-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gs84CtOTJ2BgcAqR0YLEC570tPTmSujDA5CtUazGClQCslVAzh7wAdQw+Vq3raFt uS/2BcPipvBJwUdwnEmr/w== 0000910647-01-500083.txt : 20010330 0000910647-01-500083.hdr.sgml : 20010330 ACCESSION NUMBER: 0000910647-01-500083 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION BANKSHARES INC CENTRAL INDEX KEY: 0000706863 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030283552 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15985 FILM NUMBER: 1583992 BUSINESS ADDRESS: STREET 1: 20 MAIN STREET STREET 2: P O BOX 667 CITY: MORRISVILLE STATE: VT ZIP: 05661-0667 BUSINESS PHONE: 8028886600 MAIL ADDRESS: STREET 1: 20 MAIN STREET STREET 2: P O BOX 667 CITY: MORRISVILLE STATE: VT ZIP: 05661-0667 10-K 1 unio-10k.txt BODY OF FORM 10-K 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, 2000 Commission file number 000-28449 UNION BANKSHARES, INC. VERMONT 03-0283552 P.O. BOX 667 MAIN STREET MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address and former fiscal year, if changed since last report: Not applicable Securities registered pursuant to section 12(g) of the Act: Common Stock, $2.00 par value ----------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last known trade price prior to March 15, 2001 was $30,729,846. As of March 15, 2001, there were 3,029,729 shares of the registrant's $2 par value common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents, in whole or in part, are specifically incorporated by reference in the indicated Part of this Annual Report on Form 10-K: Document Part -------- ---- Annual Report to Shareholders for the year ended December 31, 2000 I, II Proxy Statement for the 2001 Annual Meeting of Shareholders III UNION BANKSHARES, INC. Table of Contents Part I Item 1 --- Business 3 Item 2 --- Properties 7 Item 3 --- Legal Proceedings 7 Item 4 --- Submission of Matters to a Vote of Security Holders 7 Part II Item 5 --- Market for Registrant's Common Equity and Related Stockholder Matters* 7 Item 6 --- Selected Financial Data 8 Item 7 --- Management's Discussion and Analysis of Financial Condition and Results of Operations* 9 Item 7A --- Quantitative and Qualitative Disclosures about Market Risk* 9 Item 8 --- Financial Statements and Supplementary Data* 9 Item 9 --- Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 9 Part III Item 10 --- Directors and Executive Officers of Registrant** 9 Item 11 --- Executive Compensation** 9 Item 12 --- Security Ownership of Certain Beneficial Owners and Management** 10 Item 13 --- Certain Relationships and Related Party Transactions** 10 Part IV Item 14 --- Exhibits, Financial Statement Schedules and Reports on Form 8-K 10 Signatures 12 [FN] - -------------------- * The information required by Part II, Items 5,7, 7A and 10 is incorporated herein by reference from the 2000 Annual Report to Shareholders ** The information required by Part III is incorporated herein by reference from Union's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2001. Part I-Item 1 Business General: Union Bankshares, Inc. (Union) is a two-bank holding company whose subsidiaries are Citizens Savings Bank & Trust Co. and Union Bank. It was incorporated in the State of Vermont in 1982. Citizens Savings Bank and Trust Company was chartered under Vermont law in 1887 as a State bank and is headquartered in St. Johnsbury, Vermont. Citizens became a wholly owned subsidiary of Union on November 30, 1999 through a pooling of interests but kept its separate name and banking franchise. Union Bank was organized and chartered as a State bank in 1891 and became a wholly owned subsidiary of Union in 1982 upon its formation. Union and Union Bank are headquartered in Morrisville, Vermont. Union has two definable segments that are Citizens Savings Bank & Trust Co. and Union Bank which both generally operate in the same geographic and economic environments in Northern Vermont. Citizens Savings Bank & Trust Co. has 49 full time equivalent employees while Union Bank has 99. Union, itself, does not have any paid employees. Union's income is derived principally from interest on loans and earnings on other investments. Its primary expenses arise from interest paid on deposits and borrowings and general overhead expenses. The assets of Union have grown from $256 million to $303 million over the last five years or 18.6% while our total deposits have grown from $224 million to $259 million or 15.3% during that same period. Please refer to our schedule of Selected Financial Information, which has been restated for all periods for the pooling of interest with Citizens, at Item 6 of this annual report for further details. The deposits of both banks are insured by the Bank Insurance Fund of the FDIC up to legal limits (generally $100,000 per depositor). Competition: Union and its two subsidiaries face substantial competition in their market area from local commercial banks, savings banks, credit unions, and financial services affiliates of bank holding companies, as well as from national financial service providers such as mutual funds, brokerage houses, consumer finance companies and internet banks. Union anticipates continued strong competition from such financial institutions in the foreseeable future. Within Union's market area are branches of several commercial and savings banks that are substantially larger than Union. Both the subsidiary banks focus on their niche of being community banks and focus hours and modes of delivery to provide outstanding customer service. We compete for checking, savings, money market accounts and other deposits by offering depositors competitive rates, personal service, local area expertise, convenient locations and access, and an array of financial services and products. The competition in originating real estate and other loans comes principally from commercial banks, mortgage banking companies and credit unions. Union competes for loan originations primarily through the interest rates and loan fees it charges, the types of loans it offers, and the efficiency and quality of services it provides. In addition to residential mortgage lending and municipal loans, Union also emphasizes commercial real estate, construction, and both conventional and SBA commercial lending. Factors that affect Union's ability to compete for loans include general and local economic conditions, prevailing interest rates including "prime" rate, and pricing volatility of the secondary mortgage markets. Union attempts to promote an increased level of personal service and expertise within the community to position itself as a lender to small to middle market business and residential customers, which tend to be under-served by larger institutions. Management's strategy includes continued evaluation of changing market needs and design and implementation of products and services to meet those needs. The directors and management of Union intend to continue to offer products and services that will allow Union to manage responsibly the growth of its assets, while building and enhancing both shareholder value and both Citizens' and Union Bank's image as premiere Vermont community banks. Regulation and Supervision: As Vermont-chartered commercial banks, each subsidiary is subject to regulation, examination, and supervision by the Vermont Banking Department and the FDIC. Union, as a bank holding company, is subject to regulation, examination and supervision by the Federal Reserve Board. The regulations of these authorities govern certain of the operations of Union. The following discussion summarizes the material aspects of federal and state banking laws and regulations that apply to Union, Citizens, and Union Bank: Acquisitions and Activities. The activities of bank holding companies, such as Union, and those of companies that they control 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 any other activity that the Federal Reserve Board determines to be so closely related to banking or managing or to controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Generally, bank holding companies, such as Union, are required to obtain prior approval of the Federal Reserve Board to engage in any new activity or to acquire more than 5% of any class of voting stock of any bank or other company. According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to their subsidiary banks 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 provide such support. The federal Gramm-Leach-Bliley financial modernization act ("Gramm-Leach- Bliley"), which became effective on March 11, 2000, permits eligible bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in a broader range of activities than is otherwise permissible for bank holding companies. A bank holding company is eligible to elect to become a financial holding company and to engage in activities that are "financial in nature" if each of its subsidiary banks is well capitalized for regulatory capital purposes, is well managed and has at least a satisfactory rating under the Community Reinvestment Act ("CRA"). No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incident to activities that are financial in nature, as defined by the Federal Reserve Board. Gramm-Leach-Bliley defines activities which are "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. Gramm-Leach-Bliley also contains similar provisions authorizing eligible national banks to engage indirectly through a financial subsidiary and subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating. State-chartered banks in Vermont would have comparable powers under the state's national bank parity powers statute. Implementation of Gramm-Leach-Bliley may result in structural changes to the financial services industry, the full effect of which cannot be predicted with any certainty but has had no material effect on the company's financial statements or business practices to date. Interstate Banking and Branching. With the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, bank holding companies became able to acquire banks based outside their home states, generally without regard to whether the state's law would permit the acquisition. The Riegle-Neal Act also authorizes banks to merge across state lines, to create interstate branches. This provision, which was effective June 1, 1997, allowed each state an opportunity to "opt out" of interstate branching. Neither Vermont nor the contiguous states of New Hampshire, New York and Massachusetts has "opted out" of interstate branching. The Riegle-Neal Act also permits a bank to open new branches in a state in which it does not already have banking operations if the state has enacted a law permitting such de novo branching. Neither Vermont nor any of the three contiguous states has adopted legislation permitting de novo interstate branching, but all of such states except New Hampshire permits out-of-state banks or bank holding companies to acquire existing branches. Although interstate banking and branching may result in increased competitive pressures in the markets in which we operate, we also believe that they present competitive opportunities for locally owned and managed banks, such as Union and Citizens, 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. Further, under the Federal Reserve Act and Federal Reserve Board regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in-arrangements in connection with extensions of credit or furnishing of property or services to third parties. Union, Union Bank and Citizens are subject to these restrictions in their intercompany transactions. Banks: The various laws and regulations applicable to Citizens and Union that are administered by the FDIC and the Vermont Banking Commissioner affect the banks' corporate practices, such as payment of dividends, incurring of debt and acquisition of financial institutions and other companies. These laws also affect their business practices, such as payment of interest on deposits, the charging of interest on loans, or the location of offices. There are no outstanding regulatory orders resulting from regulatory examinations of Union, Union Bank or Citizens. A comprehensive recodification of Vermont's banking laws was passed by the Vermont Legislature during 2000. The bill modernizes and streamlines the laws applicable to state bank corporate practices and regulatory procedures, but had no material effect on the company's financial statements or business practices. Dividend Limitations: As a holding company, Union's ability to pay dividends to its shareholders is largely dependent on the ability of its subsidiaries to pay dividends to it. Payment of dividends by Vermont- chartered banks, such as Union Bank and Citizens, is subject to applicable state and federal laws. A Vermont bank may pay dividends only if the bank's board has reviewed the bank's financial results and has found that the proposed dividend will be paid out of amounts actually earned. The Vermont Banking Commissioner may limit or condition a bank's ability to pay dividends, if the bank does not have a segregated surplus fund which, together with earned surplus, equals at least 10% of the amount of the bank's deposits and other liabilities, except surplus, capital notes and debentures. In addition, the Federal Reserve Board, the FDIC and the Vermont Banking Commissioner are authorized under applicable federal and state laws to prohibit payment of dividends that they determine would be an unsafe or unsound practice. Payment of dividends that deplete the capital of a bank or a bank holding company, or render it illiquid, could be found to be an unsafe or unsound practice. Capital Requirements: The Federal Reserve Board, the FDIC and other federal banking regulators have issued substantially similar risk-based and leverage capital guidelines for United States Banking organizations. Those regulatory agencies are also authorized to require that a banking organization maintain capital above the minimum levels, whether because of its financial condition of actual or anticipated growth. The Federal Reserve Board's risk-based capital guidelines define a three-tier capital framework and specify three relevant capital ratios: Tier 1 Capital Ratio, a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of common and qualifying preferred 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 Union, Union Bank, nor Citizens is currently subject to this special capital charge. Federal Reserve Board policy provides that banking organizations generally, and, in particular, those that are experiencing internal growth or actively making acquisitions, will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets, such as goodwill. Furthermore, the capital guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is calculated by dividing a banking organization's Tier 1 Capital less all intangible assets by its total consolidated quarterly average assets less all intangible assets. The Federal Reserve Board's capital adequacy guidelines generally provide that bank holding companies with a ratio of intangible assets to tangible Tier 1 Capital in excess of 25% will be subject to close scrutiny for certain purposes, including the Federal Reserve Board's evaluation of acquisition proposals. Union does not have a material amount of intangibles in its capital base, nor was any goodwill intangible created as a result of the merger. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and requires the respective federal banking agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various federal banking agencies to prescribe certain noncapital standards for safety and soundness related generally to operations and management, asset quality and executive compensation, and permits regulatory action against a financial institution that does not meet such standards. The various federal banking agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the Total Capital, Tier 1 Ratio and the Leverage Ratio as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Community Reinvestment Act: Union Bank and Citizens are subject to the federal Community Reinvestment Act ("CRA"), which requires banks to demonstrate their commitment to serving the credit needs of low and moderate income residents of their communities. Both banks participate in a variety of direct and indirect lending programs and other investments for the benefit of the low and moderate income residents in our communities. At their last CRA compliance examinations by the FDIC, Union Bank received a rating of "outstanding" and Citizens received a rating of "satisfactory." Deposit Insurance Premium Assessments: Under applicable federal laws and regulations, deposit insurance premium assessments to the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are based on a supervisory risk rating system, with the most favorably rated institutions paying the lowest premiums. The deposits of Union Bank and Citizens are insured under the BIF. As "well capitalized" institutions, both banks are presently in the most favorable deposit insurance assessment category, and pay the minimum deposit premium assessment. FDICIA Cross-Guarantees: Under the cross-guarantee provisions of FDICIA, in some circumstances in the event of a loss suffered or anticipated by the FDIC-either as a result of a bank's insolvency or FDIC assistance provided to a bank in danger of default-the FDIC may assess the other banks in the same holding company family to recoup its losses to the deposit insurance fund. Part I-Item 2 Properties As of December 31, 2000, Union's subsidiaries operated 12 community-banking locations all of which are in Lamoille or Caledonia counties of Vermont. Eight of these branch locations are Union Bank's and four are Citizens. Together they also operate 23 automated banking machines in northern Vermont. The Company owns eight of its branch locations and leases the other branches and certain ATM premises from third parties under terms and conditions considered by management to be favorable to the Company. Additional information relating to the Company's properties is set forth in Note 7 to the consolidated financial statements and incorporated herein by reference. Part I-Item 3 Legal Proceedings There are no known pending legal proceedings to which Union or its subsidiaries are a party, or to which any of the properties are subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinion of counsel, any such liability will not have a material effect on the consolidated financial position of Union and its subsidiaries. Part I-Item 4 Submission of Matters to a Vote of Security Holders There was no submission of matters to a vote of security holders during the fourth quarter of 2000. Part I-Item 5 Market for Registrant's Common Equity and Related Stockholder Matters Please refer to page 49 of the Company's 2000 Annual Report to Shareholders, which page is incorporated herein by reference. Part II-Item 6 Selected Historical Financial Information
At or For The Years Ended December 31 (5) -------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------- (Dollars in thousands except per share data) Balance Sheet Data: Total Assets $303,394 $295,476 $290,129 $273,280 $255,747 Investment Securities 56,642 60,441 58,585 45,900 44,341 Loans, net of unearned income 224,796 209,353 202,468 201,918 189,051 Allowance for loan losses (2,863) (2,870) (2,845) (2,811) (2,844) Total nonperforming loans 4,398 4,123 2,407 4,161 4,028 Total nonperforming assets 4,514 4,150 2,932 4,829 4,462 Other real estate owned 116 27 525 668 434 Deposits 258,737 257,593 248,919 239,229 224,419 Borrowed funds 6,382 2,872 6,084 1,636 1,693 Shareholders' equity (1) 35,157 32,220 31,762 29,023 26,393 Income Statement Data: Net interest and dividend income $ 14,249 $ 13,747 $ 13,374 $ 12,884 $ 12,291 Provision for loan losses 250 359 400 425 580 Noninterest income 2,569 2,568 2,911 2,412 2,555 Noninterest expense 9,944 10,065 9,278 8,567 8,430 Net income 4,800 4,075 4,551 4,355 4,043 Per Common Shara Data: (2) Net income (3) $ 1.58 $ 1.35 $ 1.51 $ 1.44 $ 1.31 Cash dividends paid 0.98 0.90 0.82 0.75 0.69 Book value (1) 11.60 10.64 10.50 9.60 8.72 Selected Ratios: Return on average assets 1.61% 1.39% 1.65% 1.66% 1.60% Return on average equity 14.54% 12.70% 14.95% 15.73% 15.58% Dividend payout (4) 62.03% 66.67% 54.30% 52.08% 52.67% Interest rate spread 4.40% 4.41% 4.61% 4.61% 4.62% Net interest margin 5.19% 5.13% 5.34% 5.35% 5.35% Operating expenses to average assets 3.32% 3.42% 3.36% 3.26% 3.34% Average interest earning assets to average interest bearing liabilities 122.26% 121.58% 120.42% 121.11% 119.66% Average Shareholders' equity to average assets 11.01% 10.92% 11.03% 10.52% 10.29% Tier 1 leverage capital ratio 11.74% 11.35% 10.87% 10.68% 10.45% Tier 1 risk-based capital ratio 16.27% 17.27% 16.24% 15.95% 15.43% Total risk-based capital ratio 17.62% 18.55% 17.57% 17.21% 16.68% Asset Quality Ratios: Non-performing loans to total loans 1.96% 1.97% 1.19% 2.06% 2.13% Non-performing assets to total assets 1.49% 1.40% 1.01% 1.77% 1.74% Allowance for loan losses to non-performing loans 65.10% 69.61% 118.20% 67.56% 70.61% Allowance for loan losses to percentage of loans 1.27% 1.37% 1.41% 1.39% 1.50% - -------------------- Shareholders' equity includes unrealized gains or losses, net of applicable income taxes, on investments securities classified as "available for sale." Adjusted to reflect a two-for-one stock split of Union's common stock, completed June 6, 1997 and effected in the form of a 100% stock dividend. 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 all periods presented to reflect the merger with Citizens accomplished through a pooling of interest.
