SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
____________________________
UNION BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Vermont 6022 03-0283552
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
20 Main Street, P.O. Box 667, Morrisville, VT 05661-0667
(802) 888-6600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Mr. Kenneth D. Gibbons
President and Chief Executive Officer
Union Bankshares, Inc.
20 Main St., P.O. Box 667
Morrisville, VT 05661-0667
(802) 888-6600
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
____________________________
Copies to:
Denise J. Deschenes, Esq. Edward R. Zuccaro, Esq.
Primmer & Piper, P.C Zuccaro, Willis & Bent
52 Summer St., PO Box 159 87 Main St., PO Box 97
St. Johnsbury, VT 05819 St. Johnsbury, VT 05819-0097
(802) 748-5061 (802) 748-8958
Approximate date of commencement of proposed sale of securities to be
public: As soon as practicable following the effective date of this
registration statement.
____________________________
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. /__/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. /__/
_________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. /__/ _________
<PAGE>
Calculation of Registration Fee
<TABLE>
<CAPTION>
Title of each class Proposed Maximum Proposed Maximum Amount of
of securities Amount Being Offering Price Aggregate Registration
Being Registered registered(1) per Share (2) Offering Price(2) Fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$2.00 par value 991,298 $70.02 $10,643,035 $2,959
<FN>
<F1> Represents the estimated maximum number of shares of Union
Bankshares, Inc. common stock, $2.00 par value per share,
issuable in exchange for the 152,000 outstanding shares of
Citizens Savings Bank and Trust Company under the terms of the
Affiliation Agreement and related Agreement and Plan of Merger
described in this Registration Statement.
<F2> Estimated solely for the purpose of calculating the registration
fee. Pursuant to Rule 457(f)(2) under the Securities Act of 1933,
as amended, the maximum aggregate offering price is based on the per
share book value of the Citizens Savings Bank and Trust Company
common stock at June 30, 1999, multiplied by the number of shares
being registered, and divided by the conversion ratio (6.5217).
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
UNION BANKSHARES, INC. CITIZENS SAVINGS BANK AND TRUST COMPANY
[logo] [logo]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Union Bankshares, Inc. and Citizens Savings Bank
and Trust Company have approved an affiliation agreement which provides
that Citizens will become a subsidiary of Union through a merger of
Citizens with a temporary merger subsidiary of Union. After that merger is
completed, Citizens will be a wholly-owned subsidiary of Union and
Citizens' shareholders will become shareholders of Union. Union will
become a two-bank holding company.
If the merger is completed, holders of Citizens common stock will receive,
for each Citizens share, 6.5217 shares of Union's $2.00 par value common
stock. Only whole shares of Union common stock will be issued; cash will
be paid for any fractional shares.
Union shareholders will continue to own one share of common stock in the
combined company for each Union share they own at the time of the merger.
Union will issue approximately 991,298 shares in the merger, based on
Citizens shares outstanding on August 11, 1999. These shares will
represent approximately 33% of the outstanding Union common stock after the
merger and existing Union shareholders will own approximately 67%. There
is no established public trading market in the stock of Union or Citizens
and we cannot give any firm assurance that a public trading market will
develop in Union's stock after the merger.
We are asking shareholders of Citizens to approve the affiliation agreement
and the merger.
Because Union does not have enough authorized but unissued shares of common
stock to complete the merger, we are asking shareholders of Union to
approve an amendment to Union's Amended and Restated Articles of
Association increasing Union's authorized common stock. But if the
amendment is approved, it will take effect even if the merger with Citizens
is not completed for any reason.
The dates, times and places of the meetings are:
For Union shareholders:
October 6, 1999
10:00 a.m., Eastern Time
________________
Morrisville, Vermont 05661-0667
For Citizens shareholders:
October 6, 1999
10:00 a.m., Eastern Time
________________
St. Johnsbury, Vermont 05819-0219
This joint proxy statement/prospectus gives you detailed information about
the merger we're proposing, and it includes as appendices our affiliation
agreement and the related Agreement and Plan of Merger. We encourage you
to read carefully this entire document, including the appendices and the
risks explained under the heading "RISK FACTORS" on page __.
Your vote is very important. We cannot complete the merger unless the
Citizens shareholders approve it and the Union shareholders approve the
additional authorized shares.
We are very enthusiastic about this merger and join all the other members
of each company's Board of Directors in our whole-hearted recommendation
that you vote in favor of the proposals
Kenneth D. Gibbons Jerry S. Rowe
President and Chief Executive President and Chief Executive
Officer Officer
Union Bankshares, Inc. Citizens Savings Bank and Trust
Company
Neither the Securities and Exchange Commission nor any state securities
regulators have approved Union's common stock to be issued under this joint
proxy statement/prospectus or determined if this joint proxy
statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense. The shares of Union common stock we are
offering through this document are not savings or deposit accounts or other
obligations of any bank, and they are not insured by the Federal Deposit
Insurance Corporation, the Vermont Banking Commissioner, the Bank Insurance
Fund or any other governmental agency.
This joint proxy statement/prospectus is dated __________, 1999, and was
first mailed to shareholders on or about _________, 1999.
<PAGE>
We have not authorized anyone to give any information or make any
representation about the merger or our companies that differs from, or adds
to, the information in this joint proxy statement/prospectus. Therefore,
if anyone does give you different or additional information, you should not
rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by
this joint proxy statement/prospectus or to ask for proxies, or if you are
a person to whom it is unlawful to direct such activities, then the offer
presented by this joint proxy statement/prospectus does not extend to you.
