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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, 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
Securities registered pursuant to section 12(b) of the Act:
Common Stock, $2.00 par value
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(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.
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, 2003, based on the last closing price on the
American Stock Exchange of $30.55 (not restated for the 3-for-2 stock split
effective 8/8/04) was $65,714,333. 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 17, 2004, there were 4,550,313 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, 2003 I, II
Proxy Statement for the 2004 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, Related Stockholder
Matters and Issuer Purchases of Equity Securities (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
Item 9A-Controls and Procedures (a) 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-Principal Accountant Fees and Services (b) 12
Part IV
Item 15-Exhibits, Financial Statement Schedules and Reports on Form 8-K 12
Signatures 14
Exhibit Index 15
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(a) The information required by Part II, Items 5, 7, 7A, 8 and 9A is
incorporated herein by reference from the 2003 Annual Report to
Shareholders
(b) The information required by Part III Items 10, 11, 12, 13 and 14 is
incorporated herein by reference from the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on May 19, 2004. The
incorporation by reference herein of portions of the Proxy Statement
shall not be deemed to specifically 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. (the "Company") is a one-bank
holding company whose subsidiary is Union Bank ("Union"). It was
incorporated in the State of Vermont in 1982. On May 16, 2003, the two
subsidiaries (Union Bank and Citizens Savings Bank and Trust Company
[Citizens]) of Union Bankshares, Inc. were successfully merged together
with the surviving, state chartered bank being Union Bank headquartered in
Morrisville, Vermont. Union Bank was organized and chartered as a State
bank in 1891 and became a wholly owned subsidiary of the Company in 1982
upon its formation. Both Union Bankshares, Inc. and Union Bank are
headquartered in Morrisville, Vermont.
After the merger of the two subsidiaries the Company had one definable
business segment, Union, which is a commercial bank in Northern
Vermont. Union is a community bank that provides a full range of
commercial and retail banking services. At December 31, 2003, Union
maintained 12 branch offices, a loan production office in Littleton, New
Hampshire, 28 ATMs, and also provided many of its services via the phone
and the internet. Union has 155 full time equivalent employees. The
Company, itself, does not have any paid employees.
The Company'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 the Company have grown from $290 million to $357
million over the last five years or 23.1% while our total consolidated
deposits have grown from $249 million to $305 million or 22.5% 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 in 1999 and the 3 for 2 stock split in 2003, at Item 6 of this
annual report for further details.
The deposits of Union 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, Union offers a full
line of personal trust services to its customers. Assets held in fiduciary
capacity by Union's trust department are not included in the Company's
consolidated balance sheet for financial reporting purposes other than
trust cash on deposit with Union Bank.
Competition: The Company and its subsidiary face substantial competition
for loans and deposits in their market area from local commercial banks,
savings banks, tax-exempt 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. The Company anticipates continued strong competition from such
financial institutions for the foreseeable future. Within the Company's market
area are branches of several commercial and savings banks that are
substantially larger than the Company. Union focuses on its community banking
niche and on providing convenient hours and modes of delivery to provide
superior customer service. In order to compete with the larger financial
institutions in its service area, Union uses the flexibility and local
autonomy which is accorded by its independent status. This includes an
emphasis on personal service, local promotional activity, and personal
contacts and community service by Union's officers, directors and
employees.
The Company 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. The Company 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, the Company also emphasizes commercial
real estate, construction, and both conventional and Small Business
Administration ("SBA") guaranteed commercial lending. Union is a
preferred SBA lender. Factors that affect the Company'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. The Company 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.
The Company competes 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 the Company 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 the Company intend to continue to
offer products and services that will allow the Company to manage responsibly
the growth of its assets, while building and enhancing stockholder value and
preserve Union Bank's image as a premiere Vermont community bank.
3
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. Tax-exempt credit unions are becoming an
increasingly significant source of competition. Credit union common bond
requirements and the definition of a credit union "member" have been
interpreted liberally by federal and state credit union regulators,
allowing greater penetration into traditional banking markets. In February
of 2003, the 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: The following discussion describes certain
material elements of an extensive regulatory framework applicable to bank
holding companies and their subsidiaries and provides certain information
specific to the Company. This regulatory framework is intended primarily
for the protection of depositors, federal deposit insurance funds and the
banking system as a whole, and not for the protection of security holders.