Part II-Items 7 and 7A Management's Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk Please refer to pages 35 to 48 of the Company's 2000 Annual Report to Shareholders, which pages are incorporated herein by reference. Part II-Item 8 Financial Statements and Supplementary Data The consolidated balance sheets of Union Bankshares, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000, together with related notes and the opinion of A.M. Peisch and Company, independent public accountants, all as contained on pages 6 to 34 of the Company's 2000 Annual Report to Shareholders, are incorporated herein by reference. Part II-Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure a) On February 21, 2001, the audit committee of the Board of Directors recommended to and the Board of Directors approved dismissing A.M. Peisch & Company, our current independent accountants, after the Form 10-K report for December 31, 2000 is filed. b) The accountant had not issued a report in the last two fiscal years containing either a disclaimer or an adverse or qualified opinion, nor were the reports subsequently modified as to uncertainty, audit scope or accounting principles. c) The Registrant had no disagreement with our former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the two most recent fiscal years. d) The Registrant requested A.M. Peisch & Company to furnish it with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of A.M. Peisch & Company's letter to the SEC, dated February 26, 2001, was filed as exhibit 16 to the Form 8-K on February 27, 2001. e) At its Board meeting of February 21, 2001, the Board of Directors of Union Bankshares, Inc. engaged the accounting firm of Urbach Kahn & Werlin LLP as independent accountants for the Registrant for 2001. Part III-Item 10 Directors and Executive Officers of Registrant Listing of the names, ages, principal occupations and business experience of the directors under the caption "PROPOSAL I: TO ELECT DIRECTORS". Listing of the names, ages, titles and business experience of the executive officers under the caption "EXECUTIVE OFFICERS". Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 under the caption "SHARE OWNERSHIP INFORMATION-Section 16(a) Beneficial Ownership Reporting Compliance". Part III-Item 11 Executive Compensation Information regarding compensation of directors under the caption "PROPOSAL I: TO ELECT DIRECTORS-Directors' Compensation". Information regarding executive compensation and benefit plans under the caption "EXECUTIVE OFFICERS-Executive Compensation and Benefit Plans". Information regarding management interlocks and certain transactions under the caption "PROPOSAL I: TO ELECT DIRECTORS-Compensation Committee Interlocks and Insider Participation". Information set forth under the caption "REPORT OF THE COMPENSATION COMMITTEE". Part III-Item 12 Security Ownership of Certain Beneficial Owners and Management Information regarding the share ownership of management and principal shareholders under the caption "SHARE OWNERSHIP INFORMATION-Share Ownership of Management and Principal Holders". Part III-Item 13 Certain Relationships and Related Party Transactions Information regarding transactions with management under the caption "PROPOSAL I: TO ELECT DIRECTORS-Transactions with Management". Part IV-Item 14 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 2000 Annual Report to Shareholders, are incorporated herein by reference. 1) Consolidated Balance Sheets at December 31, 2000 and 1999 2) Consolidated Income Statements for the years ended December 31, 2000, 1999 and 1998 3) Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 4) Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 (2) The following exhibits are either filed or attached 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 3.1 to the Company's Registration Statement on Form S-4 (#333-82709) and incorporated herein by reference.* 10.4 Employment Agreement, dated December 10, 1998, between Citizens Savings Bank & Trust Company and Jerry S. Rowe., previously filed with the Commission as Exhibit 10.6 to the Company's 1999 Form 10-K and incorporated herein by reference.* 11 Statement re: Computation of per share earnings: See footnote 1 to the consolidated financial statements for details on earnings per share computations for 2000, 1999 and 1998 13 The following specifically designated portions of Union's 2000 Annual Report to Shareholders have been incorporated by reference in this Report on Form 10-K, is filed herewith: pages 5 to 49. 16 Letter from A.M. Peisch & Company, our former independent accountants, dated February 26, 2001, previously filed with the Commission as Exhibit 16 to Form 8-K filed on February 27, 2001 and incorporated herein by reference. 21 Subsidiaries of Union Bankshares, Inc. Union Bank, Morrisville, Vermont Citizens Savings Bank & Trust Company, St. Johnsbury, Vermont 23 Consent of Independent Public Accountants. (3) Reports on Form 8-K Form 8-K filed on October 6, 2000 to report an increase in third quarter earnings and the declaration of a dividend announcement. [FN] - -------------------- * denotes management contract or compensatory plan. 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. Union Bankshares, Inc. By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon ---------------------- --------------------- Kenneth D. Gibbons Marsha A. Mongeon President and Chief Executive Officer Treasurer and Chief Financial Officer Date: March 21, 2001 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 and on the dates indicated.
Name Title Date - --------------------------------------------------------------------------------------------- /s/ W. Arlen Smith Director, Chairman of the Board March 21, 2001 - ------------------------ W. Arlen Smith /s/ Kenneth D. Gibbons Director, President and Chief Executive Officer March 21, 2001 - ------------------------ (Principal Executive Officer) Kenneth D. Gibbons /s/ Marsha A. Mongeon Treasurer and Chief Financial Officer March 21, 2001 - ------------------------ (Principal Financial Officer) Marsha A. Mongeon /s/ Cynthia D. Borck Director and Vice President March 21, 2001 - ------------------------ Cynthia D. Borck /s/ William T. Costa Jr. Director March 21, 2001 - ------------------------ William T. Costa Jr. /s/ Peter M. Haslam Director and Secretary March 21, 2001 - ------------------------ Peter M. Haslam /s/ Franklin G. Hovey II Director March 21, 2001 - ------------------------ Franklin G. Hovey II /s/ William F. Kinney Director March 21, 2001 - ------------------------ William F. Kinney /s/ Richard C. Marron Director March 21, 2001 - ------------------------ Richard C. Marron /s/ Robert P. Rollins Director March 21, 2001 - ------------------------ Robert P. Rollins /s/ Jerry S. Rowe Director and Vice President March 21, 2001 - ------------------------ Jerry S. Rowe /s/ Richard C. Sargent Director March 21, 2001 - ------------------------ Richard C. Sargent
EX-13 2 unio-x13.txt EXHIBIT 13 -- ANNUAL REPORT Union Bankshares, Inc. A N N U A L R E P O R T 2 0 0 0 [Map of Vermont] Citizens Savings Bank & Trust Company [logo] Union Bank [logo] Wholly Owned Subsidiaries U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S [Photograph of Walter M. Sargent] WALTER M. SARGENT SIXTY-EIGHT YEARS OF SERVICE TO UNION BANK JANITOR TELLER LOAN OFFICER DIRECTOR PRESIDENT MENTOR AND FRIEND U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S L E T T E R T O O U R S H A R E H O L D E R S [Letterhead of Union Bankshares, Inc.] Dear Shareholders, March 21, 2001 The past twelve months have been important ones for your company. Considerable time and effort was expended in bringing Union Bank and Citizens Savings Bank and Trust Company backroom operations, policies and procedures closer together. The highlights of the year 2000, located on page three of this report, clearly indicate a year of much activity and consolidation. Many of the accomplishments noted were not undertaken to gain "immediate" improvement in our financial results. In fact, some activities, such as one-time costs associated with the conversion of Citizens' data processing to Union Bank, added to current year expenses. Projects such as this will lead to enhanced customer service and improved employee productivity over the long term while retaining Union and Citizens as independent community banks. We have established a number of sound foundations from which we will build upon to further strengthen our financial performance. We are pleased with the progress made during the past year and plan much more of the same going forward. The audited financial statements included in this report reveal some good trends. Capital is in excess of 11%, placing us in the Well Capitalized category according to regulatory standards. Loans Outstanding grew over $15 million (7.4%) reflecting our strategic decision to more actively seek good loans and to hold loans "in house" rather than sell them into the secondary market. Deposits, however, had minimal growth reflecting a problem most banks are having by competing with Credit Unions and non-bank financial institutions. We are always researching ways to attract core deposits as well as alternative methods to fund loan demand. Net income of $4.8 million and earnings per share of $1.58 both showed good improvement over 1999. There are a number of reasons for this, which include: increased net interest income, a substantial reduction in merger- related costs and some early benefits from our consolidation efforts. We look for continued growth and earnings improvement going forward. The economy within our service area is doing quite well. Residential construction lending was brisk this past year and indicators tell us 2001 will see more of the same. Small business continues to thrive and an almost record snowfall this winter certainly has helped the travel and tourism industry. In the proxy statement you will notice three directors are not being nominated for re-election, leaving a slate of nine directors. Last November, Director Walter M. Sargent (Sarge, as we all knew him) passed away. Sarge served the bank in various capacities during the past 68 years. We felt it only fitting to include his picture (at left), taken a few years back in his office at the bank, in our year 2000 annual report. Two directors, Peter M. Haslam and William F. Kinney, have attained the retirement age established by the Board of Directors in 1983. Mr. Kinney has served as a director since 1967 and Mr. Haslam since 1972. All three of these directors have had a substantial influence on the growth and prosperity Union Bankshares has experienced during their tenure. On a personal note, both of us have found their wisdom and candor very helpful over the years. Each year as we draft this letter and assemble the annual report it helps us reflect on what has happened in the past year and, more importantly, on what awaits us in the years ahead. As we move forward in this competitive age, it is important to acknowledge the contributions made by and the dedication of the people who work for your company. These folks, from the tellers, clerks and the night shift operator to the managers and supervisors and officers, in conjunction with thousands of satisfied customers, are what make Union Bankshares successful. We want to say thank you, we appreciate your dedication and business. Sincerely, /s/ W. Arlen Smith /s/ Kenneth D. Gibbons W. Arlen Smith Kenneth D. Gibbons Chairman President U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S T A B L E O F C O N T E N T S Page ACCOMPLISHMENTS AND EVENTS OF 2000 3 SELECTED FINANCIAL INFORMATION 4 MANAGEMENT'S RESPONSIBILITY 5 INDEPENDENT AUDITOR'S REPORT 6 FINANCIAL STATEMENTS Consolidated balance sheets 7 Consolidated statements of income 8 Consolidated statements of changes in stockholders' equity 9 Consolidated statements of cash flows 10 Notes to consolidated financial statements 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS 35 MARKET FOR UNION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS 49 SHAREHOLDER ASSISTANCE AND INVESTOR INFORMATION 50 U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S H I G H L I G H T S O F T H E Y E A R 2 0 0 0 The Year 2000 was one of accomplishments and events for Union Bank, Citizens Savings Bank and Trust Company and Union Bankshares, Inc. The following is a summary of some of those items: January * Celebrated a successful millennium/Y2K changeover * Selected American Stock Exchange for listing UNB stock * Updated consolidation plans and finalized budgets for 2000 * Citizens contracts with Union for loan review services February * Successfully completed data processing conversion of Citizens to Union (This conversion took much effort and went well.) * Formed an Audit Committee for Union Bankshares, Inc. March * B.U.I.L.D. construction loan program offered at Citizens (Both Union and Citizens eventually granted over 100 construction loans for over $13,000,000 in 2000.) * Prepared first annual 10-K filing for SEC April * First annual meeting of combined shareholder groups * Genevieve Hovey retires from Citizens Board after 28 years of service * Oscar Churchill retires from Union Board after 42 years of service May * Operational reorganization and staff adjustments at Citizens * Citizens offers merchant credit card services June * Union installs its 17th ATM - located at Ben & Jerry's in Waterbury * Union converts merchant credit card processing to new vendor * Union recognized by SBA as #1 Small Business Lender in Vermont for 6th year * Major addition to Union's Jeffersonville office July * Union Bankshares, Inc. listed on AMEX under UNB ticker symbol * Citizens locates Trust Officer at Union in Morrisville August * Citizens added to Union e-mail network allowing company-wide access October * External auditors complete post-conversion Data Processing Review at both banks * Union and Citizens Boards meet for strategic planning retreat November * Citizens introduces on-line banking through Net Teller * Union school savings program tops 1,900 accounts with over $350,000 in deposits December * Citizens installs its 6th ATM - located at Burke Mountain Ski Area * Union installs its 18th ATM - located at Tafts Corner, Williston * Union Trust Department transferred to Citizens Trust Department * Citizens contracts with Union for Audit and Compliance services * Union and Citizens merge health care plans * Union Bankshares, Inc. reaches $300,000,000 in assets milestone U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S S E L E C T E D F I N A N C I A L I N F O R M A T I O N
At or For The Years Ended December 31 -------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------- (Dollars in thousands, except per share data) Balance Sheet Data: Total Assets $ 303,394 $ 295,476 $ 290,129 $ 273,280 $ 255,747 Investment Securities 56,642 60,441 58,585 45,900 44,341 Loans, net of unearned income 224,796 209,353 202,468 201,918 189,051 Allowance for loan losses (2,863) (2,870) (2,845) (2,811) (2,844) Deposits 258,737 257,593 248,919 239,229 224,419 Borrowed funds 6,382 2,872 6,084 1,636 1,693 Shareholders' equity (1) 35,157 32,220 31,762 29,023 26,393 Income Statement Data: Total interest income $ 24,126 $ 22,868 $ 22,626 $ 21,666 $ 21,061 Total interest expense (9,877) (9,122) (9,252) (8,782) (8,770) ------------------------------------------------------------------ Net interest and dividend income 14,249 13,746 13,374 12,884 12,291 Provision for loan losses (250) (359) (400) (425) (580) Noninterest income 2,569 2,568 2,911 2,412 2,555 Noninterest expense (9,944) (10,065) (9,279) (8,567) (8,430) ------------------------------------------------------------------ Income before income taxes 6,625 5,890 6,606 6,304 5,836 Income tax expense (1,825) (1,815) (2,055) (1,949) (1,793) ------------------------------------------------------------------ Net income $ 4,800 $ 4,075 $ 4,551 $ 4,355 $ 4,043 ================================================================== Per Common Share Data: (2) Net income (3) $ 1.58 $ 1.35 $ 1.51 $ 1.44 $ 1.31 Cash dividends paid 0.98 0.90 0.82 0.75 0.69 Book value (1) 11.60 10.64 10.50 9.60 8.72 Weighted average number of shares outstanding 3,029,627 3,028,457 3,022,223 3,025,978 3,084,608 Number of shares outstanding 3,029,729 3,029,529 3,025,438 3,023,558 3,028,158 - ------------------- Shareholders' equity includes unrealized gains or losses, net of applicable income taxes, on investment securities classified as "available-for-sale". Adjusted to reflect a two-for-one stock split of Union's common stock, completed June 6, 1997 and effected in the form of a 100% stock dividend. Computed using the weighted average number of shares outstanding for the period.
