40,902 37,325
Other liabilities 3,818 3,719
-------- --------
Total liabilities 302,484 298,629
Stockholders' equity 38,813 36,892
-------- --------
Total liabilities and
stockholders' equity $341,297 $335,521
======== ========
Net interest income $12,042 $11,754
======= =======
Net interest spread (1) 4.91% 4.75%
==== ====
Net interest margin (1) 5.22% 5.17%
==== ====
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 $66 thousand, or 1.6%, to
$4.10 million for the three months ended September 30, 2003, from $4.04
million for the three months ended September 30, 2002. The net interest
spread increased by 15 basis points to 4.95% for the three months ended
September 30, 2003, from 4.80% for the three months ended September 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 3 basis points to 5.22% from
the 2002 period at 5.19%. 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 $12.0 million compared
to the prior year of $11.7 million or an increase of 2.5% between the two
years. This increase was due to the increase in average interest earning
assets to $314 million for 2003 from $309 million for 2002 partially offset
by the decrease in yield from 7.29% to 6.62%. And, while average interest
bearing liabilities only grew $179 thousand, the rate paid dropped from
2.54% to 1.71% between years. The net interest spread increased by 16 basis
13
points to 4.91% for the nine months ended September 30, 2003 from 4.75% for
the nine months ended September 30, 2002. The net interest margin for the
2003 period increased to 5.22% from 5.17% for the 2002 period or an
increase of 5 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 September 30, 2003 Compared
to Three Months Ended September 30, 2002
Increase/(Decrease) Due to Change In
----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ (3) $ (13) $ (16)
Interest bearing deposits in banks 7 (18) (11)
Investments (136) (70) (206)
Loans, net 244 (513) (269)
----- ----- -----
Total interest-earning assets 112 (614) (502)
Interest-bearing liabilities:
Now accounts 12 (64) (52)
Savings and money market accounts 8 (202) (194)
Certificates of deposit (35) (255) (290)
Borrowed funds (40) 8 (32)
----- ----- -----
Total interest-bearing liabilities (55) (513) (568)
----- ----- -----
Net change in net interest income $ 167 $(101) $ 66
===== ===== =====
Nine Months Ended September 30, 2003 Compared
to Nine Months Ended September 30, 2002
Increase/(Decrease) Due to Change In
---------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
Interest-earning assets:
Federal funds sold and overnight deposits $ 15 $ (37) $ (22)
Interest bearing deposits in banks 22 (42) (20)
Investments (290) (258) (548)
Loans, net 533 (1,260) (727)
----- ------- -------
Total interest-earning assets 280 (1,597) (1,317)
Interest-bearing liabilities:
Now accounts 41 (183) (142)
Savings and money market accounts 38 (580) (542)
Certificates of deposit (74) (727) (801)
Borrowed funds (150) 30 (120)
----- ------- -------
Total interest-bearing liabilities (145) (1,460) (1,605)
----- ------- -------
Net change in net interest income $ 425 $ (137) $ 288
===== ======= =======
14
Quarter Ended September 30, 2003 compared to Quarter Ended September 30, 2002.
Interest and Dividend Income. The Company's interest and dividend income
decreased by $502 thousand, or 9.0%, to $5.1 million for the three months
ended September 30, 2003, from $5.6 million for the three months ended
September 30, 2002 reflecting the low interest rate environment. Average
earning assets increased by $2.7 million, or .9%, to $317.3 million for the
three months ended September 30, 2003, from $314.6 million for the three
months ended September 30, 2002. Average loans approximated $269.1 million
for the three months ended September 30, 2003 up from $256.6 million for
the three months ended September 30, 2002. Construction loans grew by $6.2
million or 62.6%, which reflects favorably on local economic conditions
since the Company does not invest in properties built on "spec". In
addition, there was an $8.2 million or 6.4% increase in commercial and
commercial real estate loans and a $3.9 million or 32.7% increase in loans
to municipalities.