You are urged to read carefully the information about the risks associated
with the merger and ownership of the combined company's common stock,
described in this joint proxy statement/prospectus under the heading "RISK
FACTORS" on page __.
The information contained in this joint proxy statement/prospectus is given
only as of its date unless the information specifically indicates that
another date applies.
Information in this joint proxy statement/prospectus about Union has been
supplied by Union, and information about Citizens has been supplied by
Citizens.
A Warning About Forward-Looking Statements
Each company makes forward-looking statements in this document that are
subject to risks and uncertainties. These forward-looking statements
include information about possible or assumed future results of our
operations or the performance of Union after the merger. 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 each of our companies and the combined company after the merger. This
could cause results or performance to differ materially from those
expressed in our forward-looking statements. You should consider these
uncertainties when you vote on the merger. The possible events or factors
that might affect our forward-looking statements include, but are not
limited to, the following:
* our revenues after the merger are lower than we expect, our
merger-related charges are higher than we expect, we lose
deposits, customers or business, or our operating costs after the
merger are greater than we expect;
* competition among depository and other financial service providers
increases significantly;
* we have more trouble obtaining regulatory approvals for the merger
than we expect;
* we have more trouble integrating our businesses or retaining key
personnel than we expect;
* our cost savings from the merger are less than we expect, or we
are unable to obtain those cost savings as soon as we expect;
* our application for listing on AMEX is denied;
* changes in the interest rate environment reduce our margins;
* general economic or business conditions are worse than we expect;
* legislative or regulatory changes adversely affect our business;
* technological changes and systems integration are harder to make
or more expensive than we expect; and
* adverse changes occur in the securities markets.
Some of these risks are described in greater detail under the heading "RISK
FACTORS" on page ____.
<PAGE>
UNION BANKSHARES, INC.
[logo]
Notice of Special Meeting
To Be Held On October 6, 1999
To the Shareholders of Union Bankshares, Inc.:
A special meeting of shareholders of Union Bankshares, Inc.("Union") will
be held on Wednesday, October 6, 1999, at 10:00 a.m., at _________________,
Morrisville, Vermont for the following purposes:
1. To approve an amendment to Section 7 of Union's Amended and
Restated Articles of Association increasing the number of
authorized shares of common stock, $2.00 par value per share,
from 2,400,000 to 5,000,000 shares; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of the
meeting.
Only holders of record of Union common stock at the close of business on
August 11, 1999, will be entitled to vote at the meeting or any adjournment
or postponement. A list of shareholders entitled to vote will be available
for inspection by any Union shareholder during ordinary banking hours at
Union's office at 20 Main Street in Morrisville, Vermont, beginning two
business days after the date of this Notice, through the date of the
meeting.
The proposed amendment to Union's Amended and Restated Articles of
Association is necessary in order for Union to complete the proposed
affiliation with Citizens Savings Bank and Trust Company ("Citizens"),
under the terms of an Affiliation Agreement, dated as of February 16, 1999,
between Union and Citizens and a related Agreement and Plan of Merger.
Those documents provide for a merger of Citizens with a temporary merger
subsidiary of Union, with the result that Citizens will become a wholly-
owned subsidiary of Union, and Union will become a two-bank holding
company. If the amendment is approved and the proposed merger of Citizens
with Union's merger subsidiary is completed, Union will issue approximately
991,298 of the newly authorized shares to Citizens shareholders in the
merger, and the remainder of the authorized shares will be available for
future issuance by Union from time to time. The proposed merger and
amendment to Union's Amended and Restated Articles of Association are
described in the attached joint proxy statement/prospectus.
If approved, the amendment will take effect even if the merger is
terminated or abandoned for any reason.
Peter M. Haslam
Secretary
_____________, 1999
Your vote is important regardless of the number of shares you own. Whether
or not you plan to attend the Union meeting, please fill in, sign, date and
return your proxy card in the enclosed envelope promptly. If for any
reason you wish to revoke your proxy, you may do so at any time before it
is voted at the meeting.
Your Board of Directors unanimously recommends a vote FOR the above
matters.
<PAGE>
CITIZENS SAVINGS BANK AND TRUST COMPANY
[logo]
Notice of Special Meeting
To Be Held On October 6, 1999
To the Shareholders of Citizens Savings Bank and Trust Company:
A special meeting of shareholders of Citizens Savings Bank and Trust
Company ("Citizens") will be held on Wednesday, October 6, 1999, at 10:00
a.m., at __________________________, St. Johnsbury, Vermont for the
following purposes:
1. To consider and vote upon a proposal to approve the merger of
Citizens with a temporary merger subsidiary of Union
Bankshares, Inc. ("Union"), under the terms contained in an
Affiliation Agreement, dated as of February 16, 1999, between
Citizens and Union, and a related Agreement and Plan of Merger
between Citizens and Union's merger subsidiary, and joined in
by Union, all as described in the attached joint proxy
statement/prospectus; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of the
meeting.
Only holders of record of Citizens common stock at the close of business on
August 11, 1999, will be entitled to vote at the meeting or any adjournment
or postponement. A list of shareholders entitled to vote will be available
for inspection by any Citizens shareholder during ordinary banking hours at
Citizens' office at 364 Railroad Street in St. Johnsbury, Vermont,
beginning two business days after the date of this Notice, through the date
of the meeting.
If the merger is completed, Citizens will become a subsidiary of Union and
Union will become a two-bank holding company for Citizens and Union Bank,
headquartered in Morrisville, Vermont. The proposed merger and related
matters are described in the attached joint proxy statement/prospectus.
Please do not send any of your Citizens stock certificates at this time.