To the extent that this information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to those
provisions.
As a Vermont-chartered commercial bank, Union is subject to
regulation, examination, and supervision by the Vermont Banking Department
and the FDIC. Regular examinations of Union by the Vermont Banking
Department and the FDIC include examination of the bank's financial
condition and operations, including but not limited to its 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
its management.
In addition the Company, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board ("FRB"). The
regulations of these authorities govern certain of the operations of the
Company and its subsidiary. The following discussion summarizes the material
aspects of various federal and state banking laws and regulations that
apply to the Company and Union.
The Company 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. The Company'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, the Company 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 Bankshares,
and those of companies that they control, such as Union, 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 FRB has determined to be so
closely related to banking, 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 Bankshares that have not elected to become financial holding
companies, are required to obtain the prior approval of the FRB to engage in
any new activity or to acquire more than 5% of any class of voting stock of
any bank or other company. Satisfactory capital ratios, CRA ratings and anti-
money laundering policies are generally prerequisites to obtaining Federal
regulatory approval to make acquisitions.
The FRB 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 FRB also has the
authority to remove officers, directors and other institution-affiliated
parties.
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 financial and other
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 FRB, 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.
4
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 FRB
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 the date of this report, the Company had not elected to become a
financial holding company.
Source of Strength. Under FRB policy, bank holding companies, such as
Union Bankshares, are expected to act as a source of financial and management
strength to their subsidiary banks, such as Union, 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. Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 an adequately capitalized and managed bank holding
company is permitted 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 the Company operates, interstate
branching may present competitive opportunities for locally-owned and
managed banks, such as Union, 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 FRB 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. The Company and Union are subject to
these restrictions in their intercompany transactions.
Bank. The various laws and regulations applicable to Union that are
administered by the FDIC and the Vermont Banking Commissioner affect the
bank's corporate practices, such as payment of dividends, incurring of debt
and acquisition of financial institutions and other companies. These laws
also affect its 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 the Company or Union.
Dividend Limitations. As a holding company, Union Bankshares' ability to pay
dividends to its stockholders is largely dependent on the ability of its
subsidiary to pay dividends to it. Payment of dividends by Vermont-
chartered banks, such as Union, 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 does not have any capital
restrictions in its Certificate 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 Union, and the capital
standards of the FRB apply to the Company on a consolidated basis. In addition,
the FRB, 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.
Loans to Related Parties. The Company's and Union's authority to extend credit
to its directors, executive officers and 10 percent stockholders, as well
as to entities controlled by such persons, is currently governed by the
requirements of the Sarbanes-Oxley Act and Regulation O of the FRB
thereunder. Among other things, these provisions require that extensions of
credit to insiders (i) be made on terms that are substantially the same as,
and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features and (ii) not exceed certain limitations on the amount
of credit extended to such
5
persons, individually and in the aggregate, which limits are based in part,
on the amount of the Bank's capital. Under American Stock Exchange (AMEX)
guidelines, any related party transaction including loans must be approved
by the Company's Audit Committee. Under the Sarbanes-Oxley Act, the Company,
itself, may not extend or arrange for any personal loans to its directors
and executive officers.
Capital Requirements. The FRB, 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 FRB'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 shareholders' 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 the Company's nor Union is currently subject to this special
capital charge.
FRB 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 FRB 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.
The FRB'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 FRB's evaluation of acquisition proposals. The Company does not
have a material amount of intangibles in its capital base.
Prompt Corrective Action. At December 31, 2003, the Company's consolidated
Total and Tier I Risk-Based Capital Ratios were 17.67% and 16.39%,
respectively, and its Leverage Capital Ratio was 11.16%, and is considered
well-capitalized under the above regulatory guidelines. In addition, Union
is 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
6
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 is 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. The bank
participates 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 its last CRA compliance examination
by the FDIC, Union received a rating of "Outstanding."