U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S M A N A G E M E N T ' S R E S P O N S I B I L I T Y The management of Union Bankshares, Inc. is responsible for the integrity and objectivity of the information and representations in this annual report, including the consolidated financial statements. These statements have been prepared in conformity with generally accepted accounting principles, using informed estimates where appropriate, to reflect the Company's financial condition and results of operations. The information in other sections of the annual report is consistent with these statements. The Company's Board of Directors has oversight responsibilities for determining that management has fulfilled its obligation in the preparation of the financial statements and in the ongoing examination of the Company's established internal control structure over financial reporting. The Audit Committee, which consists solely of outside directors and which reports directly to the Board of Directors, meets regularly with management, A.M. Peisch & Company Certified Public Accountants and the Company's internal auditor to discuss accounting, auditing and reporting matters. To ensure auditor independence, both A.M. Peisch & Company and the internal auditor have unrestricted access to the Audit Committee. The financial statements have been audited by A.M. Peisch & Company, whose report appears on the next page. The auditors provide an objective, independent review as to management's discharge of its responsibilities insofar as they relate to the fairness of the Company's reported financial condition and results of operations. Their audit includes procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement and includes a review of the Company's internal control structure over financial reporting. /s/ Marsha A. Mongeon /s/ Kenneth D. Gibbons Marsha A. Mongeon Kenneth D. Gibbons Chief Financial Officer Chief Executive Officer U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S I N D E P E N D E N T A U D I T O R ' S R E P O R T DECEMBER 31, 2000 Board of Directors Union Bankshares, Inc. and Subsidiaries Morrisville, Vermont We have audited the accompanying consolidated balance sheets of Union Bankshares, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 2000, 1999, and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with U. S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Union Bankshares, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999, and 1998 in conformity with U. S. generally accepted accounting principles. /s/ A.M. Peisch & Company LLP January 12, 2001 St. Johnsbury, Vermont VT Reg. No. 92-0000102 U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S C O N S O L I D A T E D B A L A N C E S H E E T S DECEMBER 31, 2000 AND 1999
2000 1999 ------------------------------ ASSETS Cash and due from banks $ 10,353,570 $ 11,627,481 Federal funds sold and overnight deposits 1,070,000 3,474,064 ------------------------------ Cash and cash equivalents 11,423,570 15,101,545 Interest bearing deposits 1,721,408 1,956,999 Securities available-for-sale 56,641,687 60,440,524 Federal Home Loan Bank stock 1,016,800 938,800 Loans held for sale 9,153,305 8,101,815 Loans 215,892,669 201,524,889 Allowance for loan losses (2,862,707) (2,869,983) Unearned net loan fees (250,374) (273,305) ------------------------------ Net loans 212,779,588 198,381,601 Accrued interest receivable 2,596,891 2,199,426 Premises and equipment, net 3,964,314 4,043,036 Other real estate owned 116,293 26,667 Other assets 3,980,553 4,285,233 ------------------------------ Total assets $303,394,409 $295,475,646 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest bearing $ 33,546,985 $ 32,988,892 Interest bearing 225,189,595 224,603,911 ------------------------------ 258,736,580 257,592,803 Borrowed funds 6,381,778 2,871,929 Accrued expenses and other liabilities 3,118,996 2,790,900 ------------------------------ 268,237,354 263,255,632 ------------------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $2 par value; 5,000,000 shares authorized; 3,263,689 shares issued in 2000; 3,263,489 shares in 1999 6,527,378 6,526,978 Paid-in capital 239,903 238,353 Retained earnings 30,010,683 28,180,180 Treasury stock at cost (233,960) shares at December 31, 2000 and 1999 (1,592,451) (1,592,451) Accumulated other comprehensive income (loss) (28,458) (1,133,046) ------------------------------ 35,157,055 32,220,014 ------------------------------ Total liabilities and stockholders' equity $303,394,409 $295,475,646 ==============================
See notes to consolidated financial statements. U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 --------------------------------------------- Interest income Interest and fees on loans $20,058,057 $18,635,371 $18,836,133 Interest on debt securities Taxable 3,284,256 3,363,022 3,041,725 Tax exempt 216,101 207,222 73,856 Dividends 114,908 115,282 130,283 Interest on federal funds sold 333,105 425,389 461,541 Interest on interest bearing deposits 119,898 122,300 82,641 --------------------------------------------- Total interest income 24,126,325 22,868,586 22,626,179 --------------------------------------------- Interest expense Interest on deposits 9,455,437 8,833,767 8,958,729 Interest on federal funds purchased 4,955 1,796 1,647 Interest on other borrowed money 416,965 286,008 292,088 --------------------------------------------- Total interest expense 9,877,357 9,121,571 9,252,464 --------------------------------------------- Net interest income 14,248,968 13,747,015 13,373,715 Provision for loan losses 250,000 359,496 400,000 --------------------------------------------- Net interest income after provision for loan losses 13,998,968 13,387,519 12,973,715 --------------------------------------------- Other income Trust department income 181,611 165,770 120,410 Service fees 2,209,651 2,228,873 2,145,998 Gain on sale of securities 24,648 2,976 150,038 Gain on sale of loans 33,747 39,991 301,919 Other 119,603 130,602 192,588 --------------------------------------------- 2,569,260 2,568,212 2,910,953 --------------------------------------------- Other expenses Salaries and wages 4,493,992 4,233,731 4,111,063 Pension and employee benefits 1,122,965 1,082,679 1,057,568 Occupancy expense, net 560,477 534,813 502,549 Equipment expense 993,943 1,124,755 1,005,109 Other operating expense 2,772,299 3,089,023 2,602,076 --------------------------------------------- 9,943,676 10,065,001 9,278,365 --------------------------------------------- Income before income taxes 6,624,552 5,890,730 6,606,303 Income tax expense 1,825,010 1,815,259 2,054,907 --------------------------------------------- Net income $ 4,799,542 $ 4,075,471 $ 4,551,396 ============================================= Earnings per common share $ 1.58 $ 1.35 $ 1.51 =============================================
See notes to consolidated financial statements. U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S C O N D O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S T O C K H O L D E R S' E Q U I T Y YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Accumulated Common Stock other Total ----------------------- Paid-in Retained Treasury comprehensive stockholders' Shares Amount capital earnings stock income (loss) equity ------------------------------------------------------------------------------------------------- Balances, December 31, 1997 3,023,558 $6,510,596 $182,619 $23,485,478 $(1,548,491) $ 392,704 $29,022,906 Comprehensive income Net income 0 0 0 4,551,396 0 0 4,551,396 Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects 0 0 0 0 0 202,425 202,425 ------------ Total comprehensive income 4,753,821 ------------ Cash dividends declared 0 0 0 (2,007,519) 0 0 (2,007,519) Treasury stock purchased (2,220) 0 0 0 (43,960) 0 (43,960) Exercise of stock option 4,100 8,200 28,775 0 0 0 36,975 ------------------------------------------------------------------------------------------------ Balances, December 31, 1998 3,025,438 6,518,796 211,394 26,029,355 (1,592,451) 595,129 31,762,223 Comprehensive income Net income 0 0 0 4,075,471 0 0 4,075,471 Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects 0 0 0 0 0 (1,728,175) (1,728,175) ------------ Total comprehensive income 2,347,296 ------------ Cash dividends declared 0 0 0 (1,924,646) 0 0 (1,924,646) Exercise of stock option 4,300 8,600 31,325 0 0 0 39,925 Retirement of common stock (209) (418) (4,366) 0 0 0 (4,784) ------------------------------------------------------------------------------------------------ Balances, December 31, 1999 3,029,529 6,526,978 238,353 28,180,180 (1,592,451) (1,133,046) 32,220,014 Comprehensive income Net income 0 0 0 4,799,542 0 0 4,799,542 Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects 0 0 0 0 0 1,104,588 1,104,588 ------------ Total comprehensive income 5,904,130 ------------ Cash dividends declared 0 0 0 (2,969,039) 0 0 (2,969,039) Exercise of stock option 200 400 1,550 0 0 0 1,950 ------------------------------------------------------------------------------------------------ Balances, December 31, 2000 3,029,729 $6,527,378 $239,903 $30,010,683 $(1,592,451) $ (28,458) $35,157,055 ===============================================================================================
See notes to consolidated financial statements. U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,799,542 $ 4,075,471 $ 4,551,396 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 789,027 867,114 789,826 Provision for loan losses 250,000 359,496 400,000 (Credit) provision for deferred income taxes (18,339) 52,958 28,650 Amortization, net 51,389 123,705 108,818 Write-downs of other real estate owned 12,008 7,421 77,578 (Decrease) increase in unamortized loan fees (22,931) 7,837 11,361 Increase in loans held for resale (1,017,743) (661,968) (902,839) Increase in accrued interest receivable (397,465) (93,724) (82,907) Decrease (increase) in other assets 102,923 (339,262) (65,736) (Increase) decrease in income taxes receivable (196,601) 24,281 75,689 Increase (decrease) in accrued interest payable 288,879 (107,210) (79,649) Increase (decrease) in other liabilities 39,217 (127,072) (33,947) Gain on sale of securities (24,648) (2,976) (150,038) Gain on sale of loans (33,747) (39,991) (301,919) Gain on sale of other real estate owned (6,785) (4,779) (50,005) Loss on disposal of fixed assets 3,750 15,530 2,358 --------------------------------------------- Net cash provided by operating activities 4,618,476 4,156,831 4,378,636 --------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Interest bearing deposits Maturities and redemptions 892,024 982,000 1,586,000 Purchases (656,330) (1,065,999) (3,459,000) Securities available-for-sale Sales and maturities 11,353,211 18,581,808 16,616,681 Purchases (5,907,600) (23,176,008) (28,953,788) Purchase of Federal Home Loan Bank stock (78,000) (34,800) (46,600) Increase in loans, net (14,936,084) (6,696,985) (474,700) Recoveries of loans charged off 123,590 94,194 120,826 Purchase of premises and equipment, net (737,316) (350,659) (928,708) Investments in limited partnerships, net (145,472) (451,360) (24,889) Proceeds from sales of premises and equipment 23,261 2,200 4,660 Proceeds from sales of other real estate owned 42,241 559,498 629,855 Proceeds from sales of repossessed property 43,487 73,930 87,243 --------------------------------------------- Net cash used in investing activities (9,982,988) (11,482,181) (14,842,420) --------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings, net of repayments 3,509,849 (3,212,439) 4,448,484 Proceeds from exercise of stock options 1,950 39,925 36,975 Net increase in noninterest bearing deposits 558,093 40,271 3,884,066 Net increase in interest bearing deposits 585,684 8,634,316 5,804,527 Purchase of stock 0 (4,784) (43,960) Dividends paid (2,969,039) (2,266,646) (1,969,519) --------------------------------------------- Net cash provided by financing activities 1,686,537 3,230,643 12,160,573 --------------------------------------------- (Decrease) increase in cash and cash equivalents (3,677,975) (4,094,707) 1,696,789 Cash and cash equivalents: Beginning 15,101,545 19,196,252 17,499,463 --------------------------------------------- Ending $11,423,570 $15,101,545 $19,196,252 ============================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 9,588,478 $ 9,228,781 $ 9,332,113 ============================================= Income taxes paid $ 2,039,950 $ 1,738,020 $ 1,996,000 ============================================= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Other real estate acquired in settlement of loans $ 137,090 $ 102,658 $ 636,934 ============================================= Repossessed property acquired in settlement of loans $ 143,325 $ 151,356 $ 295,405 ============================================= Total change in unrealized gain (loss) on securities available-for-sale $ 1,673,618 $(2,618,447) $ 306,704 =============================================
See notes to consolidated financial statements. U N I O N B A N K S H A R E S , I N C . A N D S U B S I D I A R I E S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Note 1. Significant Accounting Policies The accounting policies of Union Bankshares, Inc. and Subsidiaries (the Company) are in conformity with U. S. generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. Basis of presentation and consolidation The consolidated financial statements include the accounts of Union Bankshares, Inc., and its wholly-owned subsidiaries, Union Bank (Union), and Citizens Savings Bank and Trust Company (Citizens). All financial information has been restated historically for the acquisition of Citizens accounted for as pooling of interests as described in Note 19. All significant intercompany transactions and balances have been eliminated. Nature of operations The Company provides a variety of financial services to individuals and corporate customers through its branches, ATM's, telebanking, and Internet systems in northern Vermont which encompasses primarily small businesses, agriculture, and the tourism industry. The Company's primary deposit products are checking, savings and money market accounts, and certificates of deposit. Its primary lending products are commercial, real estate, municipal, and consumer loans. Concentration of risk The Company's operations are affected by various risk factors, including interest-rate risk, credit risk, and risk from geographic concentration of lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to credit- worthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although the Company has a diversified loan portfolio and economic conditions are stable, most of its lending activities are conducted within the geographic area where it is located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy. Note 4 discusses the types of securities that the Bank invests in. Note 5 discusses the types of lending which the Bank engages in. In addition, a substantial portion of the Company's loans are secured by real estate and/or are SBA guaranteed. Use of estimates The preparation of consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and deferred tax assets. The amount of the change that is reasonably possible cannot be estimated. Presentation of cash flows For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods), and overnight deposits. Trust assets Assets of the Trust Department, other than trust cash on deposit, are not included in these consolidated financial statements because they are not assets of the Company. Investment securities Investment securities purchased and held primarily for resale in the near future are classified as trading securities and are carried at fair value with unrealized gains and losses included in earnings. Debt securities the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at cost, adjusted for amortization of premium and accretion of discounts using methods approximating the interest method. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported as a net amount in other comprehensive income, net of tax and reclassification adjustment. Declines in the fair value of held- to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. The specific identification method is used to determine realized gains and losses on sales of securities available-for-sale. Federal Home Loan Bank stock As members of the Federal Home Loan Bank, Union and Citizens are required to invest in $100 par value stock of the Federal Home Loan Bank. The stock is nonmarketable, and when redeemed, they would receive from the Federal Home Loan Bank an amount equal to the par value of the stock. Loans held for sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. All sales are made without recourse. Net unrealized losses are recognized through a valuation allowance by charges to income. Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan interest income is accrued daily on outstanding balances. The accrual of interest is discontinued when a loan is specifically determined to be impaired or management believes, after considering collection efforts and other factors, that the borrowers financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company is generally amortizing these amounts over the contractual life. Allowance for loan 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. The amount of the allowance is based on management's periodic evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, 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. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over their estimated useful lives. The cost of assets sold or otherwise disposed of and the related allowance for depreciation is eliminated from the accounts and the resulting gains or losses are reflected in the income statement. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments are capitalized. Other real estate owned Real estate properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new carrying basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in other income and expenses. Mortgage servicing Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Pension plans Union maintains a non-contributory defined benefit pension plan covering all eligible employees who meet certain service requirements. Union also has a contributory 401(k) pension plan covering all employees who meet certain service requirements. The plan is voluntary, and in 2000, 1999, and 1998, Union contributed fifty cents for every dollar contributed by participants, up to six percent of each participant's salary. Citizens has a contributory 401(k) pension plan covering all employees who meet certain age and service requirements. The plan is voluntary, and Citizens contributes fifty cents for every dollar contributed by participants, up to six percent of each participant's salary. Pension costs are charged to pension and other employee benefits expense and are funded as accrued. Advertising costs The Company expenses advertising costs as incurred. Earnings per common share Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period, retroactively adjusted for stock splits, stock dividends, and stock issues relating to the acquisition of Citizens in a merger accounted for as a pooling of interests as described in Note 19 and reduced for shares held in treasury. The weighted average shares outstanding were 3,029,627, 3,028,457, and 3,022,223 for the years ended December 31, 2000, 1999, and 1998, respectively. Income taxes The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company's deferred tax assets are recognized as deferred income tax expense or benefit based on management's judgment relating to the realizability of such assets. Off-balance-sheet financial instruments In the ordinary course of business, the Company has entered into off- balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Fair values of financial instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment securities and interest bearing deposits: Fair values for investment securities and interest bearing deposits are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or discounted present values of cash flows. Federal Home Loan Bank stock: The carrying amount of this stock approximates its fair value. Loans and loans held for sale: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their fair market values. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits: The fair values disclosed for demand deposits (for example, checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date. The fair values for fixed rate certificates of deposit and borrowed funds are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and debt to a schedule of aggregated contractual maturities on such time deposits and debt. Accrued interest: The carrying amounts of accrued interest approximates their fair values. Borrowed funds: The fair values of the Company's long term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments. Other liabilities: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Comprehensive income The Company adopted SFAS No. 130, Reporting Comprehensive Income, as of January 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The adoption of SFAS No. 130 had no effect on the Company's net income or stockholders' equity. The components of other comprehensive income and related tax effects at December 31 are as follows:
2000 1999 1998 -------------------------------------------- Unrealized holding gains (losses) on available-for-sale securities $ 1,698,266 $(2,615,471) $ 456,742 Reclassification adjustment for gains realized in income (24,648) (2,976) (150,038) -------------------------------------------- Net unrealized gains (losses) 1,673,618 (2,618,447) 306,704 Tax effect (569,030) 890,272 (104,279) -------------------------------------------- Net of tax amount $ 1,104,588 $(1,728,175) $ 202,425 ============================================