Wendy McReynolds Somers
Clerk
_____________, 1999
Your vote is important regardless of the number of shares you own. Whether
or not you plan to attend the Citizens meeting, please fill in, sign, date
and return your proxy card in the enclosed envelope promptly. If for any
reason you wish to revoke your proxy, you may do so at any time before it
is voted at the meeting.
Your Board of Directors unanimously recommends a vote FOR the above
matters.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER 1
SUMMARY 3
The Companies 3
The Merger 3
Increase in Union's Authorized Shares 4
Exchange of Shares 4
The Special Meeting 4
Record Date; Vote Required 5
Voting Agreements 5
Our Reasons for the Merger 5
Risk Factors 6
Management and Operations after the Merger 6
Recommendations to Our Shareholders 6
Opinions of Financial Advisors 7
Conditions to Completion of the Merger 7
Termination of the Agreement 8
Termination Fee 8
Waiver and Amendment 8
Expenses 8
Accounting Treatment 8
Regulatory Approvals 9
Exchange Act Registration; Trading Market; and AMEX Application 9
Interests of Citizens' Directors and Officers in the Merger that
Differ From Your Interests 9
Dissenters' Rights of Appraisal 10
Material Federal Income Tax Consequences 10
Shareholder Rights Comparison 10
RISK FACTORS 11
STOCK PRICE AND DIVIDEND INFORMATION 15
Stock Prices 15
Dividends 16
UNAUDITED COMPARATIVE PER SHARE DATA 18
SELECTED FINANCIAL DATA 20
INFORMATION ABOUT THE MEETINGS AND VOTING 24
Matters Relating to the Special Meetings 24
<PAGE> i
Vote Necessary to Approve the Union and Citizens Proposals 27
Other Business; Adjournments 29
THE MERGER 29
Structure of Transaction and Conversion of Citizens Stock 29
Background of the Merger 31
Union Board's Recommendation and Reasons for the Merger 36
Opinion of Union's Financial Advisor 40
Citizens Board's Recommendation and Reasons for the Merger 49
Opinion of Citizens' Financial Advisor 52
Exchange of Certificates; Fractional Shares 58
Effective Time 59
Conditions to Completing the Merger; Regulatory Approvals 59
Shareholder Agreements 61
Amendment or Termination 61
Termination Fees 62
Conduct of Business Pending the Merger 62
Management and Operations After the Merger 63
Employee Compensation and Benefits 64
Interests of Certain Persons in the Merger 64
Material Federal Income Tax Consequences 65
Accounting Treatment 67
Dissenters' Rights of Appraisal 68
Resale of Union Common Stock 69
No Solicitation 70
Expenses 70
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 71
INCREASE IN UNION'S AUTHORIZED COMMON STOCK 78
INFORMATION ABOUT UNION 81
Business and Properties 81
Management's Discussion and Analysis of Financial Condition and
Results of Operations 93
Other Financial Considerations 102
Year 2000 109
Directors and Management 111
Share Ownership of Management and Principal Holders 118
INFORMATION ABOUT CITIZENS 119
Business and Properties 119
<PAGE> ii
Management's Discussion and Analysis of Financial Condition and
Results of Operation 128
Other Financial Considerations 136
Year 2000 138
Directors and Management 140
Share Ownership of Management and Principal Holders 142
DESCRIPTION OF UNION'S COMMON STOCK 143
Authorized Capital Stock 143
Voting Rights 144
Dividends 144
Liquidation 144
Non-Assessable Shares 144
No Conversion, Redemption or Preemptive Rights 144
No Preferential Rights 145
Antitakeover Provisions 145
COMPARISON OF SHAREHOLDER RIGHTS 146
REGULATION AND SUPERVISION 155
Bank Holding Companies 155
Banks 156
Dividend Limitations 156
Capital Requirements 157
Community Reinvestment Act 159
Deposit Insurance Premium Assessments 159
FDICIA Cross-Guarantees 159
LEGAL OPINION 159
EXPERTS 159
WHERE YOU CAN FIND MORE INFORMATION 160
OTHER MATTERS 160
INDEX TO FINANCIAL STATEMENTS F-1
APPENDIX A -- Affiliation Agreement A-1
APPENDIX B -- Agreement and Plan of Merger B-1
APPENDIX C -- Fairness Opinion of Bank Analysis Center, Inc. C-1
APPENDIX D -- Fairness Opinion of HAS Associates, Inc. D-1
APPENDIX E -- Text of 8 V.S.A. Section 1006 (Dissenters' Rights of
Appraisal) E-1
</TABLE>
<PAGE> iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the purpose of this document?
A: This document serves as a joint proxy statement of both Union and
Citizens and also as a prospectus of Union. If you are a Citizens
shareholder, it's being provided to you: (1) as a Citizens proxy statement
because the Citizens Board of Directors is soliciting your proxy for use at
the special Citizens meeting to vote on the merger and (2) as a Union
prospectus because Union is offering to convert your shares of Citizens
common stock into Union common stock in the merger. If you are a Union
shareholder, this document is being provided to you as a Union proxy
statement because Union's Board of Directors is soliciting your proxy for
use at the special Union meeting to vote on the proposed charter amendment
increasing Union's authorized common stock, which is necessary to complete
the merger.
Q: Do I need to read the entire document, including the appendices?
A: Absolutely. Much of this joint proxy statement/prospectus summarizes
information that is described in greater detail elsewhere in the document
or in the appendices and financial statements. Each summary is qualified
completely by reference to the full document being summarized. If there
are any differences, the information in the document being summarized will
control over the summary. To fully understand the merger and Union charter
amendment and your rights as a shareholder, you should therefore read the
entire document carefully, including the appendices and financial
statements.