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 are
insured under the BIF. As a "well capitalized" institution, the bank is
presently in the most favorable deposit insurance assessment category, and
pays the minimum deposit premium assessment.
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,
Union has not accepted brokered deposits.
Consumer Protection Laws. In connection with its lending activities, Union
is 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 is 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.
Union is subject to the provisions of Title V of the Gramm-Leach-
Bliley Act, which requires it to notify their consumer customers of its
information collection and sharing practices and restrict those practices
in certain respects. In addition, the bank is 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 is 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 policy on the
availability of deposited funds.
Bank Secrecy Act. Union is 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 require banks to avoid establishing or maintaining
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 an anti-money laundering program. The act
requires banks to establish due diligence policies, procedures and controls
that are reasonably designed to detect and report instances of money
laundering in United States private banking accounts and correspondent
accounts maintained for non-U.S. persons or their representatives.
The Department of Treasury has issued regulations implementing the due
diligence requirements. These regulations require minimum standards to
verify customer identity and maintain accurate records, encourages
cooperation among financial institutions, federal banking agencies and law
enforcement authorities regarding possible money laundering or terrorist
activities, prohibits the anonymous use of "concentrations accounts" and
requires all covered financial institutions to have in place an anti-money
laundering compliance program. 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.
7
The Act also amends the Bank Holding Company Act and the Bank Merger Act to
require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering program when reviewing an
application under these acts.
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 strengthening corporate
governance and improving the accuracy and reliability of corporate
disclosures made pursuant to securities law. The Sarbanes-Oxley Act
provides for, among other things:
* a prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank
subject to Regulation O);
* independence requirements for audit committee members;
* corporate governance requirements;
* independence requirements for company auditors;
* enhanced disclosure requirements pertaining to corporate operations
and internal controls;
* certification of financial statements on Forms 10-K and 10-Q reports
by the chief executive officer and the chief financial officer;
* the forfeiture by the chief executive officer and the chief financial
officer of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by such officers in the
twelve month period following initial publication of any financial
statements that later require restatement due to corporate
misconduct;
* disclosure of off-balance sheet transactions;
* two-business day filing requirements for insiders filing Form 4s;
* accelerated filing requirements for Forms 10-k and 10-Q by public
companies which qualify as "accelerated filers;"
* disclosure of a code of ethics for principal financial officers and
filing a Form 8-K for a change in or waiver of such code;
* the reporting of securities violations "up the ladder" by both
in-house and outside attorneys;
* restrictions on the use of non-GAAP financial measures in press
releases and SEC filings;
* the formation of a public accounting oversight board; and
* various increased criminal penalties for violations of securities
laws.
Not all of the final rules under the Act have been promulgated or have gone
into effect.
AMEX. The AMEX where the Company's common stock is listed, has implemented new
corporate governance listing standards, including rules strengthening
director independence requirements for boards and committees of the board,
the director nomination process and shareholder communication avenues.
These rules require the Company to certify to the AMEX under Sections 121 and
132(e) of the AMEX Company Guide that the Company complies and will
continue to comply with AMEX corporate governance requirements. The
certification has to be filed immediately following the Company's first
annual shareholders meeting after March 15, 2004. The Company's Chief Executive
Officer and Chief Financial Officer have also filed certifications
regarding the quality of the Company's public disclosure with the Securities
and Exchange Commission.
Certain legislative and regulatory proposals that could affect the Company
or Union and the financial services business in general are periodically
introduced before the United States Congress, the Vermont State Legislature
and federal and state government agencies. It is not known to what extent,
if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such
legislation could subject the Company and Union to increases in
regulation, disclosure and reporting requirements, competition and the cost
of doing business.
In addition to legislative changes, the various federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be predicted
whether or in what form any such rules or regulations will be enacted or
the effect that such enactment may have on the Company or Union.