The average balance of investment securities (including mortgage-backed
securities) decreased by $9.7 million, or 20.8%, to $36.9 million for the
three months ended September 30, 2003, from $46.6 million for the three
months ended September 30, 2002. The average level of federal funds sold
and overnight deposits decreased by $.7 million or 9.7%, to $6.9 million
for the three months ended September 30, 2003, from $7.6 million for the
three months ended September 30, 2002. The average balance in interest
bearing deposits in banks increased by $.5 million to $4.4 million from
$3.9 million, or a 13.8% increase. The net decrease in the investment
portfolio, federal funds sold and interest bearing deposits in banks of
$9.9 million during 2003 reflects the continuing growth in our loan
portfolio. Interest income from non-loan instruments was $487 thousand for
2003 and $720 thousand for 2002 reflecting the decrease in yields and the
overall decrease in volume.
Interest Expense. The Company's interest expense decreased by $569
thousand, or 36.8%, to $1.0 million for the three months ended September
30, 2003 from $1.5 million for the three months ended September 30, 2002
reflecting the low interest rate environment. Average interest-bearing
liabilities decreased by $1.7 million, or .6%, to $259.7 million for the
three months ended September 30, 2003, from $261.4 million for the three
months ended September 30, 2002. Average time deposits were $99.7 million
for the three months ended September 30, 2003 and $104.2 million for the
three months ended September 30, 2002, or a decrease of 4.3%. The average
balances for money market and savings accounts increased by $2.2 million,
or 2.0% to $108.5 million for the three months ended September 30, 2003,
from $106.4 million for the three months ended September 30, 2002. The
11.7% increase in Now accounts brought the average balance up to $43.7
million from $39.1 million. Management believes that customers have
maintained very liquid positions during the last 2 years as they anticipate
interest rates paid on deposit instruments will rise.
The average balance on funds borrowed has decreased from $11.8 million for
the three months ended September 30, 2002 to $7.8 million for the three months
ended September 30, 2003 as the Company paid off $3.5 million of high rate
advances in late 2002, took down $1.2 million in a new amortizing advance in
May 2003, and has continued to pay down amortizing Federal Home Loan Bank
advances.
Noninterest Income. The Company's noninterest income decreased $158
thousand, or 16.0%, to $828 thousand for the three months ended September
30, 2003 from $986 thousand for the three months ended September 30, 2002.
Trust department income increased to $40 thousand for the three months of
2003 from $7 thousand in the same period of 2002. Gain on Sale of Loans
decreased $182 thousand to $90 thousand for 2003 from $272 thousand for
2002 as interest rates rose during the quarter which resulted in less gains
on real estate loans sold during 2003 and the 2002 results included a $92
thousand gain on the sale of commercial loans that was not repeated in
2003. Service fees (sources of which include, among others, deposit and
loan servicing fees, ATM fees, and safe deposit fees) increased by $5
thousand, or .8%, to $652 thousand for the three months ended September 30,
2003, from $647 thousand for the three months ended September 30, 2002.
Other income in 2003 is $46 thousand down from $60 thousand in 2002 mainly
due to the non-reoccurrence of a gain on the sale of OREO during the 3rd
quarter of 2002.
Noninterest Expense. The Company's noninterest expense was flat at $3
million for the three months ended September 30, 2003 and 2002. Salaries and
wages remained flat at $1.3 million for the three months ended September 30,
2003 and 2002. Pension and employee benefits increased $125
15
thousand, or 32.8%, to $506 thousand for the three months ended September
30, 2003, from $381 thousand for the three months ended September 30, 2002
mainly due to a $130 thousand increase in retirement plan costs, mainly the
defined benefit pension plan as a result of low interest rates and the
market environment for investments. Net occupancy expense dropped 9.7% or
$16 thousand to $149 thousand for the quarter ending September 30, 2003
from $165 thousand for the third quarter of 2002. Equipment expense dropped
$8 thousand or 3.4% to $224 thousand for 2003 from $232 thousand for 2002.