Q: When and where are the shareholder meetings?
A: Each company's meeting will take place on Wednesday, October 6, 1999.
The location of each meeting is listed on page ____.
Q: What do I need to do now?
A: In order to assure that your vote is obtained, please fill in, sign,
date and return your proxy as instructed on your proxy card even if you
plan to attend the meeting in person.
Q: What do I do if I want to change my vote?
A: Just send in a later-dated, signed proxy card to your company's
Corporate Secretary before your meeting. Or, you can attend your meeting
in person, inform the Secretary that you wish to revoke your returned proxy
and vote by ballot or by later dated proxy at the meeting. You may also
revoke your proxy by sending a written notice of revocation to your
company's Secretary. Requests for a new proxy card and notices of
revocation of previously given proxies should be sent to your company's
Secretary at the address under "The Companies" in the SUMMARY section of
this document on page ___. You may also request a new proxy card by phone,
by calling the Secretary or President at (802) 888-6600 (for Union
shareholders) or (802) 748-3131 (for Citizens shareholders).
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: If you are a Citizens shareholder and you do not provide your broker
with instructions on how to vote your "street name" shares, your broker
will not be permitted to vote them at the Citizens special meeting and you
will, in effect, be voting against the merger. You should therefore be
sure to provide your broker with instructions on how to vote your shares.
<PAGE> 1
If you are a Union shareholder, your broker may vote your shares at the
Union special meeting without voting instructions from you, although some
brokers may decide to seek instructions because the vote indirectly relates
to a merger. If your broker does not vote your Union shares, it will not
affect the outcome of the vote (assuming a quorum is present at the
meeting).
Q: Should I send in my stock certificates now?
A: No. If the merger is completed, we will send Citizens shareholders
written instructions for exchanging their share certificates. Union
shareholders will keep their existing certificates.
Q: What happens to my future dividends?
A: Former Citizens shareholders will no longer receive annual dividends
from Citizens; rather, they will receive dividends from Union, on the same
basis as other Union shareholders, under Union's dividend payment
policies.
We expect no changes in Union's dividend policies before the merger and
that Union will continue to pay quarterly cash dividends on its common
stock after the merger. The payment of dividends by Union in the future,
however, will depend on business conditions, Union's financial condition
and earnings, and other factors that we cannot predict with certainty. To
compare dividends paid by Union and Citizens, see page ___.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible.
Before we can complete the merger we must obtain required shareholder and
regulatory approvals. We hope to complete the merger as soon after the end
of the third quarter of 1999 as practicable. Our affiliation agreement
permits either of us to terminate the transaction if the merger hasn't been
completed on or before December 31, 1999.
Q: Who do I call if I have questions about the meetings or the merger?
A: Union shareholders may call Kenneth D. Gibbons at (802)-888-6600.
Citizens shareholders may call Jerry S. Rowe at (802) 748-3131.
<PAGE> 2
SUMMARY
This brief summary highlights selected information from the joint proxy
statement/ prospectus. It does not contain all of the information that is
important to you. We urge you to read carefully the entire joint proxy
statement/prospectus, including its appendices and financial statements, to
fully understand the proposed merger and charter amendment.
The Companies (Pages __ and __)
Union Bankshares, Inc.
20 Main St., P.O. Box 667
Morrisville, VT 05661-0667
(802) 888-6600
Union is a one-bank holding company incorporated in Vermont in 1982 and
registered under the federal Bank Holding Company Act. Our only subsidiary
(other than Interim Bank, described below) is Union Bank, a Vermont
commercial bank chartered in 1891, based in Morrisville. We provide retail
and commercial banking services and limited fiduciary services through
Union Bank's eight offices throughout Vermont's Lamoille county and in the
western portion of Caledonia county.
At March 31, 1999, our unaudited assets were $191.5 million, our deposits
were $162.5 million and our shareholders' equity was $21.4 million.
Citizens Savings Bank & Trust Company
364 Railroad Street, P.O. Box 219
St. Johnsbury, Vermont 05819-0219
(802) 748-3131
Citizens is a Vermont commercial bank incorporated in 1887 and based in St.
Johnsbury. We provide retail and commercial banking services and personal
fiduciary services through our four banking offices in Vermont's Caledonia
County.
At March 31, 1999, our unaudited assets were $98.1 million, our deposits
were $85.7 million and our shareholders' equity was $10.6 million.
Union Interim Bank ("Interim Bank")
Interim Bank is a new Vermont commercial bank organized as a subsidiary of
Union for the sole purpose of completing the merger. When the merger of
Interim Bank into Citizens is completed, Citizens will become a subsidiary
of Union and Interim Bank will cease to exist. Interim Bank will never
conduct any banking business.
The Merger (Page __)
We've attached the Affiliation Agreement and the related Agreement and Plan
of Merger to this document as Appendix A and Appendix B. Please read them
carefully. They are the legal documents that govern the merger.
We propose a combination in which Citizens will become a subsidiary of
Union, but will keep its separate name and banking franchise. Union will
become a two-bank holding company that will own all the stock of Citizens
and of Union Bank. Citizens' Board is asking the Citizens shareholders to
approve the merger.
Because Citizens will become part of Union's corporate family, and will be
<PAGE> 3
consolidated with it for purposes of accounting and financial reporting and
certain tax filings, we sometimes refer in this document to Union after the
merger as "the combined company." The combined company will operate under
Union's Amended and Restated Articles of Association and By-laws. We
propose to make one change in Union's Articles in connection with the
merger, as discussed under "INCREASE IN UNION'S AUTHORIZED COMMON STOCK" on
page ___. The combined company will continue to be incorporated in Vermont
with its corporate headquarters in Morrisville.