Stock option plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. FASB Statement No. 123, "Accounting for Stock-Based Compensation", permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, Statement No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide proforma net income disclosures for employee stock-based awards made in 1995 and future years as if the fair value based method defined in Statement No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the proforma disclosures of Statement No. 123. See Note 18. Transfers of financial assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Segment reporting The FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes standards relative to public companies for the reporting of certain information about operating segments within their financial statements. Management has determined that the Company has two reportable segments as defined within the Statement. These segments are disclosed in Note 20 of the financial statements. Recent accounting pronouncements The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement No. 137, which becomes effective for years beginning after June 15, 2000. This Statement establishes new accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those derivatives at fair value. The accounting for the gains or losses resulting in the changes of value of those derivatives will depend on the intended use of the derivatives and whether it qualifies for hedge accounting. Management is currently evaluating the impact of this Statement on the Company's financial statements but does not anticipate it will have a material impact. Reclassifications Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the current year presentation. Note 2. Restrictions on Cash and Due From Banks The Company is required to maintain reserve balances in cash with Federal Reserve Banks. The totals of those reserve balances were approximately $2,819,000 and $2,513,000 at December 31, 2000 and 1999, respectively. The nature of the Bank's business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. The balance in these accounts at December 31, is as follows:
2000 1999 -------------------------- Noninterest-bearing accounts $1,725,716 $1,004,524 Federal Reserve Bank 5,732,135 4,873,648 Federal funds sold 1,070,000 3,474,064
No losses have been experienced in these accounts. In addition, the Company was required to maintain contracted clearing balances of $750,000 and $1,000,000 at December 31, 2000 and 1999, respectively. Note 3. Interest Bearing Deposits Interest bearing deposits consist of certificates of deposit purchased from various financial institutions. Deposits at each institution are maintained at or below the FDIC insurable limits of $100,000. These certificates were issued with rates ranging from 5.15% to 7.15% and mature at various dates through 2005 with approximately $684,975 scheduled to mature in 2001. Note 4. Investment Securities Securities available-for-sale consist of the following:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------------- December 31, 2000: U.S. Government and agency and corporation securities $30,168,563 $ 95,272 $ 190,348 $30,073,487 State and political subdivisions 4,914,973 0 117,777 4,797,196 Corporate debt securities 20,973,602 43,677 360,051 20,657,228 Marketable equity securities 627,667 486,109 0 1,113,776 ---------------------------------------------------------- $56,684,805 $625,058 $ 668,176 $56,641,687 ========================================================== December 31, 1999: U.S. Government and agency and corporation securities $35,506,095 $ 5,881 $ 781,225 $34,730,751 State and political subdivisions 5,047,300 0 257,705 4,789,595 Corporate debt securities 21,043,240 432 802,391 20,241,281 Marketable equity securities 560,625 133,325 15,053 678,897 ---------------------------------------------------------- $62,157,260 $139,638 $1,856,374 $60,440,524 ==========================================================
Included in the caption "U.S. Government and agency and corporation securities" are mortgage-backed securities with a carrying amount of $7,766,461 and $6,171,658 at December 31, 2000 and 1999, respectively. Investment securities with a carrying amount of $7,494,231 and $9,919,532 at December 31, 2000 and 1999, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. All realized gains and losses in 2000, 1999, and 1998 were from the sale of securities available-for-sale. Proceeds from the sale of securities available-for-sale were $7,409,118, $9,651,088, and $2,350,035 in 2000, 1999, and 1998, respectively. Realized gains from sales of investments available-for-sale were $69,765, $7,751, and $194,563 with realized losses of $45,117, $4,775, and $44,525 for the years 2000, 1999, and 1998, respectively. The scheduled maturities of securities available-for-sale as of December 31, 2000 were as follows:
Amortized Fair Cost Value ---------------------------- Due in one year or less $ 7,023,505 $ 7,009,850 Due from one to five years 27,728,312 27,576,937 Due from five to ten years 11,580,027 11,301,780 Due after ten years 1,957,547 1,872,883 Mortgage-backed securities 7,767,747 7,766,461 Marketable equity securities 627,667 1,113,776 ---------------------------- $56,684,805 $56,641,687 ============================
Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the above maturity summary. Note 5. Loans The composition of net loans at December 31 is as follows:
2000 1999 ------------------------------ Real estate $ 93,004,776 $ 87,153,823 Commercial real estate 74,580,465 69,806,893 Commercial 20,594,333 16,246,118 Consumer 15,378,421 18,661,352 Municipal loans 12,334,674 9,656,703 ------------------------------ 215,892,669 201,524,889 ------------------------------ Deduct: Allowance for loan losses 2,862,707 2,869,983 Net deferred loan fees, premiums, and discounts 250,374 273,305 ------------------------------ 3,113,081 3,143,288 ------------------------------ $212,779,588 $198,381,601 ==============================
Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of commercial and mortgage loans serviced for others were $59,999,703, $59,590,014, and $61,144,487 at December 31, 2000, 1999, and 1998, respectively. Mortgage servicing rights of $44,283, $48,015, and $94,607 were capitalized in 2000, 1999, and 1998, respectively. Amortization of mortgage servicing rights was $34,990, $52,334, and $64,611 in 2000, 1999, and 1998, respectively. Impairment of loans having recorded investments of $1,323,938 at December 31, 2000 and $814,018 at December 31, 1999 has been recognized in conformity with FASB Statement No. 114, as amended by FASB Statement No. 118. The average recorded investment in impaired loans during 2000, 1999, and 1998 was $1,358,358, $693,000, and $796,566, respectively. The total allowance for loan losses related to these loans was $217,577 and $67,217 on December 31, 2000 and 1999, respectively. Interest income on impaired loans of $10,500, $2,835, and $11,993 was recognized for cash payments received in 2000, 1999, and 1998, respectively. The Company is not committed to lend additional funds to borrowers with impaired loans. Residential real estate loans aggregating $5,187,749 and $4,907,921 at December 31, 2000 and 1999, respectively, were pledged as collateral on deposits of municipalities. Note 6. Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31 are as follows:
2000 1999 1998 ------------------------------------------ Balance, beginning $2,869,983 $2,844,929 $2,811,412 Provision for loan losses 250,000 359,496 400,000 Recoveries of amounts charged off 123,590 94,194 120,826 ------------------------------------------ 3,243,573 3,298,619 3,332,238 Amounts charged off (380,866) (428,636) (487,309) ------------------------------------------ Balance, ending $2,862,707 $2,869,983 $2,844,929 ==========================================
Note 7. Premises and Equipment The major classes of premises and equipment and accumulated depreciation at December 31 are as follows:
2000 1999 ---------------------------- Land and land improvements $ 614,244 $ 573,249 Buildings and improvements 3,958,379 3,726,227 Furniture and equipment 6,211,970 6,223,285 ---------------------------- 10,784,593 10,522,761 Less accumulated depreciation (6,820,279) (6,479,725) ---------------------------- $ 3,964,314 $ 4,043,036 ============================
Depreciation included in occupancy and equipment expenses amounted to $789,027, $867,114, and $789,826 for the years ended December 31, 2000, 1999, and 1998, respectively. The Company is obligated under noncancelable operating leases for premises expiring in various years through the year 2021. Options to renew for additional periods are available with these leases. Future minimum rental commitments for these leases with terms of one year or more at December 31, 2000 were as follows: 2001 $ 76,824 2002 90,303 2003 83,391 2004 75,626 2005 60,920 2006 and thereafter 750,720 ---------- $1,137,784 ==========
Rent expense for 2000, 1999, and 1998 amounted to $72,086, $69,555, and $68,977, respectively. Occupancy expense is shown in the consolidated statements net of rental income of $55,025 in 2000, $55,585 in 1999, and $68,840 in 1998. Note 8. Other Real Estate Owned A summary of foreclosed real estate at December 31 is as follows:
2000 1999 --------------------- Other real estate owned $120,250 $26,667 Less allowance for losses on OREO (3,957) 0 --------------------- Other real estate owned, net $116,293 $26,667 =====================
Changes in the allowance for losses on OREO for the years ended December 31 were as follows:
2000 1999 1998 ------------------------------------ Balance, beginning $ 0 $ 42,588 $ 71,952 Provision for losses 12,008 7,421 77,578 Charge-offs, net (8,051) (50,009) (106,942) ------------------------------------ Balance, ending $ 3,957 $ 0 $ 42,588 ====================================
Note 9. Investments Carried at Equity The Company has purchased various partnership interests in low income housing limited partnerships. These partnerships were established to acquire, own and rent residential housing for low and moderate income Vermonters located in northeastern Vermont. The investments are accounted for under the equity method of accounting. These equity investments, which are included in other assets, are recorded at cost and adjusted for the Company's proportionate share of the partnerships' undistributed earnings or losses. The carrying values of these investments were $621,721 and $476,249 at December 31, 2000 and 1999, respectively. The provision for undistributed net losses of the partnerships charged to earnings was $45,103 and $21,523 for 2000 and 1999, respectively. Note 10. Deposits The following is a summary of interest bearing deposits at December 31:
2000 1999 ------------------------------ NOW accounts $ 38,353,841 $ 37,536,937 Savings and money market 85,919,417 91,284,331 Time, $100,000 and over 26,193,826 21,414,788 Other time 74,722,511 74,367,855 ------------------------------ $225,189,595 $224,603,911 ==============================
The following is a summary of time certificates of deposit by maturity at December 31, 2000: 2001 $ 84,663,729 2002 9,108,100 2003 5,483,941 2004 1,253,422 2005 and thereafter 407,145 ------------ $100,916,337 ============
A maturity distribution of time certificates of deposit in denominations of $100,000 or more at December 31, 2000 is as follows: Three months or less $ 6,757,398 Over three months through six months 11,258,700 Over six months through twelve months 4,439,167 Over twelve months 3,738,561 ----------- $26,193,826 ===========
Note 11. Borrowed Funds Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the years ended December 31, were as follows:
2000 1999 -------------------------- Option Advances 6.06% note payable to FHLB, payable in monthly installments of $11,178, including interest, through May 6, 2008 $ 804,363 $ 886,176 6.06% note payable to FHLB, payable in monthly installments of $5,589, including interest, through March 24, 2008 395,113 436,443 5.95% note payable to FHLB, payable in monthly installments of $13,354, including interest, through March 24, 2003 347,938 482,662 6.06% note payable to FHLB, payable in monthly installments of $7,341, including interest, through March 23, 2005 334,364 399,648 6.74% term borrowing from FHLB, maturing January 22, 2001 2,000,000 0 6.92% term borrowing from FHLB, maturing August 4, 2003 2,500,000 0 IDEAL Way advances payable monthly, various rates as determined by FHLB 0 667,000 -------------------------- $6,381,778 $2,871,929 ==========================
Principal maturities of borrowed funds as of December 31, 2000 are as follows: 2001 $2,343,274 2002 365,676 2003 2,779,723 2004 240,986 2005 196,576 Thereafter 455,543 ---------- $6,381,778 ==========
Additionally, Union and Citizens each maintain an IDEAL Way Line of Credit with the Federal Home Loan Bank of Boston. As of December 31, 2000, the total amounts of these lines approximated $3,356,000 and $3,040,000 for Union and Citizens, respectively. Total borrowings against this line of credit were $0 and $667,000 at December 31, 2000 and 1999, respectively. Interest on these borrowings is chargeable at a rate determined by the Federal Home Loan Bank and payable monthly. Collateral on these borrowings consists of Federal Home Loan Bank stock purchased by each Bank, all funds placed in deposit with the Federal Home Loan Bank, and qualified first mortgages held by each Bank, and any additional holdings which may be pledged as security. Union Bank also maintains a line of credit with Fleet Bank for the purchase of overnight Federal Funds. As of December 31, 2000, the total amount of this line approximated $4,000,000 with outstanding borrowings of $0. Interest on this borrowing is chargeable at the Federal Funds rate at the time of the borrowing and payable daily. Note 12. Income Taxes The Company prepares its Federal income tax return on a consolidated basis. Federal income taxes are allocated to members of the consolidated group based on taxable income. Income taxes for the years ended December 31 were as follows:
2000 1999 1998 ------------------------------------------ Currently paid or payable $1,843,349 $1,762,301 $2,026,257 Deferred (18,339) 52,958 28,650 ------------------------------------------ $1,825,010 $1,815,259 $2,054,907 ==========================================
Total income tax expense differs from the amounts computed at the statutory federal income tax rate of 34% primarily due to the following at December 31:
2000 1999 1998 ------------------------------------------ Computed "expected" tax expense $2,252,348 $2,002,848 $2,246,143 Tax exempt interest (267,148) (223,150) (223,262) Disallowed interest expense 36,851 29,902 31,557 Dividend exclusion (10,224) (11,737) (11,576) Increase in CSV life (36,063) (27,990) (27,494) Nondeductible acquisition costs 631 169,708 23,632 Tax credits on limited partnership investments (167,618) (141,484) 0 Other 16,233 17,162 15,907 ------------------------------------------ $1,825,010 $1,815,259 $2,054,907 ==========================================
The deferred income tax provision consisted of the following for the years ended December 31:
2000 1999 1998 ---------------------------------------- Bad debts $ 3,491 $(50,219) $(15,121) Mark-to-market, loans (41,506) 16,223 (130) Deferred loan fees 8,022 17,389 26,928 Nonaccrual loan interest (36,007) (24,371) 15,808 OREO (1,345) 14,480 9,984 Deferred compensation 37,575 57,208 4,626 Pension 8,248 6,001 (31,762) Depreciation (45,763) (41,922) (14,692) Limited partnership tax credits 65,375 60,316 0 Mortgage servicing rights 3,160 (1,468) 10,199 Other (19,589) (679) 22,810 ---------------------------------------- $(18,339) $ 52,958 $ 28,650 ========================================
Listed below are the significant components of the net deferred tax asset at December 31:
2000 1999 --------------------------- Components of the deferred tax asset: Bad debts $ 771,997 $ 775,488 Mark-to-market loans 59,330 17,824 Deferred loan fees 25,668 33,690 Nonaccrual loan interest 98,094 62,087 OREO writedowns 1,345 0 Deferred compensation 524,082 561,657 Pension 14,403 22,651 Unrealized loss on securities available-for-sale 14,660 583,690 --------------------------- Total deferred tax asset 1,509,579 2,057,087 Valuation allowance 0 0 --------------------------- Total deferred tax asset, net of valuation allowance 1,509,579 2,057,087 --------------------------- Components of the deferred tax liability: Depreciation (69,103) (114,866) Mortgage servicing rights (32,054) (28,894) Limited partnership tax credits (125,691) (60,316) Other (70,107) (64,117) --------------------------- Total deferred tax liability (296,955) (268,193) --------------------------- Net deferred tax asset $1,212,624 $1,788,894 ===========================
FASB Statement No. 109 allows for recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred asset will be realized. Net deferred income tax assets are included in the caption "Other assets" on the balance sheets at December 31, 2000 and 1999, respectively. Note 13. Employee Benefits Union sponsors a non-contributory defined benefit pension plan covering all eligible employees. Union's policy is to accrue annually an amount equal to the actuarially calculated expense. Net pension cost for Union's defined benefit pension plan consisted of the following components at December 31:
2000 1999 ------------------------ Service cost $ 195,070 $ 185,950 Interest cost on projected benefit obligation 293,450 270,765 Actual return on plan assets (263,794) (269,861) Net amortization and deferral 3,642 (7,656) ------------------------ $ 228,368 $ 179,198 ========================
The following table sets forth the Plan's funded status and amounts recognized in the accompanying consolidated balance sheets at December 31:
2000 1999 ---------------------------- Actuarial present value of benefit obligations: Vested benefits $ 3,259,533 $ 2,954,924 Nonvested benefits 38,432 46,980 ---------------------------- Accumulated benefits 3,297,965 3,001,904 ============================ Projected benefits (4,621,211) (4,269,543) Plan assets at fair value 4,136,716 3,645,807 ---------------------------- Projected benefit obligation in excess of plan assets (484,495) (623,736) Unrecognized transition amount (22,961) (30,617) Unrecognized net loss 465,095 587,733 ---------------------------- Accrued pension $ (42,361) $ (66,620) ============================
Assumptions used by Union in the determination of pension plan information consisted of the following:
2000 1999 ---------------- Discount rate 7.00% 7.00% Rate of increase in compensation levels 4.25% 4.25% Expected long-term rate of return of plan assets 7.25% 7.25%
Contributions to the plan are invested in diversified portfolios, mainly corporate stocks and bonds. Contributions to Union's defined contribution 401(k) plan, including employer matching amounts, are at the discretion of the Board of Directors. Employer contributions to the plan were $67,440, $65,785, and $63,375 for 2000, 1999, and 1998, respectively. Additionally, the Company and Union have a non-qualified Deferred Compensation Plan for Directors and certain key officers. Under the plan, compensation may be deferred that would otherwise be currently payable. Deferrals are made to an uninsured interest bearing account and are payable upon attainment of a certain age or death over a 15 year period. The Company and Union have purchased life insurance contracts for each participant in order to fund these benefits. The benefits accrued under this plan aggregated $1,541,417 and $1,651,932 at December 31, 2000 and 1999, respectively, and is included in the financial statement caption "Accrued expenses and other liabilities". The cash surrender value of the life insurance policies purchased to fund these plans aggregated $1,230,291 and $1,124,222 at December 31, 2000 and 1999, respectively. These amounts are included in the financial statement caption "Other assets". The annual net cost of the plan is immaterial to the financial statements of the Company. Citizens maintains separately a 401(k) plan and a discretionary profit sharing plan. The 401(k) plan covers all employees meeting certain eligibility requirements. Employees are permitted to contribute any amount, up to 10% of their compensation, to the 401(k) plan. Citizens makes matching contributions up to 6% of an employee's compensation. Matching contributions to this plan were $30,800, $37,178, and $30,852 for 2000, 1999, and 1998, respectively. Contributions to the profit sharing plan are at the discretion of Citizens' Board of Directors. Contributions to this plan were $66,384, $42,003, and $74,934 for 2000, 1999, and 1998, respectively. Note 14. Financial Instruments With Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable rate loans, and commitments to sell loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance- sheet instruments. For interest rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits, and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
Contract or Notional Amount 2000 ----------- Financial instruments whose contract amount represent credit risk: Commitments to extend credit $23,237,926 =========== Standby letters of credit and commercial letters of credit $ 789,360 =========== Credit card arrangements $ 2,005,998 =========== Home equity lines $ 3,731,920 ===========