Net operation of other real estate owned was $34 thousand for the three
months ended September 30, 2003 compared to $164 thousand for the same
period in 2002, as a large commercial property was acquired during the
second quarter of 2002 and land foreclosed on during the third quarter of
2002 required funds to make it saleable. Both properties have subsequently
been sold. Other operating expenses were $754 thousand for the three months
ending September 30, 2003 compared to $725 thousand for the same period in
2002. The increase of $29 thousand, or 4.0%, is mainly due to the cost of
the additional listing fee to the American Stock Exchange necessitated by
the stock split.
Income Tax Expense. The Company's income tax expense increased by $8
thousand, or 1.4%, to $574 thousand for the three months ended September
30, 2003, from $566 thousand for the comparable period of 2002.
Year to Date September 30, 2003 compared to Year to Date September 30, 2002.
Interest and Dividend Income. The Company's interest and dividend income
decreased by $1.3 million, or 8.0%, to $15.3 million for the nine months
ended September 30, 2003, from $16.6 million for the nine months ended
September 30, 2002 reflecting the low interest rate environment. Average
earning assets increased by $4.5 million, or 1.4%, to $313.8 million for
the nine months ended September 30, 2003, from $309.3 million for the nine
months ended September 30, 2002. Average loans approximated $260.5 million
for the nine months ended September 30, 2003 up from $251.4 million for the
nine months ended September 30, 2002. The $6.3 million or 6.0% increase in
commercial real estate loans, the $2.8 million or 24.7% increase in
municipal loans and the growth of residential construction loans 39.2% from
$9.7 million to $13.5 million was partially offset by the $1.5 million or
15.0% decrease in personal loans and the $2.5 million or 3.0% decrease in
residential mortgage loans which was caused by the sale of $19.1 million in
2003 compared to $9.4 million during 2002 as we managed our loan
portfolio's interest rate risk. 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 $6.5 million, or 14.0%, to $40.2 million for the
nine months ended September 30, 2003, from $46.7 million for the nine
months ended September 30, 2002. The average level of federal funds sold
and overnight deposits increased by $1.3 million or 18.4%, to $8.4 million
for the nine months ended September 30, 2003, from $7.1 million for the
nine months ended September 30, 2002. The average balance in interest
bearing deposits in banks increased by $.6 million to $4.7 million from
$4.1 million, or 14.4% 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 $1.6 million for 2003 and $2.2 million for
2002 reflecting the decrease in yields and the overall decrease in volume.
Interest Expense. The Company's interest expense decreased by $1.6 million,
or 32.8%, to $3.3 million for the nine months ended September 30, 2003 from
$4.9 million for the nine months ended September 30, 2002 reflecting the
low interest rate environment. Average interest-bearing liabilities were
stable at $257.8 million for the nine months ended September 30, 2003, from
$257.6 million for the nine months ended September 30, 2002. Average time
deposits were $100.3 million for the nine months ended September 30, 2003
and $102.9 million for the nine months ended September 30, 2002, or a
decrease of 2.6%. The average balances for money market and savings
accounts increased by $3.0 million, or 2.9% to $107.7 million for the nine
months ended September 30, 2003, from $104.7 million for the nine months
ended September 30, 2002. The 12.8% increase in NOW accounts brought the
average balance up to $42.1 million from $37.3 million. Management believes
that customers have maintained very liquid positions during the last 2 years
as they anticipate interest rates paid on deposit instruments will rise.
The average balance on funds borrowed has decreased from $12.6 million for
the nine months ended September 30, 2002 to $7.6 million for the nine months
ended September 30 2003 as the Company paid off $3.5 million of high rate
advances in late 2002, took down $1.2 million in a new amortizing advance in
May 2003, and
16
has continued to pay down amortizing Federal Home Loan Bank Advances.