Increase in Union's Authorized Shares (Page __)
Union's Board is asking the Union shareholders to approve an amendment to
Union's Amended and Restated Articles of Association to increase the number
of authorized shares of common stock. We do not have enough authorized but
unissued shares available to complete the merger without the amendment.
The merger will be abandoned if the amendment is not approved. However, if
the amendment is approved, it will take effect even if the merger is not
completed for any reason.
Exchange of Shares (Pages __ and ___)
If the merger is completed:
* Citizens. Except for Citizens shareholders who exercise their
dissenters' rights of appraisal, each share of Citizens common
stock will be automatically converted into 6.5217 shares of
Union common stock. The total number of shares you will have
the right to receive will therefore be equal to the number of
shares of Citizens common stock you own, multiplied by 6.5217.
However, Union will only issue whole shares and will pay for
any fractional share in cash, valued at $23 per share.
You will have to surrender your Citizens common stock
certificates to receive new certificates representing Union
common stock. You should not do so until you receive written
instructions after we have completed the merger.
* Union. Each share of Union common stock will remain
outstanding as one share of common stock of Union. You do not
need to surrender your stock certificates or exchange them for
new ones.
The Special Meetings (Page __ )
Union. The Union special meeting will be held on Wednesday, October 6,
1999 at 10:00 a.m., local time at ____________, Morrisville, Vermont. At
the meeting, you will be asked:
* to adopt an amendment to our company's Amended and Restated
Articles of Association to increase our authorized shares of
common stock from 2,400,000 to 5,000,000; and
* to act on any other matters that may be submitted to a vote at
the meeting.
<PAGE> 4
Vermont corporate laws do not require that the merger be approved by
Union's shareholders because the Citizens merger is between Citizens and
Interim Bank, and not directly with Union.
Citizens. The Citizens special meeting will be held on Wednesday, October
6, 1999 at 10:00 a.m., local time, at __________, St. Johnsbury, Vermont.
At the meeting, you will be asked:
* to approve the merger of Citizens and Interim Bank, under the
terms contained in the affiliation agreement between Union and
Citizens and in the related Agreement and Plan of Merger; and
* to act on any other matters that may be submitted to a vote at
the meeting.
Record Date; Vote Required (Page )
Union. You can vote at the Union special meeting if you owned Union common
stock at the close of business on August 11, 1999, the record date for the
meeting. You can cast one vote for each share of Union common stock that
you owned at that time. To approve the amendment to our Amended and
Restated Articles of Association, there must be more shares of Union common
stock voted at the meeting in favor of the amendment than shares voted
against it.
Citizens. You can vote at the Citizens special meeting if you owned
Citizens common stock at the close of business on August 11, 1999, the
record date for the meeting. You can cast one vote for each share of
Citizens common stock that you owned at that time. To approve the merger,
the holders of at least two-thirds of the outstanding shares of Citizens
common stock must vote in favor of it.
Union and Citizens. You may vote your shares in person by attending the
meeting or by completing and mailing us your proxy if you are unable or do
not wish to attend. You may revoke your proxy at any time before we take a
vote at the meeting by sending a written notice revoking the proxy or
sending a later-dated proxy to the Secretary of your company, or by
attending the meeting and voting in person by ballot or later-dated proxy.
Voting Agreements (Page __)
The directors and executive officers of
* Citizens have agreed in writing to vote their shares of
Citizens common stock in favor of the merger; and
* Union have agreed in writing to vote their shares of Union
common stock in favor of the amendment to Union's Amended and
Restated Articles of Association.
Our Reasons for the Merger (Pages __ and __)
Our companies are proposing to combine together into a two-bank holding
company because we believe that we can create a stronger and more
competitive company that will benefit our shareholders and customers alike.
For instance, after approximately two full years of operations the
combination of our businesses should help us to reduce duplicate costs by
about $450 thousand annually, before taxes. We are also hopeful
<PAGE> 5
that the combination of our companies will create opportunities to increase
revenues.
Risk Factors (Page __)
The merger presents certain risks to our shareholders, which we urge you to
consider carefully before deciding how to vote. In addition, this document
contains certain forward-looking statements about possible or assumed
future results of our operations and the performance of the combined
company after the merger. For a discussion of these risks and factors that
could affect our future results, we urge you to read carefully the
information under "RISK FACTORS," beginning on page ___ and "A Warning
About Forward-Looking Statements" on the inside front cover of this
document.
Management and Operations after the Merger (Page __)
When the merger is completed:
* Union's Board will be expanded to add these three directors
chosen by Citizens and approved by Union: Jerry S. Rowe,
President and Chief Executive Officer of Citizens, Franklin G.
Hovey, II and William T. Costa, Jr.;
* Citizens' Board will be expanded to add these two directors
chosen by Union and approved by Citizens: Kenneth D. Gibbons,
President and Chief Executive Officer of Union, and Cynthia D.
Borck, Vice President of Union;
* Mr. Gibbons will remain President, Chief Executive Officer and
a director of Union;
* Mr. Rowe will be appointed as a Vice President of Union and
will also continue as President, Chief Executive Officer and a
director of Citizens; and
* Citizens and Union Bank will continue to operate as separate
banks, but will consolidate certain administrative, corporate
and operational functions and eliminate duplicate systems and
technologies in order to achieve greater efficiencies.