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 commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivables, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Note 15. Commitments and Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, after consulting with the Company's legal counsel, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. Note 16. Fair Values of Financial Instruments The estimated fair values of the Company's financial instruments at December 31, 2000 are as follows:
Carrying Estimated Amount Fair Value ------------------------------ Financial assets: Cash and cash equivalents $ 11,423,570 $ 11,423,570 Interest bearing deposits 1,721,408 1,721,590 Securities available-for-sale 56,641,687 56,641,687 Federal Home Loan Bank stock 1,016,800 1,016,800 Loans and loans held for sale, net 221,932,893 218,612,116 Accrued interest receivable 2,596,891 2,596,891 Financial liabilities: Deposits 258,736,580 259,091,587 Borrowed funds 6,381,778 6,476,126 Accrued interest payable 838,592 838,592
The estimated fair values of the Company's financial instruments at December 31, 1999 are as follows:
Carrying Estimated Amount Fair Value ------------------------------ Financial assets: Cash and cash equivalents $ 15,101,545 $ 15,101,545 Interest bearing deposits 1,956,999 1,942,088 Securities available-for-sale 60,440,524 60,440,524 Federal Home Loan Bank stock 938,800 938,800 Loans and loans held for sale, net 206,483,416 204,026,180 Accrued interest receivable 2,199,426 2,199,426 Financial liabilities: Deposits 257,592,803 257,993,340 Borrowed funds 2,871,929 2,181,136 Accrued interest payable 549,712 549,712
The estimated fair values of deferred fees on commitments to extend credit and letters of credit were immaterial at December 31, 2000 and1999. The carrying amounts in the preceding table are included in the balance sheet under the applicable captions. Note 17. Transactions With Related Parties The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Aggregate loan transactions with related parties for the year ended December 31 were as follows:
2000 1999 ------------------------ Balance, beginning $ 863,663 $ 866,865 New loans 447,942 248,822 Repayments (332,250) (246,524) Other, net 0 (5,500) ------------------------ Balance, ending $ 979,355 $ 863,663 ======================== Balance available on lines of credit $ 131,854 $ 217,908 ========================
Other activity consists of transactions with related parties who have been newly elected and the sale of mortgage loans on the secondary market. Deposit accounts with related parties approximated $706,318 and $2,015,213 at December 31, 2000 and 1999, respectively. Note 18. Incentive Stock Option Plan Under the terms of a Stock Option Plan with certain key employees, options to purchase shares of the Company's common stock are granted at a price equal to the market price of the stock at the date of grant. These stock options are exercisable within five years from the date of grant. Following is a summary of transactions:
Shares Under Option ------------------------------ 2000 1999 1998 ------------------------------ Outstanding, January 1 11,900 13,700 15,300 Granted during the year 0 2,500 2,500 Exercised during the year (200 shares at $9.75 per share in 2000; 4,000 shares at $9.25 per share and 300 shares at $9.75 in 1999; 4,000 shares at $9.00 per share and 100 shares at $9.75 in 1998) (200) (4,300) (4,100) ------------------------------ Outstanding, December 31 11,700 11,900 13,700 ==============================
Shares Under Option ------------------------------ 2000 1999 1998 ------------------------------ Eligible, December 31, for exercise currently at: $ 9.25 per share 0 0 4,000 $ 9.75 per share 4,200 4,400 4,700 $18.00 per share 2,500 2,500 2,500 $20.25 per share 2,500 2,500 0 $22.00 per share 2,500 2,500 2,500 ------------------------------ 11,700 11,900 13,700 ==============================
Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, net income would have been reduced as follows at December 31:
2000 1999 1998 ------------------------------------------ Net income As reported $4,799,542 $4,075,471 $4,551,396 Proforma $4,795,130 $4,071,059 $4,547,953
Note 19. Acquisitions Effective November 30, 1999, the Company acquired Citizens Savings Bank and Trust Company in a merger accounted for in a tax-free transaction as a pooling of interests with the exchange of 991,089 shares (net of 196 fractional shares redeemed for approximately $4,516) of newly-issued Company common stock in exchange for all of the outstanding shares of Citizens' common stock. Interest income, net income and earnings per share (as restated) for the Company and Citizens Savings Bank and Trust Company prior to the acquisition are as follows:
Eleven Months Year Ended Ended December 31, November 30, 1998 1999 ------------------------------ Interest income Union Bankshares, Inc. $14,733,104 $13,694,631 Citizens Savings Bank and Trust Company 7,893,075 7,178,879 ---------------------------- Combined $22,626,179 $20,873,510 ============================ Net income, giving effect to proforma income taxes Union Bankshares, Inc. $ 3,449,912 $ 2,937,645 Citizens Savings Bank and Trust Company 1,101,484 987,109 ---------------------------- Combined $ 4,551,396 $ 3,924,754 ============================ Basic earnings per share Union Bankshares, Inc. $ 1.70 $ 1.44 Citizens Savings Bank and Trust Company 1.11 1.00 ---------------------------- Combined $ 1.51 $ 1.30 ============================
Note 20. Reportable Segments The Company has two reportable operating segments, Union Bank (Union) and Citizens Savings Bank and Trust Company (Citizens). The accounting policies, including the operation of each, are the same as those described in the summary of significant accounting policies in Note 1. Management regularly evaluates separate financial information for each segment in deciding how to allocate resources and in assessing performance. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, follows:
Intersegment Consolidated 2000 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------------------------- Interest income $ 16,331,233 $ 7,795,092 $ 0 $ 0 $ 24,126,325 Interest expense 6,369,555 3,506,590 0 1,212 9,877,357 Provision for loan loss 0 250,000 0 0 250,000 Service fee income 1,696,478 513,173 0 0 2,209,651 Income tax expense (benefit) 1,420,800 479,000 0 (74,790) 1,825,010 Net income (loss) 3,957,914 976,252 0 (134,624) 4,799,542 Assets 204,051,287 98,844,191 0 498,931 303,394,409 Intersegment Consolidated 1999 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------------------------- Interest income $ 15,035,945 $ 7,832,641 $ 0 $ 0 $ 22,868,586 Interest expense 5,757,892 3,362,522 0 1,157 9,121,571 Provision for loan loss 62,500 296,996 0 0 359,496 Service fee income 1,666,244 562,629 0 0 2,228,873 Income tax expense (benefit) 1,277,950 560,195 0 (22,886) 1,815,259 Net income (loss) 3,496,397 937,342 0 (358,268) 4,075,471 Assets 197,648,845 97,512,372 (79,755) 394,184 295,475,646 Intersegment Consolidated 1998 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------------------------- Interest income $ 14,733,104 $ 7,893,075 $ 0 $ 0 $ 22,626,179 Interest expense 5,778,179 3,472,861 0 1,424 9,252,464 Provision for loan loss 100,000 300,000 0 0 400,000 Service fee income 1,559,924 586,074 0 0 2,145,998 Income tax expense (benefit) 1,541,504 547,650 0 (34,247) 2,054,907 Net income (loss) 3,540,023 1,101,484 0 (90,111) 4,551,396 Assets 190,783,600 98,966,698 0 381,691 290,131,989
Amounts in the "Other" column encompass activity in Union Bankshares, Inc., the "parent company". Holding company assets are stated after intercompany eliminations. Note 21. Regulatory Capital Requirements Union and Citizens (the Banks) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000, that the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notification from the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' category. The Banks' actual capital amounts (000's omitted) and ratios are also 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 ------------------------------------------------------------------ As of December 31, 2000: Total capital to risk weighted assets Union $25,818 17.44% $11,845 8.0% $14,807 10.0% Citizens 11,975 18.06% 5,304 8.0% 6,630 10.0% Tier I capital to risk weighted assets Union 23,808 16.08% 5,923 4.0% 8,884 6.0% Citizens 11,143 16.81% 2,652 4.0% 3,978 6.0% Tier I capital to average assets Union 23,808 11.49% 8,287 4.0% 10,358 5.0% Citizens 11,143 11.00% 4,050 4.0% 5,063 5.0% As of December 31, 1999: Total capital to risk weighted assets Union $23,506 18.80% $10,002 8.0% $12,502 10.0% Citizens 12,057 17.35% 5,559 8.0% 6,949 10.0% Tier I capital to risk weighted assets Union 21,889 17.51% 5,001 4.0% 7,501 6.0% Citizens 11,188 16.10% 2,780 4.0% 4,169 6.0% Tier I capital to average assets Union 21,889 10.93% 8,010 4.0% 10,013 5.0% Citizens 11,188 11.43% 3,914 4.0% 4,893 5.0%
Note 22. Restrictions on Retained Earnings The Company is subject to restrictions on the amount of dividends that it may declare without prior regulatory approval. Also, Vermont state banking regulations require each Bank to transfer, at a minimum, 10% of annual net profits to restricted retained earnings until such amounts of capital equal 10% of each Bank's deposits and other liabilities. Note 23. Subsequent Events On January 3, 2001, Union Bankshares, Inc. declared a $0.26 per share dividend payable January 17, 2001 to stockholders of record on January 13, 2001. Note 24. Condensed Financial Information (Parent Company Only) The following financial statements are for Union Bankshares, Inc. (Parent Company Only), and should be read in conjunction with the consolidated financial statements of Union Bankshares, Inc. and Subsidiaries. UNION BANKSHARES, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
2000 1999 ---------------------------- ASSETS Cash $ 144,411 $ 344,714 Investment in Subsidiary-Union 23,823,428 21,176,978 Investment in Subsidiary-Citizens 11,100,606 10,768,302 Other assets 507,190 394,184 ---------------------------- Total assets $35,575,635 $32,684,178 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Other liabilities $ 418,580 $ 464,164 ---------------------------- Total liabilities 418,580 464,164 ---------------------------- Stockholders' equity Common stock, $2 par value; 5,000,000 shares authorized, 3,263,689 shares issued at 12/31/00 and 3,263,489 shares issued at 12/31/99 6,527,378 6,526,978 Paid-in capital 239,903 238,353 Retained earnings (Note 21) 30,010,683 28,180,180 Less treasury stock, at cost 233,960 shares; 2000 and 1999 (1,592,451) (1,592,451) Accumulated other comprehensive (loss) income (28,458) (1,133,046) ---------------------------- Total stockholders' equity 35,157,055 32,220,014 ---------------------------- Total liabilities and stockholders' equity $35,575,635 $32,684,178 ============================
Note 24. Condensed Financial Information (Parent Company Only) (Continued) The investment in the subsidiary banks is carried under the equity method of accounting. The investment and cash, which is on deposit with the Bank, has been eliminated in consolidation. UNION BANKSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998 ------------------------------------------ Revenues Dividends Bank subsidiaries $3,060,000 $2,300,000 $1,850,000 Loss on sale of securities 0 (109) 0 ------------------------------------------ Total revenues 3,060,000 2,299,891 1,850,000 ------------------------------------------ Expenses Interest 1,212 1,157 1,424 Merger and acquisition costs 1,026 332,940 23,632 Administrative and other 207,176 46,948 99,302 ------------------------------------------ Total expenses 209,414 381,045 124,358 ------------------------------------------ Income before applicable income tax and equity in undistributed net income of subsidiaries 2,850,586 1,918,846 1,725,642 Applicable income tax (benefit) (74,790) (22,886) (34,247) ------------------------------------------ Income before equity (deficit) in undistributed net income of subsidiaries 2,925,376 1,941,732 1,759,889 Equity in undistributed net income-Union 1,917,914 1,196,398 1,690,023 Deficit in undistributed net income-Citizens (43,748) (49,768) 0 ------------------------------------------ Net income $4,799,542 $3,088,362 $3,449,912 ==========================================
Equity in undistributed net income of Citizens for the year ended December 31, 1999 represents earnings of Citizens subsequent to the merger occurring November 30, 1999. UNION BANKSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,799,542 $ 3,088,362 $ 3,449,912 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net income of Union (1,917,914) (1,196,398) (1,690,023) Deficit in undistributed net loss of Citizens 43,748 49,768 0 Increase in income taxes receivable (76,353) (6,404) (2,078) Increase in other assets (36,653) (23,891) (33,203) Loss on sale of securities 0 109 0 (Decrease) increase in other liabilities (45,584) 21,974 42,116 -------------------------------------------- Net cash provided by operating activities 2,766,786 1,933,520 1,766,724 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of securities 0 17,693 0 Purchases of securities 0 0 (17,802) -------------------------------------------- Net cash provided (used) by investing activities 0 17,693 (17,802) -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock 0 0 (43,960) Dividends paid (2,969,039) (1,833,446) (1,665,519) Proceeds from exercise of stock option 1,950 39,925 36,975 Purchase of fractional shares 0 (4,516) 0 -------------------------------------------- Net cash used by financing activities (2,967,089) (1,798,037) (1,672,504) -------------------------------------------- Net (decrease) increase in cash (200,303) 153,176 76,418 Cash Beginning 344,714 191,538 115,120 -------------------------------------------- Ending $ 144,411 $ 344,714 $ 191,538 ============================================= SUPPLEMENTAL SCHEDULE OF CASH PAID (RECEIVED) DURING THE YEAR Interest $ 1,212 $ 1,157 $ 1,424 ============================================= Income taxes $ 5,250 $ (34,247) $ (28,395) =============================================
Note 25. Quarterly Financial Data (Unaudited) A summary of financial data for the four quarters of 2000, 1999, and 1998 is presented below (dollars in thousands): UNION BANKSHARES, INC. AND SUBSIDIARIES
Quarters in 2000 Ended ----------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, ----------------------------------------------- Interest income $5,743 $5,912 $6,174 $6,297 Interest expense 2,266 2,379 2,593 2,639 Provision for loan losses 62 63 63 62 Securities gains (loss) 37 (3) 0 (9) Other operating expenses 2,526 2,619 2,394 2,405 Net income 1,078 1,168 1,247 1,307 Earnings per common share 0.36 0.38 0.41 0.43 Quarters in 1999 Ended ----------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, ----------------------------------------------- Interest income $5,525 $5,617 $5,824 $5,903 Interest expense 2,248 2,249 2,302 2,323 Provision for loan losses 100 88 62 109 Securities gains (loss) 0 3 0 0 Other operating expenses 2,426 2,426 2,450 2,763 Net income 973 1,042 1,134 926 Earnings per common share 0.32 0.34 0.38 0.31 Quarters in 1998 Ended ----------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, ----------------------------------------------- Interest income $5,506 $5,672 $5,664 $5,784 Interest expense 2,283 2,315 2,311 2,343 Provision for loan losses 113 112 100 75 Securities gains (loss) (41) 0 65 126 Other operating expenses 2,357 2,275 2,314 2,332 Net income 978 1,180 1,096 1,297 Earnings per common share 0.33 0.39 0.36 0.43
Note 26. Other Income and Other Expenses The components of other income and other expenses which are in excess of one percent of total revenues in any of the three years disclosed are as follows:
2000 1999 1998 ------------------------------------------ Expenses State franchise tax $ 296,321 $ 281,480 $ 266,009 Legal fees 60,200 280,503 33,438 Professional fees 198,777 308,431 136,871 Fees to directors 237,012 261,609 246,717 Postage and shipping 242,987 246,321 253,634 Other 1,737,002 1,710,679 1,665,407 ------------------------------------------ $2,772,299 $3,089,023 $2,602,076 ==========================================
U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S GENERAL The following discussion and analysis by Management focuses on those factors that had a material effect on Union Bankshares, Inc.'s (Union's) financial position as of December 31, 2000 and 1999, and its results of operations for the years ended December 31, 2000, 1999, and 1998. This discussion should be read in conjunction with the consolidated Financial Statements and related notes and with other financial data appearing elsewhere. Management is not aware of the occurrence of any events after December 31, 2000, which would materially affect the information presented below. 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 Annual Report, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risk exists that 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" or similar expressions, we are making forward-looking statements. Many possible events or factors 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 or the United States including changes in laws concerning taxes, banking and other aspects of the financial services industry * developments in general economic or business conditions, including interest rate fluctuations, market fluctuations and perceptions, and inflation * 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 * unanticipated lower revenues, loss of customers or business, or higher operating expenses * adverse changes in the securities market When relying on forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties. ACQUISITION Effective November 30, 1999, following the receipt of all required stockholder, state and federal regulatory approvals, Union Bankshares, Inc. acquired Citizens Savings Bank and Trust Co. This makes Union a two bank holding company. The accompanying consolidated financial statements reflect the accounting for the acquisition as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the acquisition been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of Citizens common stock into 6.5217 shares of Union common stock. Additional information with respect to this acquisition can be found in Note 19 to the Financial Statements. RESULTS OF OPERATIONS The Company's net income for the year ended December 31, 2000 was $4.800 million compared with net income of $4.075 million for the year 1999. Without merger related nondeductible expenses and Y2K expenses, 1999's net income would have been $4.614 million. Net income per share was $1.58 for 2000 compared to $1.35 for 1999 and would have been $1.52 per share for 1999 without merger related and Y2K expenses. Net Interest Income. The largest component of Union's operating income is net interest income, which is the difference between interest and dividend income received from interest-earning assets and the interest expense paid on its interest-bearing liabilities. Yields Earned and Rates Paid. The following table shows for the periods indicated, the total amount of income recorded from interest-earning assets, and the related average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and average rates, and the relative net interest spread and net interest margin. Yield and rate information for a period is average information for the period, and is calculated by dividing the income or expense item for the period by the average balances of the appropriate balance sheet item during the period. Net interest margin is 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 and net interest margins appearing in the following table have been calculated on a pre-tax basis:
Years ended December 31 --------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------------------------------- Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate --------------------------------------------------------------------------------------------------- (Dollars in thousands) Average Assets: Federal funds sold $ 5,379 $ 333 6.19% $ 8,604 $ 425 4.94% $ 8,799 $ 461 5.24% Interest bearing deposits 1,962 120 6.12% 2,223 122 5.49% 1,494 83 5.56% Investments (1) (2) 58,680 3,615 6.34% 61,097 3,685 6.21% 51,663 3,246 6.35% Loans, net (1), (3) 215,450 20,058 9.42% 202,674 18,636 9.31% 194,716 18,836 9.83% ------------------ ------------------ ------------------ Total interest-earning assets (1) 281,471 24,126 8.69% 274,598 22,868 8.45% 256,672 22,626 8.95% Cash and due from banks 9,042 9,195 8,507 Premises and equipment 3,989 4,330 4,596 Other assets 5,204 5,621 6,227 -------- -------- -------- Total assets $299,706 $293,744 $276,002 ======== ======== ======== Average Liabilities and Stockholders' Equity: NOW accounts $ 34,383 $ 702 2.04% $ 34,654 $ 676 1.95% $ 30,957 $ 691 2.23% Savings/money market accounts 90,923 3,375 3.71% 87,360 3,072 3.52% 75,579 2,712 3.59% Certificates of deposit 98,571 5,378 5.46% 98,901 5,086 5.14% 101,578 5,556 5.47% Borrowed funds 6,340 422 6.66% 4,948 287 5.80% 5,027 294 5.85% ------------------ ------------------ ------------------ Total interest-bearing liabilities 230,217 9,877 4.29% 225,863 9,121 4.04% 213,141 9,253 4.34% Non-interest bearing deposits 32,906 32,505 28,838 Other liabilities 3,575 3,292 3,581 -------- -------- -------- Total liabilities 266,698 261,660 245,560 Stockholders' equity 33,008 32,084 30,442 -------- -------- -------- Total liabilities and stockholders equity $299,706 $293,774 $276,002 ======== ======== ======== Net interest income (1) $14,249 $13,747 $13,373 ======= ======= ======= Net interest spread 4.40% 4.41% 4.61% Net interest margin 5.19% 5.13% 5.34% - ------------------- Average yield reported on a tax-equivalent basis. Average balance of investments calculated on the amortized cost basis. Net of unearned income and allowance for loan losses.