Part I-Item 2 Properties
As of December 31, 2003, the Company's subsidiary operated 12 community-banking
locations which are in Lamoille, Caledonia and Franklin counties of
Vermont. Union also has a loan production office in Littleton, New
Hampshire, opened in May of 2001. Union also operates 28 automated
teller machines (ATM's) in northern Vermont. Union 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 Bank.
Additional information relating to the Company's properties is set forth in
Note 9 to the consolidated financial statements and incorporated herein by
reference.
8
Part I-Item 3 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.
Part I-Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders through a
solicitation of proxies or otherwise during the fourth quarter of 2003.
Part II-Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
Please refer to page 59 of the Company's 2003 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)
--------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------
(Dollars in thousands except per share data)
Balance Sheet Data:
Total Assets $356,650 $343,492 $337,475 $303,394 $295,476
Investment Securities 44,370 45,824 49,610 56,642 60,441
Loans Held for Sale 18,524 17,139 16,333 9,153 8,102
Loans, net of unearned income 253,037 238,768 234,610 215,642 201,251
Allowance for loan losses (3,029) (2,908) (2,801) (2,863) (2,870)
Total nonperforming loans 3,305 2,272 4,864 4,398 4,123
Total nonperforming assets 3,315 3,074 6,160 4,514 4,150
Other real estate owned 10 784 1,296 116 27
Deposits 305,379 293,004 285,722 258,737 257,593
Borrowed funds 7,223 7,536 10,344 6,382 2,872
Stockholders' equity (1) 40,987 39,169 37,215 35,157 32,220
Income Statement Data:
Net interest and dividend income $ 16,163 $ 15,805 $ 14,559 $ 14,249 $ 13,747
Provision for loan losses 114 356 320 250 359
Noninterest income 3,603 3,560 3,073 2,569 2,568
Noninterest expense 12,060 11,761 10,496 9,944 10,065
Net income 5,387 5,180 4,832 4,800 4,075
Per Common Share Data:
Net income (2)(5) $ 1.18 $ 1.14 $ 1.06 $ 1.05 $ 0.90
Cash dividends paid(5) 0.82 0.76 0.71 0.65 0.60
Book value (1)(5) 9.01 8.62 8.19 7.73 7.09
Selected Ratios:
Return on average assets 1.56% 1.52% 1.51% 1.61% 1.39%
Return on average equity 13.50% 13.74% 13.34% 14.54% 12.70%
Dividend payout (3) 69.49% 66.67% 66.67% 62.03% 66.67%
Interest rate spread 4.91% 4.75% 4.29% 4.40% 4.41%
Net interest margin 5.21% 5.14% 4.99% 5.19% 5.13%
Operating expenses to average assets 3.49% 3.46% 3.29% 3.32% 3.42%
Efficiency ratio 61.01% 60.73% 60.06% 59.21% 61.70%
Average interest earning assets to
average interest bearing liabilities 122.33% 120.59% 122.11% 122.26% 121.58%
Average stockholders' equity to
average assets 11.56% 11.10% 11.35% 11.01% 10.92%
Tier 1 leverage capital ratio 11.38% 11.03% 11.06% 11.74% 11.35%
Tier 1 risk-based capital ratio 16.70% 16.74% 15.59% 16.27% 17.27%
Total risk-based capital ratio 17.99% 17.99% 16.83% 17.62% 18.55%
Asset Quality Ratios:
Nonperforming loans to total loans 1.22% .89% 1.94% 1.96% 1.97%
Nonperforming assets to total assets .93% .89% 1.83% 1.49% 1.40%
Allowance for loan losses to
nonperforming loans 91.65% 127.99% 57.59% 65.10% 69.61%
Allowance for loan losses to
loans not held for sale 1.20% 1.22% 1.19% 1.33% 1.42%
- --------------------
Stockholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale."
Computed using the weighted average number of shares outstanding for
the period.
Cash dividend declared and paid per share for the holding company
divided by consolidated net income per share.
Restated for 1999 to reflect the acquisition of Citizens accounted
for as a pooling of interest.
Per common share data for all periods have been restated to reflect
the three for two stock split effected in the form of a 50% stock
dividend to shareholders of record on July 26, 2003.