Recommendations to Our Shareholders (Pages __ and __)
Union. Union's Board believes that the merger is fair to Union's
shareholders and in your best interests. We also believe that it is
desirable to have additional authorized but unissued shares available
beyond the number necessary to complete the merger, to issue from time to
time for other corporate purposes, such as stock splits, stock dividends,
dividend reinvestment plans, stock-based compensation plans, raising
additional capital and future acquisitions. The Board therefore
unanimously recommends that you vote "FOR" adopting the amendment to
Union's Amended and Restated Articles of Association increasing the
authorized shares of common stock.
Citizens. Citizens' Board believes that the merger is fair to you and in
your best interests, and unanimously recommends that you vote "FOR" the
merger.
<PAGE> 6
Opinions of Financial Advisors (Pages __ and __)
Union. Bank Analysis Center, Inc. ("Bank Analysis") has delivered a
written opinion to Union's Board that, as of the date of this joint proxy
statement/prospectus, the conversion ratio is fair to the holders of Union
common stock, from a financial point of view. We have attached Bank
Analysis' opinion to this document as Appendix C. You should read it
completely to understand the assumptions made, matters considered and
limitations of the review undertaken by Bank Analysis in providing its
opinion.
Citizens. HAS Associates, Inc. ("HAS") has delivered its written opinion
to Citizens' Board that, as of the date of this joint proxy
statement/prospectus, the conversion ratio is fair to the holders of
Citizens common stock, from a financial point of view. We have attached
HAS' opinion to this document as Appendix D. You should read it completely
to understand the assumptions made, matters considered and limitations of
the review undertaken by HAS in providing its opinion.
If we complete the merger, Union will pay to Bank Analysis a total fee of
$60,000, plus reimbursement for certain expenses and Citizens will pay to
HAS a fee of approximately $80,000, plus reimbursement for certain
expenses.
Conditions to Completion of the Merger (Page __)
Completion of the merger depends on a number of conditions being met.
These include:
* approval of the merger by the Citizens shareholders;
* approval of the amendment to Union's Amended and Restated
Articles of Association by the Union shareholders;
* approval of the merger by certain federal and state regulatory
authorities;
* receipt by us of an opinion from our tax consultants that, for
United States federal income tax purposes, Union, Interim Bank,
Citizens and the shareholders of Citizens who exchange their
shares for shares of Union common stock, will not recognize any
gain or loss as a result of the merger, except for the payment
of cash instead of fractional shares. These opinions will be
subject to various limitations and we recommend that you read
the fuller description of tax consequences provided in this
document beginning on page ___;
* receipt by us of a letter from our independent accountants that
the merger will qualify for "pooling of interests" accounting
treatment;
* the absence of any injunction or legal restraint blocking the
merger, or of
<PAGE> 7
any proceedings by a government body trying to block the
merger;
* the truth of our various representations and warranties to each
other, contained in the affiliation agreement; and
* the absence of any material adverse change in either party's
assets, financial condition, results of operations or future
prospects.
Union and Citizens each have the right to choose to complete the merger
even though a condition has not been satisfied, as long as the law permits
it. We cannot be certain when, or if, all of the conditions to the merger
will be satisfied or waived, or that the merger will be completed.
Termination of the Agreement (Page __)
We can agree at any time to terminate the affiliation agreement without
completing the merger. Also, either of us can decide, without the consent
of the other, to terminate the agreement in some circumstances if the party
seeking to terminate is not itself in material breach of the agreement.
These circumstances will exist if:
* any government agency denies an approval we need to complete
the merger, and that denial has become final and nonappealable;
* any of the conditions to the terminating party's obligations
have not been met, such as failure of the Citizens shareholders
to approve the merger or of the Union shareholders to approve
the amendment to Union's Amended and Restated Articles of
Association; or
* the merger has not been completed by December 31, 1999.
Termination Fee (Page __)
Citizens has agreed to pay Union a termination fee of $2 million, and Union
has agreed to pay Citizens a termination fee of $1.25 million, if the
merger is terminated due to the paying party's breach or wrongful
termination.
Waiver and Amendment (Page __)
We may agree to amend the affiliation agreement, and each of us may waive
our right to require the other party to adhere to the terms and conditions
of the affiliation agreement. However, we may not do so after Citizens'
shareholders approve the merger, if the amendment or waiver reduces or
changes the consideration that will be received by Citizens shareholders,
unless they approve the amendment or waiver.
Expenses (Page __)
Except for payment of any termination fee, whether or not the merger is
completed, we will each pay our own fees and expenses. However, we will
evenly divide the costs and expenses that we've incurred in printing and
mailing this document.
Accounting Treatment (Page __)
We expect the merger to qualify as a "pooling of interests." That means
that, for consolidated accounting and financial
<PAGE> 8
reporting purposes, we will treat our companies as if they had always been
one.
Regulatory Approvals (Page __)
We cannot complete the merger unless it is approved by the Board of
Governors of the Federal Reserve System. Once the Federal Reserve Board
approves the merger, we have to wait anywhere from 15 to 30 days before we
can complete the merger. During that time the Department of Justice can
challenge the merger if it believes the merger would substantially lessen
competition. We do not expect such a challenge because Union and Citizens
do not operate in the same banking markets, as those markets are defined
under Federal Reserve Board and Department of Justice guidelines.
The merger is also subject to approval by the Federal Deposit Insurance
Corporation ("FDIC") and the Vermont Department of Banking, Insurance,
Securities and Health Care Administration ("Vermont Banking Department").
We have filed the required applications with all of these regulatory
authorities.
As of the date of this document, we haven't received all of the required
approvals. Although we expect to obtain the necessary approvals in a
timely manner and without any adverse conditions, we cannot be certain when
or if we will receive them, or whether the approvals will be conditioned in
any way.