Union's net interest income increased by $502 thousand, or 3.65%, to $14.2 million for the year ended December 31, 2000, from $13.7 million for the year ended December 31, 1999. This increase was primarily due to the growth in our loan portfolio which had an average yield of 9.42% in 2000 while the lower yielding investment, interest-bearing deposits and federal funds sold average balances decreased. On average for the year 93.9% of our assets were earning interest in 2000 versus 93.5% in 1999. The net interest spread decreased by 1 basis point to 4.40% for the year ended December 31, 2000, from 4.41% for the year ended December 31, 1999. The net interest margin for the 2000 period increased by 6 basis points to 5.19% from 5.13% for the 1999 period. Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Union's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: * changes in volume (change in volume multiplied by prior rate); * changes in rate (change in rate multiplied by current volume); and * total change in rate and volume. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate. All changes are expressed as Dollars in thousands.
Year Ended December 31, 2000 Year Ended December 31, 1999 Compared to Year Ended Compared to Year Ended December 31, 1999 Increase/ December 31, 1998 Increase/ (Decrease) Due to Change In (Decrease) Due to Change In ------------------------------------------------------------------------ Volume Rate Net Volume Rate Net ------------------------------------------------------------------------ Interest-earning assets: Federal funds sold $ (159) $ 67 $ (92) $ (10) $ (26) $ (36) Interest-bearing deposits (14) 12 (2) 41 (2) 39 Investments (150) 80 (70) 599 (160) 439 Loans, net 1,189 233 1,422 782 (987) (205) ------------------------------------------------------------------------ Total interest-earning assets $ 866 $ 392 $ 1,258 $ 1,412 $(1,175) $ 237 Interest-bearing liabilities: NOW accounts $ (5) $ 31 $ 26 $ 83 $ (98) $ (15) Savings/money market accounts 125 178 303 423 (63) 360 Certificates of deposit (18) 310 292 (146) (324) (470) Borrowed funds 81 54 135 (5) (2) (7) ------------------------------------------------------------------------ Total interest-bearing liabilities $ 183 $ 573 $ 756 $ 355 $ (487) $ (132) ------------------------------------------------------------------------ Change in net interest income $ 683 $ (181) $ 502 $ 1,057 $ (688) $ 369 ========================================================================
Interest and Dividend Income. Union's interest and dividend income increased by $1,258,000, or 5.5%, to $24.1 million for the year ended December 31, 2000, from $22.9 million for the year ended December 31, 1999. Average earning assets increased by $6.9 million, or 2.5%, to $281.5 million for the year ended December 31, 2000, from $274.6 million for the year ended December 31, 1999. Average loans were $215.5 million for the year ended December 31, 2000 up from $202.7 million for the year ended December 31, 1999. Increases in commercial, municipal, construction and real estate secured loans were partially offset by a decrease in average installment loans. Increases in loan volume and interest rates led by the average prime rate for 2000 being 9.23%, up from 7.99% in 1999, was partially offset by the ever increasing competition, and the lower volume of installment loans. This mainly accounted for the increase in loan interest income of $1,423,000 or 7.6%. The average balance of investment securities (including mortgage-backed securities) decreased by $2.4 million, or 4.0%, to $58.7 million for the year ended December 31, 2000, from $61.1 million for the year ended December 31, 1999. Higher interest rates during 2000 partially offset the volume decrease in the investment portfolio as total interest and dividend income was down only 1.9%. Union extended the investment maturity window during 2000 in order to take advantage of the higher interest rates. The average level of federal funds sold decreased by $3.2 million, or 37.5%, to $5.4 million for the year ended December 31, 2000, from $8.6 million for the year ended December 31, 1999. The average balances invested in interest-bearing deposits decreased to $2.0 million at December 31, 2000 from $2.2 million, or 11.7%, at December 31, 1999. These deposits are FDIC insured. Interest Expense. Union's interest expense increased by $756,000, or 8.3%, to $9.9 million for the year ended December 31, 2000, from $9.1 million for the year ended December 31, 1999. Average interest-bearing liabilities increased by $4.4 million, or 1.9% to $230.2 million for the year ended December 31, 2000, from $225.9 million for the year ended December 31, 1999. Average time deposits decreased $330 thousand, or .3%, to $98.6 million for the year ended December 31, 2000, from $98.9 million for the year ended December 31, 1999. The average balances for NOW accounts decreased by $271 thousand to $34.4 million for the year ended December 31, 2000, from $34.7 million for the year ended December 31, 1999. The average balances in savings and money market accounts grew to $90.9 million in 2000 from $87.4 million in 1999 or a 4.1% increase. Higher interest rates prevailed for all interest-bearing liabilities for the current year. Noninterest Income. Union's noninterest income increased only $1,000 for the year ended December 31, 2000. The results for the period reflected a net gain of $34 thousand from the sale of loans compared to a net gain of $40 thousand from these sales during 1999. The net gain on Sales of Securities was $25 thousand for 2000 compared to $3 thousand for 1999. These changes can be explained by management's decision to retain in portfolio a higher percentage of loans that could be sold due to the interest rate environment and the reinvestment rates available. Service fees (sources of which include deposit fees, loan servicing fees, and ATM fees) decreased by $19,000, or 0.9%, to $2.21 million for the year ended December 31, 2000, from $2.23 million for the year ended December 31, 1999. Trust income increased to $182,000 in 2000 from $166,000 in 1999 or a 9.6% increase. Other noninterest income decreased by $11,000, or 8.4%, to $120 thousand for 2000 from $131 thousand for 1999. Noninterest Expense. Union's noninterest expense decreased $121,000, or 1.2%, to $9.9 million for the year ended December 31, 2000, from $10.1 million for the year ended December 31, 1999. Salaries increased $260,000, or 6.1%, to $4.5 million for the year ended December 31, 2000, from $4.2 million for the year ended December 31, 1999, reflecting normal salary activity and severance pay to three former CSBT employees whose jobs were eliminated as a result of the merger and the conversion of their EDP processing to Union Bank. Pension and employee benefits increased $40 thousand or 3.7% to $1.12 million for the year ended December 31, 2000, from $1.08 million for the year ended December 31, 1999 mainly due to the increase in the accrual for the Defined Benefit Pension Plan caused by anticipated increases in future salaries and the performance decline in the underlying investment instruments. Office occupancy expense increased $26 thousand, or 4.8%, to $560,000 for the year ended December 31, 2000, from $535,000 for the year ended December 31, 1999. Equipment expense decreased $131 thousand to $994 thousand for the year ended December 31, 2000, from $1.1 million for 1999 primarily resulting from decreased depreciation cost on computer equipment and software purchases which are depreciated as an expense over a time period of three to five years. Other operating expense includes approximately $500 thousand for the year ended December 31, 1999 and $1,900 for 2000, for expenses related to the merger, including legal and advisory fees. The other one time only expense in 1999 was for Year 2000 preparations. Union had $59 thousand of non- payroll-related expenses in 1999 and $1.5 thousand in 2000. Netting out these one-time only expenses would leave $2.77 million of other operating expenses for the year ended December 31, 2000 compared to $2.53 million for 1999 or a 9.4% increase. The increase was mainly attributable to the listing of the Company on the American Stock Exchange, increases in State franchise taxes paid, FDIC assessments paid, communications expense, charitable contributions, training expense, travel expense, and fees paid to the Small Business Administration. Income Tax Expense. Union's income tax expense increased by $10,000, or 0.5%, to $1.825 million for the year ended December 31, 2000, from $1.815 million for 1999 mainly due to increased taxable income offset by the low income housing and historic rehabilitation credits that are available to us in both the 2000 and 1999 tax years related to our partnership investments in low income housing projects sponsored by Housing Vermont in our market area. Our effective tax rate for 2000 was 27.5% compared to 30.8% for 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998. Interest and Dividend Income. Union's interest and dividend income increased by $242,000, or 1.07%, to $22.9 million for the year ended December 31, 1999, from $22.6 million for the year ended December 31, 1998. Average earning assets increased by $17.9 million, or 7.0%, to $274.6 million for the year ended December 31, 1999, from $256.7 million for the year ended December 31, 1998. Average loans were $202.7 million for the year ended December 31, 1999 up from $194.7 million for the year ended December 31, 1998. Increases in commercial, construction and real estate secured loans were partially offset by a decrease in average municipal loans. Decreases in loan interest rates led by the average prime rate for 1999 being 7.9%, down from 8.35% in 1998, and ever increasing competition, and the lower volume of municipal loans mainly accounted for the decrease in loan interest income of $201,000 or 1.1%. The average balance of investment securities (including mortgage-backed securities) increased by $9.4 million, or 18.3%, to $61.1 million for the year ended December 31, 1999, from $51.7 million for the year ended December 31, 1998. Lower interest rates during 1999 partially offset the volume increase in the investment portfolio as total interest and dividend income was only up 13.5%. Union deliberately kept the investment maturity window shorter in 1999 in order to be able to more quickly take advantage of an increase in interest rates in the future. The average level of federal funds sold decreased slightly by $195,000, or 2.2%, to $8.6 million for the year ended December 31, 1999, from $8.8 million for the year ended December 31, 1998. The average balances invested in interest-bearing deposits increased to $2.2 million at December 31, 1999 from $1.5 million, or 48.8%, at December 31, 1999. These deposits are FDIC insured and were an under-utilized investment vehicle until 1998. Interest Expense. Union's interest expense decreased by $131,000, or 1.4%, to $9.1 million for the year ended December 31, 1999, from $9.2 million for the year ended December 31, 1998. Average interest-bearing liabilities increased by $12.7 million, or 6.0% to $225.9 million for the year ended December 31, 1999, from $213.2 million for the year ended December 31, 1998. Average time deposits decreased $2.7 million, or 2.6%, to $98.9 million for the year ended December 31, 1999, from $101.6 million for the year ended December 31, 1998. The average balances for NOW accounts increased by $3.7 million to $34.7 million for the year ended December 31, 1999, from $31 million for the year ended December 31, 1998. The average balances in savings and money market accounts grew to $87.4 million in 1999 from $75.6 million in 1998 or a 15.6% increase. Lower interest rates prevailed for all interest bearing liabilities for the current year. Noninterest Income. Union's noninterest income decreased $343,000, or 11.8%, to $2.6 million for the year ended December 31, 1999, from $2.9 million for the year ended December 31, 1998. The results for the period reflected a net gain of $40 thousand from the sale of loans compared to a net gain of $302 thousand from these sales during 1998. The net gain on Sale of Securities was $3 thousand for 1999 compared to $150 thousand for 1998. These changes can be explained by management's decision to retain in portfolio a higher percentage of loans and securities that could be sold due to the dropping interest rate environment and the reinvestment rates available. Service fees (sources of which include deposit fees, loan servicing fees, and ATM fees) increased by $83,000, or 3.9%, to $2.2 million for the year ended December 31, 1999, from $2.1 million for the year ended December 31, 1998. Trust income increased from $166,000 in 1999 from $120,000 in 1998 or a 37.7% increase. Other noninterest income decreased by $62,000, or 32.2%, to $131,000 for the year ended December 31, 1999, from $193,000 for the previous year due mainly to the decrease in Gain on Mortgage Servicing Rights because we decided to hold more loans generated in portfolio in 1999 due to the rate environment. Noninterest Expense. Union's noninterest expense increased $787,000, or 8.5%, to $10.1 million for the year ended December 31, 1999, from $9.3 million for the year ended December 31, 1998. Salaries increased $123,000, or 3%, to $4.2 million for the year ended December 31, 1999, from $4.1 million for the year ended December 31, 1998, reflecting normal salary activity. Pension and employee benefits increased $25 thousand or 2.4% or $1.08 million for the year ended December 31, 1999, from $1.06 million for the year ended December 31, 1998 mainly due to the increase in the accrual for the Defined Benefit Pension Plan caused by anticipated increases in future salaries and the performance decline in the underlying investment instruments. Office occupancy expense increased $32 thousand, or 6.4%, to $535,000 for the year ended December 31, 1999, from $503,000 for the year ended December 31, 1998. Equipment expense increased $120 thousand to $1.1 million for the year ended December 31, 1999, from $1 million for 1998 primarily resulting from increased depreciation cost on computer equipment and software purchases which are depreciated as an expense over a time period of three to five years. Other operating expense includes $500,000 for the year ended December 31, 1999, for expenses related to the merger, including legal and advisory fees, compared to $34 thousand during 1998. The other one time only expense in both 1999 and 1998 was for Year 2000 preparations. Union had $59 thousand of non-payroll-related expenses in 1999 and $18 thousand in 1998. Netting out these one-time only expenses would leave $2.53 million of other operating expenses for the year ended December 31, 1999 compared to $2.55 million for 1998 or a 2.8% decrease. Income Tax Expense. Union's income tax expense decreased by $240,000, or 11.7%, to $1.8 million for the year ended December 31, 1999, from $2.05 million for 1998 mainly due to the low income housing and historic rehabilitation credits that are available to us for the 1999 tax year relating to our partnership investment in a low income housing project sponsored by Housing Vermont in our market area. Our effective tax rate for 1999 was 30.8% compared to 31.1% for 1998. FINANCIAL CONDITION At December 31, 2000, Union had total consolidated assets of $303 million, including net loans and loans held for sale of $222 million, deposits of $259 million and shareholders' equity of $35 million. Based on the most recent information published by the Vermont Banking Commissioner, in terms of total assets at December 31, 1999, Union Bank ranked as the 11th largest institution of the 26 commercial banks and savings institutions headquartered in Vermont and Citizens ranked 20th. Union's total assets increased by $7.9 million or 2.7% to $303.4 million at December 31, 2000 from $295.5 million at December 31, 1999. Total net loans and loans held for sale increased by $15.4 million or 7.5% to $221.9 million or 73.1% of total assets at December 31, 2000 as compared to $206.5 million or 69.9% of total assets at December 31, 1999, due to increases of $4.8 million in commercial real estate loans, $5.9 million increase in real estate loans, $4.3 million increase in commercial loans, $2.7 million increase in municipal loans, partially offset by a $3.3 million decrease in loans to consumers. Cash and Due from banks decreased from $11.6 million to $10.4 million between year ends due to Y2K liquidity buildup at December 31, 1999. Federal funds sold decreased approximately $2.4 million or 69.2% to $1.1 million at December 31, 2000 from $3.5 million at December 31, 1999, which was primarily attributable to an increase in loans. Total deposits increased $1.1 million or 0.4% to $258.7 million at December 31, 2000 from $257.6 million at December 31, 1999. A $5.4 million or 5.9% decrease in money market and savings accounts to $85.9 million from $91.3 million was offset by an increase in time deposits of $5.1 million or 5.4% raising time deposits to $100.9 million at December 31, 2000 from $95.8 million at December 31, 1999. This change was partially Y2K related as depositors were willing to commit their funds to term deposits once again. Total borrowings increased approximately $3.5 million to $6.4 million at December 31, 2000 from $2.9 million at December 31, 1999 due to the match funding of certain loan commitments and the slow down in deposit growth. Total equity increased by $2.9 million or 9.1% to $35.2 million at December 31, 2000 from $32.2 million at December 31, 1999 as a result of a decrease of $1.1 million in the net unrealized holding loss on securities available- for-sale and dividend payments of $3.0 million which were offset with net income of $4.8 million and the exercise of employee stock options for $2,000. Loan Portfolio. Union's loan portfolio primarily consists of adjustable- and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. The composition of Union's gross loan portfolio net of loans held for sale at December 31 for each of the last five years was as follows:
2000 1999 1998 1997 1996 ---------------------------------------------------------------- Real Estate $ 93,005 $ 87,154 $ 76,832 $ 81,760 $ 78,664 Commercial Real Estate 74,580 69,807 67,707 52,797 53,334 Commercial 20,594 16,246 17,446 15,786 14,037 Consumer 15,379 18,661 23,519 26,599 26,793 Term Federal Funds Sold 0 0 1,000 3,000 0 Municipal 12,335 9,657 8,830 16,034 10,283 ---------------------------------------------------------------- Total Loans $215,893 $201,525 $195,344 $195,976 $183,111 ================================================================
Union originates and sells residential mortgages into the secondary market, with most such sales made to the Federal Home Loan Mortgage Corporation (FHLMC). Union services a $130.8 million residential mortgage portfolio, approximately $48 million of which is serviced for unaffiliated third parties at December 31, 2000. Additionally, Union originates commercial loans under various SBA programs that provide an agency guarantee for a portion of the loan amount. Union occasionally will sell the guaranteed portion of the loan to other financial concerns and will retain servicing rights, which generates fee income. Union capitalizes mortgage servicing rights on these fees and recognizes gains and losses on the sale of the principal portion of these notes as they occur. Union services approximately $13.6 million of commercial and commercial real estate loans that have been previously sold. Total loans not held for sale have increased $14.4 million or 7.1% since December 31, 1999. The majority of this increase is due to management's decision to hold in portfolio many loans that could be sold on the secondary market. This strategy will increase our interest margin and combined with our increased deposit base and overall borrowing capacity has not affected our liquidity adversely. The following table breaks down by loan type the maturities of the loans held in portfolio and held for sale as of December 31, 2000:
Within 1 2-5 Over 5 Year Years Years ---------------------------------- (Dollars in thousands) Real Estate Fixed Rate $14,678 $16,513 $ 42,657 Variable Rate 904 4,013 18,475 Commercial Fixed Rate 8,011 18,927 14,067 Variable Rate 10,433 12,485 36,079 Municipal Fixed Rate 11,601 547 187 Variable Rate 0 0 0 Installment Fixed Rate 7,113 6,787 308 Variable Rate 543 13 31 Other 674 0 0 ---------------------------------- Total $53,957 $59,285 $111,804 ==================================
Asset Quality. Union, like all financial institutions, is exposed to certain credit risks related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Management closely monitors Union's loan and investment portfolios and other real estate owned for potential problems on a periodic basis and reports to Union's Board of Directors at regularly scheduled meetings. Union had loans on non-accrual status totaling $1.5 million at December 31, 2000 and $951,000 at December 31, 1999. The aggregate interest on non- accrual loans not recognized through December 31, 2000 was $288,512, through 1999 was $182,610, and through 1998 was $110,930. Union had $2.9 million and $3.2 million in loans past due 90 days or more and still accruing at December 31, 2000 and 1999, respectively. At December 31, 2000, Union had internally classified certain loans totaling $1.3 million and $1.6 million at December 31. 1999. In management's view, such loans represent a higher degree of risk and could become nonperforming loans in the future. While still on a performing status, in accordance with Union's credit policy, loans are internally classified when a review indicates any of the following conditions making the likelihood of collection questionable: * 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 December 31, 2000, Union had acquired by foreclosure or through repossession real estate worth $116,293, consisting of commercial property and undeveloped land. The balance at December 31, 1999 was $26,667. Allowance for Loan Losses. Some of Union's loan customers ultimately do not make all of their contractually scheduled payments, requiring Union to charge off the remaining principal balance due. Union maintains an allowance for loan losses to absorb such losses. While Union allocates the allowance for loan losses based on the percentage category to total loans, the portion of the allowance for loan losses allocated to each category does not represent the total available for future losses which may occur within the loan category since the total allowance for possible loan losses is a valuation reserve applicable to the entire portfolio. The following table reflects activity in the allowance for loan losses for the years ended December 31, 2000, 1999, 1998, 1997, and 1996.
Year Ended December 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------ (Dollars in thousands) Balance at the beginning of period $2,870 $2,845 $2,811 $2,844 $2,710 Charge-offs: Real Estate 0 41 49 31 45 Commercial 152 49 67 150 148 Consumer and other 229 338 371 368 377 ------------------------------------------------------ Total charge-offs 381 428 487 549 570 ------------------------------------------------------ Recoveries: Real Estate 1 3 0 4 22 Commercial 34 14 33 15 20 Consumer and other 77 77 88 72 68 ------------------------------------------------------ Total recoveries 124 94 121 91 110 ------------------------------------------------------ Net charge-offs (257) (334) (366) (458) (460) Provision for loan losses 250 359 400 425 580 Transfer from Other Reserve 0 0 0 0 14 ------------------------------------------------------ Balance at end of period $2,863 $2,870 $2,845 $2,811 $2,844 ======================================================
The following table shows the breakdown of Union's allowance for loan loss by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated:
December 31, December 31, December 31, December 31, December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------------------------------------------------------------------------------------------------- (Dollars in thousands) Real Estate Residential $ 595 40.5% $ 557 42.3% $ 255 39.5% $ 278 36.8% $ 230 36.7% Commercial 1,193 32.3% 1,014 30.6% 754 29.5% 774 27.9% 949 30.7% Construction 102 4.5% 77 3.7% 12 3.8% 10 2.1% 9 2.5% Other Loans Commercial 401 9.1% 416 8.1% 498 9.0% 601 9.3% 583 7.4% Consumer installment 319 6.5% 448 8.6% 545 11.3% 659 12.9% 662 13.8% Home equity loans 31 1.8% 28 1.8% 21 2.3% 25 2.8% 27 3.1% Municipal, Other and Unallocated 221 5.3% 330 4.9% 760 4.6% 464 8.2% 384 5.8% ----------------------------------------------------------------------------------------------- Total $2,863 100.0% $2,870 100.0% $2,845 100.0% $2,811 100.0% $2,844 100.0% =============================================================================================== Ratio of Net Charge-Offs to Average Loans .12% .16% .19% .24% .25% Ratio of Allowance for Loan Losses to Loans 1.33% 1.42% 1.46% 1.39% 1.50%
Investment Activities. At December 31, 2000, the reported value of investment securities available-for-sale was $56.6 million or 18.7% of assets. Union had no securities classified as held-to-maturity or trading. The adoption of FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities," has had an impact on our investment portfolio. This accounting standard, effective for 1994 statements, requires banks to recognize all appreciation or depreciation of the investment portfolio either on the balance sheet or through the income statement even though a gain or loss has not been realized. These changes require securities classified as "trading securities" to be marked to market with any gain or loss charged to income. Securities classified as "available-for-sale" are marked to market with any gain or loss after taxes charged to the equity portion of the balance sheet. Securities classified as "held-to-maturity" are to be held at book value. The reported value of securities available- for-sale at December 31, 2000 reflects a negative valuation adjustment of $43 thousand. The offset of this adjustment, net of income tax effect, was a $28 thousand decrease in Union's other comprehensive income component of shareholders' equity and an increase in net deferred tax assets of $15 thousand. The following tables show as of December 31, 2000 and 1999 the amortized cost of Union's investment portfolio maturing within the stated period.
At December 31, 2000 ---------------------------------------------------------------------------- Maturities ---------------------------------------------------------------------------- Within One to Five to Over Total Weighted One Year Five Years Ten Years Ten Years Cost Average Yield (Dollars in thousands) ---------------------------------------------------------------------------- Securities available-for-sale: U.S. Government, Agency and Corporation securities $5,998 $10,706 $ 5,196 $ 500 $22,400 6.23% Mortgage-backed securities 137 1,155 3,039 3,437 7,768 6.54% State and political subdivisions 25 682 3,993 215 4,915 6.19% Corporate debt securities 1,001 15,840 2,890 1,243 20,974 6.39% Marketable equity securities 0 0 0 628 628 8.47% ---------------------------------------------------------------------- Total Investment Securities $7,161 $28,383 $15,118 $6,023 $56,685 6.35% ====================================================================== Fair Value $7,146 $28,740 $14,346 $6,410 $56,642 ========================================================= Weighted Average Yield 5.62% 6.52% 6.12% 6.91% 6.35% At December 31, 1999 ---------------------------------------------------------------------------- Maturities ---------------------------------------------------------------------------- Within One to Five to Over Total Weighted One Year Five Years Ten Years Ten Years Cost Average Yield (Dollars in thousands) ---------------------------------------------------------------------------- Securities available-for-sale: U.S. Government, Agency and Corporation securities $7,499 $13,235 $ 7,948 $ 500 $29,182 5.96% Mortgage-backed securities 0 2,298 1,827 2,199 6,324 6.48% State and political subdivisions 25 73 3,743 1,206 5,047 6.24% Corporate debt securities 751 13,837 4,312 2,143 21,043 6.33% Marketable equity securities 0 0 0 558 558 10.94% ---------------------------------------------------------------------- Total Investment Securities $8,275 $29,443 $17,830 $6,606 $62,154 6.20% ====================================================================== Fair Value $8,245 $28,810 $17,009 $6,377 $60,441 ========================================================= Weighted Average Yield 5.52% 6.15% 6.32% 7.02% 6.20%
Deposits. The following table shows information concerning Union's deposits by account type, and the weighted average nominal rates at which interest was paid on such deposits as of December 31, 2000 and December 31, 1999:
Year Ended December 31, Year Ended December 31, 2000 1999 ----------------------------------------------------------------------- Percent Percent Average of Total Average Average of Total Average Amount Deposits Rate Amount Deposits Rate ----------------------------------------------------------------------- (Dollars in thousands) Non-certificate deposits: Demand deposits $ 32,906 12.81% $ 32,505 12.83% Now accounts 34,383 13.39% 2.04% 34,654 13.67% 1.95% Money Markets 53,770 20.94% 4.45% 49,296 19.45% 4.14% Savings and other 37,153 14.47% 2.72% 38,064 15.02% 2.71% -------------------- -------------------- Total non-certificate deposits 158,212 61.61% 154,519 60.97% -------------------- -------------------- Certificates of deposit: Less than $100,000 75,483 29.40% 5.29% 78,031 30.79% 5.05% $100,000 and over 23,088 8.99% 5.89% 20,870 8.24% 5.48% -------------------- -------------------- Total certificates of deposit 98,571 38.39% 98,901 39.03% -------------------- -------------------- Total deposits $256,783 100.00% 3.68% $253,420 100.00% 3.49% =====================================================================
The following table sets forth information regarding the amounts of Union's certificates of deposit in amounts of $100,000 or more at December 31, 2000 and December 31, 1999 that mature during the periods indicated:
December 31, 2000 December 31, 1999 ------------------------------------- (Dollars in thousands) Within 3 months $ 6,757 $ 2,301 3 to 6 months 11,259 11,872 6 to 12 months 4,439 3,751 Over 12 months 3,739 3,491 --------------------------- $26,194 $21,415 ===========================
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $6.4 million at December 31, 2000 at a weighted average rate of 6.6%. Borrowings totaled $2.9 million at December 31, 1999 have a weighted average rate of 5.77%. (See Footnote 11 to the Financial Statements for details.) Other Financial Considerations Market Risk and Asset and Liability Management. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Union's market risk arises primarily from interest rate risk inherent in its lending, investing, and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. Union does not have any market risk sensitive instruments acquired for trading purposes. Union attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. Union's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. Union's Asset/Liability Committee's methods for evaluating interest rate risk include an analysis of Union's interest-rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of Union's entire balance sheet, and a simulation analysis, which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving substantial increases or decreases in market rates of interest. Union's Asset/Liability Committee meets at least weekly to set loan and deposit rates, make investment decisions, monitor liquidity and evaluate the loan demand pipeline. Deposit runoff is monitored daily and loan prepayments evaluated monthly. Union historically has maintained a substantial portion of its loan portfolio on a variable rate basis and plans to continue this ALM strategy in the future. The investment portfolio is all classified as available for sale and the modified duration is relatively short. Union does not utilize any derivative products or invest in any "high risk" instruments. Our interest rate sensitivity analysis (simulation) as of December 1999 for a flat rate environment projected a Net Interest Income of $13.7 million for 2000 compared to actual results of $14.2 million or a 3.6% difference. Interest rates were up in 2000 almost equally on both interest earning assets and liabilities. We had higher demand for loans than anticipated which resulted in our percentage of interest-earning assets to total assets increasing to 93.9% and we shifted resources from lower yielding assets to loans. Our net interest margin for 2000 was 5.19% and our net interest spread was 4.40%. Net income was projected to be $4.3 million compared to actual results of $4.8 million. Of the $451 thousand difference, $369 thousand relates to the increase in net interest income offset by $2 thousand in merger-related expense, $18 thousand for American Stock Exchange listing expenses, and $2 thousand of Y2K expense, which were not included in our analysis as they are unusual, one time expenses. The other unanticipated factor was the Company's investment in a low-income housing project which generated $128 thousand in Federal Income Tax credits for 2000. Return on Assets was 1.61% compared to our projection of 1.46%. Return on Equity was 14.22% compared to our projection of 13.08%. These two ratios were higher based on higher net income as explained above and higher average balances than anticipated. The Company generally requires collateral or other security to support financial instruments with credit risk. 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. (See Footnote 14 to the Financial Statements for details) Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Union prepares its interest rate sensitivity "gap" analysis by scheduling interest-earning assets and interest-bearing liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except that: * adjustable-rate loans, securities, and FHLB advances are included in the period when they are first scheduled to adjust and not in the period in which they mature; * fixed-rate mortgage-related securities reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by Union, and empirical data; * fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and * NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by Union of the sensitivity of each such category of deposit to changes in interest rates. Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of Union's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. The following tables show Union's rate sensitivity analysis as of December 31, 2000 and 1999:
December 31, 2000 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 $ 1,070 $ 0 $ 0 $ 0 $ 0 $ 1,070 Interest-bearing deposits 174 586 770 191 0 1,721 Investments available for sale (1) 2,245 6,641 15,785 13,455 17,402 55,528 FHLB / VBSC Stock 0 0 0 0 1,017 1,017 Loans (2) 59,092 41,549 36,150 29,462 58,543 224,796 ------------------------------------------------------------------------- Total interest sensitive assets $62,581 $48,776 $52,705 $43,108 $76,962 $284,132 ========================================================================= Interest sensitive liabilities: Time deposits $29,006 $56,150 $14,100 $ 1,658 $ 2 $100,916 Money markets 18,215 0 0 0 32,495 50,710 Regular savings 4,297 0 0 0 30,913 35,210 Now accounts 20,698 0 0 0 17,656 38,354 Borrowed funds (3) 2,072 265 3,295 591 159 6,382 ------------------------------------------------------------------------- Total interest sensitive liabilities $74,288 $56,415 $17,395 $ 2,249 $81,225 $231,572 ========================================================================= Net interest rate sensitivity gap (11,707) (7,639) 35,310 40,859 (4,263) 52,560 Cumulative net interest rate sensitivity gap (11,707) (19,346) 15,964 56,823 52,560 Cumulative net interest rate sensitivity gap as a percentage of total assets (3.86)% (6.38)% 5.26% 18.73% 17.32% Cumulative interest sensitivity gap as a percentage of total interest-earning assets (4.12)% (6.81)% 5.62% 20.00% 18.50% Cumulative net interest earning assets as a percentage of cumulative interest-bearing liabilities (5.06)% (8.35)% 6.89% 24.54% 22.70% - ------------------- Investments available for sale exclude marketable equity securities with a fair value of $1,114,000 which may be sold by Union at any time. Balances shown net of unearned income of $250,374. Estimated repayment assumptions considered in Asset/Liability model.