Noninterest Income. The Company's noninterest income increased $40
thousand, or 1.6%, to $2.53 million for the nine months ended September 30,
2003 from $2.49 million for the nine months ended September 30, 2002. The
results for the period reflected a net gain of $317 thousand from the sale
of loans compared to a gain of $308 thousand from sales during 2002. Trust
department income decreased to $120 thousand for the nine months of 2003
from $123 thousand in the same period of 2002. Service fees (sources of
which include, among others, deposit and loan servicing fees, ATM fees, and
safe deposit fees) increased by $133 thousand, or 7.2%, to $1.97 million
for the nine months ended September 30, 2003, from $1.84 million for the
nine months ended September 30, 2002. Other income in 2003 was $123
thousand, down 45.3% from $225 thousand in 2002. The decrease reflects a
$40 thousand decrease between years in net servicing rights and a decrease
of $30 thousand in income from the cash surrender value of life insurance.
Noninterest Expense. The Company's noninterest expense increased $258
thousand, or 2.9%, to $9.1 million for the nine months ended September 30,
2003, from $8.9 million for the nine months ended September 30, 2002.
Salaries increased $226 thousand, or 5.9%, to $4.1 million for the nine
months ended September 30, 2003, from $3.8 million for the nine months
ended September 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 $203 thousand, or 16.5%, to $1.4 million for the nine
months ended September 30, 2003, from $1.2 million for the nine months
ended September 30, 2002 mainly due to an $185 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 the non-recurring accrual for separation
agreements. Net occupancy expense increased $14 thousand, or 2.8%, to $506
thousand for the nine months ended September 30, 2003, from $492 thousand
for the nine months ended September 30, 2002 due mainly to the addition and
renovation of some administration space in Morrisville and the new Fairfax
branch location. Equipment expense increased $23 thousand or 3.5% to $671
thousand for the nine months ended September 30, 2003, from $648 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 $113 thousand for the nine months ended September 30, 2003
compared to $497 thousand for the same period in 2002, as two large
commercial properties owned in 2002 were sold and a land parcel foreclosed
on in 2002 that required funds to make it saleable was also sold. Other
operating expenses were $2.4 million for the first nine months of 2003
compared to $2.2 million for the same period in 2002. The increase of $176
thousand, or 8.0%, is mainly due to merger related expenses of the
subsidiaries, the cost of the additional listing fee to the American Stock
Exchange necessitated by the stock split and employment costs related to
strengthening middle management.
Income Tax Expense. The Company's income tax expense increased by $114
thousand, or 8.0%, to $1.5 million for the nine months ended September 30,
2003, from $1.4 million for the comparable period of 2002, mainly due to
increased income from taxable income sources partially offset by a lower
effective tax rate because of increased tax-exempt income resulting from the
growth in our municipal loan portfolio.
FINANCIAL CONDITION
At September 30, 2003, the Company had total consolidated assets of $353.1
million, including net loans and loans held for sale of $273.3 million,
deposits of $301.3 million and stockholders' equity of $40.4 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 increased by $9.6 million or 2.8% to $353.1
million at September 30, 2003 from $343.5 million at December 31, 2002.
Total net loans and loans held for sale increased by $20.3 million or 8.0%
to $273.3 million or 77.4% of total assets at September 30, 2003 as
compared to $253.0 million or 73.7% of total assets at December 31, 2002.
Cash and cash equivalents, including federal
17
funds sold and overnight deposits, decreased $1.2 million or 4.9% to $24.5
million at September 30, 2003 from $25.7 million at December 31, 2002.
Securities available for sale decreased from $45.8 million at December 31,
2002 to $38.3 million at September 30, 2003, a $7.5 million or 16.3%
decrease. Securities maturing have been utilized to fund loan demand.