Exchange Act Registration; Trading Market; and AMEX Application
(Pages __)
Union. Union is not now subject to the information and reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act").
Union's common stock is not actively traded and is not now listed on any
exchange or traded on NASDAQ. We expect that Union will become subject to
the Exchange Act's information and reporting requirements when the merger
is completed. Union also intends to apply to list its shares on AMEX, but
we cannot be certain that our application will be successful. If our stock
becomes listed, we would also be required to file various information and
reports with AMEX.
Citizens. Citizens is subject to the information and reporting
requirements of the Exchange Act, and makes the required filings with the
FDIC, its federal banking regulator. Citizen's common stock is not
actively traded and is not listed on any exchange or traded on NASDAQ.
Interests of Citizens' Directors and Officers in the Merger that Differ
From Your Interests (Page __)
Some of Citizens' directors and officers have interests in the merger that
differ from, or are in addition to, their interests as Citizens
shareholders. For example, two directors of Citizens, Chairman of the
Board Genevieve L. Hovey and her son, Franklin G. Hovey, II, have entered
into a stock registration agreement with Union. That agreement gives them
the right to require Union in certain circumstances to register for resale
with the Securities and Exchange
<PAGE> 9
Commission and certain state securities regulators, for estate settlement
purposes, up to 150,000 shares of the Union common stock that they will
hold after the merger. The 150,000 shares will represent approximately
4.95% of Union's outstanding common stock upon completion of the merger.
Hovey family members and their related interests own approximately 52% of
Citizens' outstanding common stock and, upon completion of the merger, will
own approximately 17% of Union's outstanding common stock.
Union has also agreed to provide to directors' and officers' liability
insurance coverage for Citizens' directors and officers and to indemnify
them for losses relating to the conduct of their official duties, to the
same extent as Union provides for its own officers and directors.
The members of our Boards of Directors knew about these additional
interests and considered them when they approved the affiliation agreement
and the merger.
Dissenters' Rights of Appraisal (Page __)
Union. Vermont law does not provide Union shareholders with dissenters'
appraisal rights in the merger or in connection with the proposed amendment
to Union's Amended and Restated Articles of Association.
Citizens. Citizens shareholders are entitled to dissent from the merger if
they follow certain procedures, and if the merger is completed. If you do
so, you will have the right to be paid the value of your Citizens common
stock in cash, as provided by Vermont banking laws. If you wish to dissent
and exercise your appraisal rights it is important that you follow the
required procedures exactly.
You should therefore carefully read the discussion of dissenters' rights on
page __ of this document and the text of the Vermont dissenters' rights
statute, which is attached as Appendix E.
Material Federal Income Tax Consequences (Page __)
Citizens. We expect that for United States federal income tax purposes,
your exchange of shares of Citizens common stock for shares of Union common
stock generally will not cause you to recognize any gain or loss. You
will, however, have to recognize income or gain in connection with any cash
you receive instead of a fractional share.
This tax treatment may not apply to every Citizens' shareholder.
Determining the actual tax consequences of the merger to you may be
complicated and will depend on your specific situation and on variables not
within our control. You should consult your own tax advisor for a full
understanding of the merger's tax consequences to you.
Union. Because your shares of Union common stock will remain unchanged,
the merger will not cause you to recognize any gain or loss for purposes of
the United States federal income tax.
Shareholder Rights Comparison (Page __)
The rights of Union's shareholders are governed by Vermont's business
corporation law and Union's Amended and Restated Articles of Association
and By-laws. The rights of Citizens' shareholders are governed by Vermont
banking and business corporation laws and Citizens' Articles of
<PAGE> 10
Association and By-laws. When we complete the merger, Citizens
shareholders will become shareholders of Union, which will then be a two-
bank holding company, and the rights of former Citizens shareholders will
be governed by Vermont's business corporation law and by Union's Amended
and Restated Articles of Association and By-laws.
Upon completion of the merger, Union's Amended and Restated Articles of
Association and By-laws will be identical to those presently in effect,
except that (as described in this document) we intend to increase the
number of shares that the combined company has authority to issue.
RISK FACTORS
The proposed merger presents various risks to the shareholders of Citizens
and Union. We have summarized below some of the risks you should consider
carefully before deciding how to vote at your special meeting.
Failure to integrate our operations following the merger could reduce our
future earnings per share
The failure to successfully integrate our systems, operating procedures,
support personnel and information technologies could have a material
adverse effect on our results of operations. We cannot give you any firm
assurance that we will be able to integrate and manage these operations
effectively or promptly following the merger.
Failure to achieve expected cost savings and incurring unanticipated
merger-related costs could reduce our future earnings per share
It is possible that unexpected transaction costs such as taxes, fees or
professional expenses or unexpected future operating expenses such as
increased personnel costs or increased taxes, as well as other types of
unanticipated adverse developments, could have a material adverse effect on
our results of operations and financial condition. It is also possible
that we have not correctly estimated the amount of our likely cost savings
or the timetable for achieving them, the likely costs of integrating
operations, and the incremental costs of operating as a combined company.
If the expected savings are not realized or unexpected costs are incurred,
our earnings per share could be lower than our forecast. This also means
that Union's shareholders, who will experience some initial earnings per
share dilution compared with the forecasted level Union could have achieved
on its own, could experience greater initial dilution of earnings per share
as a result of the merger than is now expected. See "THE MERGER ---Union
Board's Recommendation and Reasons for the Merger."