December 31, 1999 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 $ 3,474 $ 0 $ 0 $ 0 $ 0 $ 3,474 Interest-bearing deposits 297 793 673 194 0 1,957 Investments available for sale (1) 2,001 6,244 13,406 15,404 22,707 59,762 FHLB / VBSC Stock 0 0 0 0 941 941 Loans (2) 53,401 34,614 16,778 26,891 77,669 209,353 -------------------------------------------------------------------------- Total interest sensitive assets $59,173 $41,651 $30,857 $42,489 $101,317 $275,487 ========================================================================== Interest sensitive liabilities: Time deposits $21,242 $50,499 $22,867 $ 1,174 $ 0 $ 95,782 Money markets 43,825 0 0 0 10,952 54,777 Regular saving 2,084 3,485 0 0 30,939 36,508 Now accounts 15,533 0 0 0 22,004 37,537 Borrowed funds (3) 745 235 685 755 452 2,872 -------------------------------------------------------------------------- Total interest sensitive liabilities $83,429 $54,219 $23,552 $ 1,929 $ 64,347 $227,476 ========================================================================== Net interest rate sensitivity gap (24,256) (12,568) 7,305 40,560 36,970 48,011 Cumulative net interest rate sensitivity gap (24,256) (36,824) (29,519) 11,041 48,011 Cumulative net interest rate sensitivity gap as a percentage of total assets (8.21)% (12.46)% (9.99)% 3.74% 16.25% Cumulative interest sensitivity gap as a percentage of total interest-earning assets (8.80)% (13.37)% (10.72)% 4.01% 17.43% Cumulative net interest earning assets as a percentage of cumulative interest-bearing liabilities (10.66)% (16.19)% (12.98)% 4.85% 21.10% - ------------------- Investments available for sale exclude marketable equity securities with a fair value of $676,000 which may be sold by Union at any time. Balances shown net of unearned income of $273,305. Estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, Union uses computer software to simulate the estimated impact on net interest income and capital under various interest rate scenarios, balance sheet trends, and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loans and deposit growth, product pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Based on the results of these simulations, Union is able to quantify its interest rate risk and develop and implement appropriate strategies. The following chart reflects the results of our latest simulation analysis for next year end on Net Interest Income, Net Income, Return on Assets, Return on Equity and Capital Value. The projection utilizes a rate shock of 300 basis points from the year end prime rate of 9.5%; 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. UNION BANKSHARES, INC. INTEREST RATE SENSITIVITY ANALYSIS MATRIX DECEMBER 31, 2000 (in thousands)
Year Prime Net Interest Change Net Return on Return on Capital Change Ending Rate Income % Income Assets % Equity % Value % - --------------------------------------------------------------------------------------------------------- December-01 12.50 $16,791 8.10 $6,748 2.18 18.16 $22,048 (24.66) 9.50 15,533 0.00 5,907 1.91 16.06 29,265 0.00 6.50 14,203 (8.56) 5,018 1.63 13.80 36,162 23.56
Liquidity. Liquidity is a measurement of Union's ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, and for other general business purposes. Union's principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities and other short-term investments, sales of securities available-for-sale, and earnings and funds provided from operations. In addition, as both subsidiary banks are members of the FHLB, Union has access to preapproved lines of credit up to 2.1% of total assets. Union also has a $4 million short term preapproved line of credit with one of their correspondent banks. The Banks maintain IDEAL Way Lines of Credit with the Federal Home Loan Bank of Boston. The total line available to Union Bank was $3,356,000 as of December 31, 2000 and December 31, 1999, respectively. The total line available to Citizens Savings Bank and Trust Company was $3,040,000 as of both December 31, 2000 and 1999. There were no borrowings against these lines of credit at December 31, 2000 and $667,000 at December 31, 1999. Interest on these borrowings is chargeable at a rate determined by the Federal Home Loan Bank and payable monthly. Should the Company utilize these lines of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings. While scheduled loan and securities payments and FHLB advances are relatively predictable sources of funds, deposit flows and prepayments on loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions, and competition. Union's liquidity is actively managed on a daily basis, monitored by the Asset/Liability Committee, and reviewed periodically with the Board of Directors. Union's Asset/Liability Committee sets liquidity targets based on Union's financial condition and existing and projected economic and market conditions. The committee measures Union's net loan to deposit ratio, the 90 day and 1 year maturity gaps and long term (>3 years) assets repricing compared to total assets on a monthly basis. The committee's primary objective is to manage Union's liquidity position and funding sources in order to ensure that it has the ability to meet its ongoing commitment to its depositors, to fund loan commitments, and to maintain a portfolio of investment securities. Since many of the loan commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Union's management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Although approximately 83.9% of Union's time deposits will mature within twelve months, management believes, based upon past experience, that Union will retain a substantial portion of these deposits. Management will continue to offer a competitive but prudent pricing strategy to facilitate retention of such deposits. Any reduction in total deposits could be offset by purchases of federal funds, short-term FHLB borrowings, or liquidation of investment securities or loans held for sale. Such steps could result in an increase in Union's cost of funds and adversely impact the net interest margin. Regulatory Capital Requirements. As of December 31, 2000, the most recent notification from the FDIC categorized Union Bank and Citizens Savings Bank & Trust Co. as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the banks must maintain a minimum total risk-based capital ratio of 10%, Tier I risk-based capital ratio of 6% and Tier I leverage ratio of 5%. (See Footnote 21 to the Financial Statements for details on the individual banks' capital ratios). Union's total risk based capital ratio is 17.62%, Tier 1 risk based capital ratio is 16.27%, and Tier 1 leverage ratio is 11.74% as of December 31, 2000. There are no conditions or events since the date of the most recent notification that management believes might result in an adverse change to either bank's or Union's regulatory capital category. Impact of Inflation and Changing Prices. Union's consolidated financial statements, included in this document, have been prepared in accordance with generally accepted accounting principles, which require the measurements of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature, and their general and administrative costs constitute relatively small percentages of total expenses. Thus, increases in the general price levels for goods and services have a relatively minor effect on Union's total expenses. Interest rates have a more significant impact on Union's financial performance than the effect of general inflation. 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. U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S M A R K E T F O R U N I O N ' S C O M M O N S H A R E S A N D S H A R E H O L D E R M A T T E R S On March 10, 2001 there were 3,029,729 shares of common stock outstanding held by 730 shareholders of record. The number of shareholders does not reflect the number of persons or entities who may hold the stock in nominee or "street name." Union common stock was listed on the American Stock Exchange on July 13, 2000. The Company's stock trades under the symbol UNB. Cranmer and Cranmer of New York City are the market specialists for Union Bankshares, Inc. stock. Prior to July 13, 2000 no broker made a market in Union common stock and trading was sporadic. The trades that occurred cannot be characterized as an established public trading market. The stock was traded from time to time by holders in private transactions or through brokers, and information on bid and ask prices was not publicly reported. Therefore, the stock prices shown below for that period reflect only the transactions known to management. Due to the limited information available, the stock prices shown may not accurately reflect the actual market value of Union's common stock. The high and low prices for shares of the Company's common stock for 2000 and 1999, as well as cash dividends paid thereon is presented below:
2000 1999 ------------------------------------------------------------------- High Low Dividends High Low Dividends ------------------------------------------------------------------- First Quarter $21.00 $15.00 $ .24 $23.00 $18.50 $ .22 Second Quarter $18.25 $15.00 $ .24 $22.25 $21.50 $ .22 Third Quarter $18.75 $14.94 $ .24 $21.25 $20.00 $ .22 Fourth Quarter $17.75 $16.00 $ .26 $22.00 $21.00 $ .24
On January 3, 2001 the Company declared a dividend of $ .26 per share to stockholders of record as of January 13, 2001, payable January 17, 2001. U N I O N B A N K S H A R E S, I N C. A N D S U B S I D I A R I E S S H A R E H O L D E R A S S I S T A N C E A N D I N V E S T O R I N F O R M A T I O N If you need assistance with a change in registration of certificates, reporting lost certificates, non-receipt or loss of dividend checks, information about the Company, or to receive copies of financial reports, please contact: JoAnn A. Tallman, Assistant Secretary Union Bankshares, Inc. P.O. Box 667 Morrisville, VT 05661-0667 Phone: 802-888-6600 Facsimile: 802-888-4921 E-mail: ubexec@together.net Union Bankshares, Inc. is listed on the American Stock Exchange under the Symbol UNB. Form 10-K A copy of the Form 10-K Report filed with the Securities and Exchange Commission may be obtained without charge upon written request to: Marsha A. Mongeon, Treasurer and Chief Financial Officer Union Bankshares, Inc. P.O. Box 667 Morrisville, VT 05661-0667 Corporate Name: Union Bankshares, Inc. Corporate Transfer Agent: Union Bank, P.O. Box 667, Morrisville, VT 05661-0667 DIRECTORS OF UNION BANKSHARES, INC. W. Arlen Smith, Chairman Cynthia D. Borck William T. Costa, Jr. Kenneth D. Gibbons Peter M. Haslam Franklin G. Hovey II William F. Kinney Richard C. Marron Robert P. Rollins Jerry S. Rowe Richard C. Sargent OFFICERS OF UNION BANKSHARES, INC. W. Arlen Smith Chairman Cynthia D. Borck Vice President Kenneth D. Gibbons President Peter M. Haslam Secretary Marsha A. Mongeon Vice President/Treasurer Jerry S. Rowe Vice President DIRECTORS OF CITIZENS SAVINGS BANK AND TRUST COMPANY Cynthia D. Borck J.R. Alexis Clouatre William T. Costa, Jr. Dwight A. Davis Kenneth D. Gibbons Franklin G. Hovey II Jerry S. Rowe Joseph M. Sherman OFFICERS OF CITIZENS SAVINGS BANK AND TRUST COMPANY John Dinsmore Assistant Treasurer Tracey D. Holbrook Assistant Vice President Susan O. Laferriere Vice President Dennis J. Lamothe Treasurer Michelle Leighton Vice President Barbara A. Olden Assistant Vice President Deborah J. Partlow Trust Officer Jerry S. Rowe President Wendy L. Somers Trust Officer David A. Weed Vice President DIRECTORS OF UNION BANK W. Arlen Smith, Chairman Cynthia D. Borck Kenneth D. Gibbons Peter M Haslam William F. Kinney Richard C. Marron Robert P. Rollins Richard C. Sargent OFFICERS OF UNION BANK Wanda L. Allaire Assistant Vice President Ethan A. Allen, Jr. Vice President Rhonda L. Bennett Vice President Cynthia D. Borck Senior Vice President Fern C. Farmer Assistant Vice President Patsy S. French Assistant Vice President Kenneth D. Gibbons President Nathaniel M. Hayward Commercial Loan Officer Claire A. Hindes Assistant Treasurer Patricia N. Hogan Vice President Peter R. Jones Vice President Margaret S. Lambert Assistant Vice President Marsha A. Mongeon Senior Vice President/ Treasurer Freda T. Moody Assistant Vice President Karen Carlson Noyes Assistant Vice President Colleen D. Putvain Assistant Treasurer Ruth P. Schwartz Vice President David S. Silverman Senior Vice President JoAnn A. Tallman Assistant Secretary Francis E. Welch Assistant Vice President Craig S. Wiltshire Vice President UNION BANK OFFICES Morrisville Jeffersonville 20 Lower Main Street* 80 Main Street* (802) 888-6600 (802) 644-6600 Northgate Plaza* Hyde Park Route 100 250 Main Street (802) 888-6860 (802) 888-6880 Stowe Remote ATM's at: Stowe Village* Smugglers' Notch Resort (2) Park and Pond Streets Johnson State College (802) 253-6600 Copley Hospital Cold Hollow Cider Mill 1857 Mountain Road Trapp Family Lodge Route 108 Stowe Mountain Resort (3) (802) 253-6642 Big John's Riverside Store Taft Corners, Williston Johnson Ben and Jerry's 198 Lower Main Street* (802) 635-6600 Express Telebanking Hardwick (802) 888-6448 103 VT Route 15* (800) 583-2869 (802) 472-8100 www.unionbankvt.com * ATM's at these branches CITIZENS SAVINGS BANK AND TRUST COMPANY OFFICES St. Johnsbury Remote ATM's at: 364 Railroad Street* East Burke, Route 114 (802) 748-3131 Danville, Route 2 Burke Mountain Ski Area 325 Portland Street (802) 748-3121 Express Phone Banking Lyndonville (802) 748-0815 183 Depot Street* (800) 748-1018 (802) 626-3100 St. Johnsbury Center Green Mountain Mall* 1998 Memorial Drive (802) 748-2454 www.csbtc.com * ATM's at these branches EX-23 3 uni-x23.txt EXHIBIT 23 -- CONSENT Exhibit 23 A. M. PEISCH & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS --SINCE 1920-- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Union Bankshares, Inc. of our report dated January 12, 2001, included in the 2000 Annual Report to Shareholders of Union Bankshares, Inc. /s/ A. M. Peisch & Company, LLP March 21, 2001 St. Johnsbury, Vermont VT Reg. No. 92-0000102 - -----------------------------------offices--------------------------------- Gilman Office Center 101 Main Street, Suite 2 27 Center Street P.O. Box 707 Burlington, VT 05401 Box 326 White River Jct., VT 05001 (802) 658-2671 Rutland, VT 05702 (802) 295-9349 (802) 773-2721 1020 Memorial Drive 181 North Main Street St. Johnsbury, VT 05819 St. Albans, VT 05478 (802) 748-5654 (802) 527-0505 -----END PRIVACY-ENHANCED MESSAGE-----