Deposits increased $8.3 million or 2.8% to $301.3 million at September 30,
2003 from $293.0 million at December 31, 2002 mainly in noninterest bearing
deposits. Total borrowings increased $98 thousand to $7.6 million at
September 30, 2003 from $7.5 million at December 31, 2002 as the Company drew
down $1.2 million in 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 September 30, 2003, the gross loan portfolio totaled $276.6
million, or 78.3%, of assets. Gross loans and loans held for sale have
increased $20.4 million or 8.0% since December 31, 2002. An increase of $14.0
million or 16.2% in commercial real estate loans, an increase in residential
real estate loans held for sale of $6.6 million or 38.6%, and an increase of
$4.3 million or 33.3% in municipal loans was partially offset by a $1.2
million or 10.9% decrease in consumer loans, a decrease of $1.6 million or
1.5% in residential real estate loans not held for sale and a $1.7 million or
8.4% drop in commercial loans. The following table shows information on the
composition of the Company's loan portfolio (dollars in thousands) as of
September 30, 2003 and December 31, 2002:
Loan Type September 30, 2003 December 31, 2002
- --------- ------------------ ------------------
Real estate $107,749 39.0% $109,347 42.7%
Commercial real estate 100,062 36.2% 86,081 33.6%
Commercial 18,253 6.6% 19,919 7.8%
Consumer 9,586 3.4% 10,758 4.2%
Municipal loans 17,151 6.2% 12,869 5.0%
Loans held for sale 23,759 8.6% 17,139 6.7%
-------- ----- -------- -----
Total loans 276,560 100.0% 256,113 100.0%
Deduct:
Allowance for loan losses 3,032 2,908
Net deferred loan fees, premiums & discounts 214 206
-------- --------
$273,314 $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 $163.9 million residential mortgage portfolio,
approximately $56.2 million of which is serviced for unaffiliated third
parties at September 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 $12.0 million of commercial and commercial real estate
loans for unaffiliated third parties as of September 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 September 30, 2003.
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 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.
18
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 $1.05 million at September 30, 2003, $1.5 million at
December 31, 2002 and $1.3 million at September 30, 2002. The aggregate
interest income not recognized on such nonaccrual loans amounted to
approximately $411 thousand and $325 thousand as of September 30, 2003 and
2002, respectively and $316 thousand as of December 31, 2002.
The Company had $1.4 million and $1.5 million in loans past due 90 days or
more and still accruing at September 30, 2003 and December 31, 2002,
respectively. In addition, at September 30, 2003 the Company had internally
classified certain loans totaling $1.8 million. In management's view, such
loans represent a higher degree of risk and could become nonperforming
loans in the future. While still on a performing status, in accordance with
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 September 30, 2003, the Company had acquired by foreclosure or through
in-substance foreclosure real estate worth $126 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, 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
19
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 September 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 nine months ended September 30,
2003 and 2002:
Three Months Ended, September 30, Nine Months Ended, September 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Balance at the beginning of period $2,993 $2,834 $2,908 $2,801
Charge-offs:
Real Estate 0 6 17 6
Commercial 0 16 10 63
Consumer and other 7 19 43 67
------ ------ ------ ------
Total charge-offs 7 41 70 136
------ ------ ------ ------
Recoveries:
Real Estate 1 1 2 7
Commercial 1 1 26 11
Consumer and other 14 20 52 42
------ ------ ------ ------
Total recoveries 16 22 80 60
------ ------ ------ ------
Net (charge-offs) recoveries 9 (19) 10 (76)
Provision for loan losses 30 105 114 195
------ ------ ------ ------
Balance at end of period $3,032 $2,920 $3,032 $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:
September 30, 2003 December 31, 2002
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate
Residential $ 637 36.5% $ 580 39.2%
Commercial 1,552 39.3% 1,428 35.6%
Construction 186 6.7% 144 5.6%
Other Loans
Commercial 350 6.6% 412 8.7%
Consumer installment 149 3.5% 208 4.3%
Home equity loans 25 1.2% 28 1.5%
Municipal, Other and
Unallocated 133 6.2% 108 5.1%
------ ----- ------ -----
Total $3,032 100.0% $2,908 100.0%
====== ===== ====== =====
Ratio of Net Charge Offs to
Average Loans (1) 0.00% 0.11%
----- -----
Ratio of Allowance for Loan
Losses to Average Loans 1.26% 1.23%
----- -----
Annualized
Management of the Company believes that the allowance for loan losses at
September 30, 2003 is adequate to cover losses inherent in the Company's
loan portfolio as of such date. However there can be
20
no assurance that the Company will not sustain losses in future periods,
which could be greater than the size of the allowance at September 30,
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 September 30, 2003, the reported value of
investment securities available-for-sale was $38.3 million or 10.9% 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
September 30, 2003, reflects a positive valuation adjustment of $1.2
million. The offset of this adjustment, net of income tax effect, was a $.8
million increase in the Company's other comprehensive income component of
stockholders' equity and a decrease in net deferred tax assets of $.4
million.