10
Part II-Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Please refer to pages 42 to 53 of the Company's 2003 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 53 to 58 of the Company's 2003 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 sheet of Union Bankshares, Inc. as of December
31, 2003 and 2002, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 2003, together with related notes
and the report of Urbach Kahn & Werlin LLP, independent public accountants, all
as contained on pages 12 to 41 of the Company's 2003 Annual Report to
Shareholders, are 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 II - Item 9A Controls and Procedures
The Company's chief executive officer and chief financial officer 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 December 31, 2003. Based on this evaluation
they 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.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation. While the Company believes that its
existing disclosure controls and procedures have been effective to
accomplish these objectives, the Company intends to continue to examine,
refine and formalize its disclosure controls and procedures and to monitor
ongoing developments in this area.
Part III-Item 10 Directors and Executive Officers of Registrant
The following information from the Company's Proxy Statement for the 2004
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"
Information regarding the Company's Audit Committee under the caption
"Board Committees"
Part III-Item 11 Executive Compensation
The following information from the Company's Proxy Statement for the 2004
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"
11
Information regarding the stock performance graph under the caption "Stock
Performance Graph"
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"
Part III-Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following information from the Company's Proxy Statement for the 2004
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 as of December 31, 2003:
Number of securities
remaining available for future
Number of securities to be issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, warrants price of outstanding options, (excluding securities reflected
and rights warrants and rights in column (a)
----------------------------- ----------------------------- --------------------------
Plan Category Column a Column b Column c
- ------------- -------- -------- --------
Equity compensation plans
approved by security holders 13,675 $16.61 55,700
Equity compensation plans
not approved by security
holders - - -
------ ------ ------
Total 13,675 $16.61 55,700
====== ====== ======
Part III-Item 13 Certain Relationships and Related Party Transactions
The following information from the Company's Proxy Statement for the 2004
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 Principal Accountant Fees and Services
The following information from the Company's Proxy Statement for the 2004
Annual Meeting of Shareholders is hereby incorporated by reference:
Information on fees paid to the Independent Auditors set forth under the
caption "Independent Auditors" and "Appendix B. Guidelines of Union Bankshares,
Inc. Audit Committee for Pre-Approval of Audit Related Services and Non-Audit
Services"
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 2003 Annual Report to Shareholders, are incorporated herein
by reference (see Exhibit 13.1):
1) Consolidated Balance Sheet at December 31, 2003 and 2002
2) Consolidated Income Statement for the years ended
December 31, 2003, 2002 and 2001
3) Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001
4) Consolidated Statement of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
5) Notes to the Consolidated Financial Statements
12
(2) 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 here in 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 2003, 2002 and 2001
13.1 The following specifically designated portions of Union's 2003
Annual Report to Shareholders have been incorporated by
reference in this Report on Form 10-K, is filed herewith: pages
11 to 58
14 Code of Ethics for Senior Financial Officers and the Chief
Executive Officer
21 Subsidiary of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont
31.1 Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(3) Reports on Form 8-K
a) Form 8-K filed on October 17, 2003 to report third
quarter and year-to-date earnings and the declaration of
a dividend.
b) Form 8-K filed on October 31, 2003 to report we mailed
our internal, unaudited Third Quarter 2003 Report to our
shareholders.
* 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 30, 2004.
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 Financial/
Executive Officer Accounting 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 30, 2004.
Name Title
/s/ Richard C. Sargent Director, Chairman of the Board
- -----------------------------
Richard C. Sargent
/s/ Kenneth D. Gibbons Director, President and Chief Executive
- ----------------------------- Officer (Principal Executive Officer)
Kenneth D. Gibbons
/s/ Marsha A. Mongeon Treasurer and Chief Financial/Accounting
- ----------------------------- Officer (Principal Financial/Accounting
Marsha A. Mongeon 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/ W. Arlen Smith Director
- -----------------------------
W. Arlen Smith
/s/ John H. Steele Director
- -----------------------------
John H. Steele
14
EXHIBT INDEX
14 Code of Ethics for Senior Financial Officers and the Chief
Executive Officer.
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
15