Deposits. The following table shows information concerning the Company's
average 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 September 30, 2003 and December 31, 2002:
Nine Months Ended, September 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 $ 40,902 14.1% $ 37,932 13.3%
Now accounts 42,128 14.5% 0.55% 39,143 13.7% 1.07%
Money Markets 63,467 21.8% 1.10% 66,562 23.3% 1.85%
Savings 44,282 15.2% 0.83% 39,296 13.7% 1.27%
-------- ------ -------- ------
Total non-certificate deposits: 190,779 65.6% 182,933 64.0%
-------- ------ -------- ------
Certificates of deposit:
Less than $100,000 75,824 26.0% 2.74% 75,021 26.3% 3.18%
$100,000 and over 24,451 8.4% 2.73% 27,736 9.7% 4.71%
-------- ------ -------- ------
Total certificates of deposit 100,275 34.4% 102,757 36.0%
-------- ------ -------- ------
Total deposits $291,054 100.00% 1.62% $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
September 30, 2003 and December 31, 2002 that mature during the periods
indicated:
September 30, 2003 December 31, 2002
------------------ -----------------
(dollars in thousands)
Within 3 months $ 8,568 $ 9,629
3 to 6 months 5,140 13,090
6 to 12 months 8,332 3,113
Over 12 months 4,970 4,217
------- -------
$27,010 $30,049
======= =======
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $7.6
million at September 30, 2003 at a weighted average rate of 4.38%.
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 third quarter of 2003 is a net increase of
$98 thousand which consisted of new borrowings of $1.2 million partially
off-set by pay downs of amortizing advances and maturities of term advances.
21
OTHER FINANCIAL CONSIDERATIONS
Market Risk and Asset and Liability Management. Market risk is the risk of
loss in a financial instrument arising from adverse changes in market
prices and rates, foreign currency exchange rates, commodity prices and
equity prices. 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 $12.1 million
for the first nine months of 2003 compared to actual results of $12.0
million where the prime rate dropped 25 basis points from 4.25% to 4% on
June 27, 2003. We saw some recovery in long term rates during the third
quarter even though short term rates including prime stayed stable. Net
income was projected to be $3.5 million in a flat rate environment compared
to actual results of $3.8 million. The $262 thousand increase in Net Income
from projections is mainly due to the after tax increase in the Gain on
Sale of Loans of $189 thousand and $49 thousand in the Net Gain on Mortgage
Servicing Rights. Return on Assets was projected to be 1.35% in a flat rate
environment and actual results were 1.48%. Return on Equity was projected
to be 12.25% in a flat rate environment compared to actual of 13.02%.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of September 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 $36,298
Standby letters of credit and commercial letters of credit 814
Credit Card arrangements 2,070
Home Equity Lines of Credit 4,843
-------
Total $44,025
=======
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. 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.
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
22
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
September 30, 2003:
September 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 $ 2,687 $ 0 $ 0 $ 0 $ 0 $ 2,687
Interest bearing deposits 1,092 1,676 1,270 396 0 4,434
Investments available for sale (1) 3,680 7,205 13,053 7,841 5,532 37,311
FHLB Stock 0 0 0 0 1,241 1,241
Loans (fixed and
adjustable rate) (2) 59,685 75,122 62,539 44,582 34,418 276,346
------- ------- ------- ------- -------- --------
Total interest sensitive assets $67,144 $84,003 $76,862 $52,819 $ 41,191 $322,019
------- ------- ------- ------- -------- --------
Interest sensitive liabilities:
Certificates of deposit $24,845 $42,238 $25,123 $ 3,625 $ 7 $ 95,838
Money markets 9,409 0 0 0 57,862 67,271
Regular savings 11,739 0 0 0 33,893 45,632
Now accounts 20,848 0 0 0 24,068 44,916
Borrowed funds (3) 350 1,075 3,045 3,164 0 7,634
------- ------- ------- ------- -------- --------
Total interest sensitive liabilities $67,191 $43,313 $28,168 $ 6,789 $115,830 $261,291
------- ------- ------- ------- -------- --------
Net interest rate sensitivity gap (47) 40,690 48,694 46,030 (74,639) 60,728
Cumulative net interest rate
sensitivity gap (47) 40,643 89,337 135,367 60,728
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (00.01)% 11.51% 25.30% 38.34% 17.20%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-earning assets (00.01)% 12.62% 27.74% 42.04% 18.86%
Cumulative net interest rate sensitivity
gap as a percentage of total
interest-bearing liabilities (00.02)% 15.55% 34.19% 51.81% 23.24%
Investments available for sale exclude marketable equity securities
with a fair value of $1.0 million that may be sold by the Company at
any time.
Balances shown net of unearned income of $214 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 of our latest simulation analysis
for each of the next two year ends (dollars in thousands) 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
Return Return
on on Capital
Year Prime Net Interest Change Net Assets Equity to Asset
Ending Rate Income % Income % % Ratio
------ ----- ------------ ------ ------ ------ ------ --------
December-03 7.00 15,736 0.99 5,170 1.49 13.47 10.42
4.00 15,582 0.00 5,069 1.46 13.20 10.40
1.00 15,343 (1.53) 4,910 1.42 12.77 10.36
December-04 7.00 18,477 13.94 6,510 1.82 17.13 10.99
4.00 16,216 0.00 4,995 1.40 13.42 10.58
1.00 13,077 (19.36) 2,893 0.81 7.99 9.95
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 4.9% of total assets or $17.3 million
over and above the term advances already drawn on the lines. 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 September 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 management monitors current and projected cash flows and
adjusts positions as necessary to maintain adequate levels of liquidity.
Although approximately 70.0% 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 a three-for-two stock split was declared
and effected in the form of a stock dividend payable August 8, 2003. The
information presented in the following paragraphs regarding our capital
has 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 $40.4
million at September 30, 2003 reflecting net income of $3.78 million for
the first nine months of 2003, less dividends paid of $2.73 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 September 30,
2003, the Company had 4,910,386 shares issued, of which 4,549,438 were
outstanding and 360,948 were held in Treasury. Also as of September 30,
2003, there were outstanding employee incentive stock options with respect
to 11,550 shares of the Company's common stock, granted pursuant to Union
Bankshares' 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 September 30, 2003 that they both meet all capital adequacy
requirements to which they are subject. As of September 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 September 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 $42,554 18.27% $18,633 8.0% $23,292 10.0%
Tier I capital to risk weighted assets $39,599 17.00% $ 9,317 4.0% $13,976 6.0%
Tier I capital to average assets $39,599 11.43% $13,857 4.0% N/A N/A
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
26
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-15(e) and Rule
15d-15(e) 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 subsidiary 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 Company's 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.
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 stock
split resulted in the issuance of 1,515,231 additional shares of the
Company's common stock net of fractional shares settled in cash. The stock
split was exempt from registration as no consideration was paid for the
shares.
During the quarter ended September 30, 2003, incentive stock options
previously granted pursuant to the Company's 1998 Incentive Stock Option
Plan ("Plan") were exercised by two participants, with respect to an
aggregate of 3,450 shares, at an aggregate exercise price of $50,600. Also,
incentive stock options previously granted for 300 shares were allowed to
lapse during the quarter. 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 to date during 2003.
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.
27
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
32.2 Certification of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act
(b) Current Reports on Form 8-K
1. Third Quarter Report to Shareholders filed on October 31, 2003
2. Press Release announcing quarterly dividend declaration and
third quarter earnings filed on October 17, 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.
November 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.
32.2 Certification of the Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act.
29