<PAGE> 11
If the merger is not completed, we will have incurred substantial expenses
without realizing the expected benefits
We have each incurred substantial expenses relating to the proposed merger,
and we will not derive any significant benefit from these expenditures if
the merger is not completed. We expect to incur merger-related expenses of
approximately $200,000 to $250,000 for Union and $125,000 to $150,000 for
Citizens. We cannot give any assurance that the merger will be completed,
since completion is still subject to substantial conditions, including
shareholder and regulatory approvals.
Failure to achieve anticipated incremental revenue could adversely affect
our financial performance
If our SBA and residential mortgage lending and trust business does not
increase after the merger, we may fail to achieve anticipated incremental
increase in revenues at the expected levels or within the expected
timeframe. This could adversely affect our financial performance.
Despite our plan to integrate our data processing systems after the Year
2000 date changeover, Year 2000 computer issues may still disrupt our
systems conversion and business operations generally
Assuming the merger is completed during 1999, we expect to integrate our
data processing systems during the first quarter of the year 2000.
Although this integration would take place after the Year 2000 date
changeover, we could nevertheless experience problems or delays in the
integration of our computer systems and other information technologies, as
well as in our general banking operations, if we encounter unanticipated
problems internally or with third party vendors and suppliers as a result
of the Year 2000 date changeover.
Our performance may decline, if key individuals leave Union or Citizens
After the merger, we will depend on the services of certain key personnel,
including (for Union) President and Chief Executive Officer, Kenneth D.
Gibbons, and (for Citizens) President and Chief Executive Officer, Jerry S.
Rowe. The loss of the services of Messrs. Gibbons or Rowe could have a
material adverse effect on the successful integration of our businesses and
on our results of operations, as well as on the continuing success and
development of our separate banking franchises.
There is no public trading market in Union's common stock and a trading
market may not develop in the future
There has never been a public trading market in Union's common stock and we
cannot give any assurance that a public trading market for the Union common
stock will develop after the merger or, if developed, that it will be
sustained for any period of time. The absence of a public trading
<PAGE> 12
market means that an investment in Union common stock might be illiquid,
with shareholders of Union potentially unable to sell their shares when
they wish to do so, or at a price established by an independent public
trading market.
We may not be successful in obtaining an AMEX listing for our common stock
As required by our affiliation agreement, Union intends to file an
application to list its common stock on the American Stock Exchange (AMEX)
as soon as practicable following completion of the merger. However, we
cannot give any assurance that our application to AMEX will be successful
and, even if successful, whether such a listing would have any effect on
the development of a public trading market in our common stock. Whether
AMEX decides to accept the combined company's common stock for listing is a
matter within its discretion and outside Union's control. Failure to
obtain a listing on AMEX would likely hinder development of a public
trading market in our common stock.
The stock registration rights granted to the Hovey family could depress the
market price of our common stock by creating the perception that a large
block of stock might be sold into the market at any time
Union has granted to the Hovey family the right, in certain circumstances,
to require Union to register for resale up to 150,000 shares (approximately
4.95%) of Union's common stock for estate settlement purposes. The
existence of these registration rights could create the perception among
potential purchasers and sellers of the combined company's common stock,
that a large block of stock may be sold into the market at any time,
resulting in a perceived over-supply of shares and downward pressure on
Union's stock price. See "THE MERGER --- Interests of Certain Persons in
the Merger."
The management teams of our companies do not have experience in integrating
bank acquisitions
Neither Union nor Citizens has engaged in the past in any whole bank or
material branch acquisitions. Therefore, our managements do not have
experience in integrating and managing bank combinations.
Citizens shareholders will lose their preemptive rights to buy additional
shares because shareholders of the combined company do not have similar
rights
Citizens' Articles of Association give shareholders the right to purchase
additional shares of common stock, on a pro rata basis, if and when
Citizens issues more shares. Shareholders of Union do not now, and will
not following the merger, have any similar preemptive rights to purchase
additional shares. Therefore, if the combined company issues more shares
in the future, it may have the effect of diluting the percentage ownership
of the shareholders of the combined company, including former Citizens
shareholders. Moreover, if the proposed amendment to
<PAGE> 13
Union's Amended and Restated Articles of Association is approved and the
merger is completed, Union will have approximately 1,679,402 shares of
authorized but unissued common stock remaining for future issuance. Those
shares could be issued by the combined company's Board of Directors without
first offering them to existing shareholders and, if permitted by law,
without seeking a shareholder vote or other authorization.
This document includes statements about our expected future operations that
are dependent on assumptions and factors that could change
This joint proxy statement/prospectus contains forward-looking statements
about our possible or assumed future results of operations. Actual results
could differ materially from those estimates or assumptions because of many
reasons, including the risk factors listed above and the other factors
identified on the inside front cover of this document under the caption "A
Warning About Forward-Looking Statements."
<PAGE> 14
STOCK PRICE AND DIVIDEND INFORMATION
Stock Prices
Neither the Union common stock nor the Citizens common stock is listed on
any exchange or quoted on NASDAQ. No broker makes a market in either Union
common stock or Citizens common stock, and trading in such stocks has been
sporadic. The trades that have occurred cannot be characterized as an
established public trading market. The Union and Citizens common stock is
traded from time to time by holders in private transactions or through
brokers, and information on bid and ask prices is not publicly reported.
Therefore, the prices shown below reflect only the transactions known to
managements of Union and Citizens. Due to the limited information
available, the following data may not accurately reflect the actual market
value of either the Union common stock or the Citizens common stock.
<TABLE>
<CAPTION>
CITIZENS
No. of Shares Stock Prices
Traded High Low
------------- ---- ---
<S> <C> <C> <C>
Year Ended December 31, 1997:
First Quarter 177 $43.00 $43.00
Second Quarter 4,161 45.00 45.00
Third Quarter 16,422 49.00 40.00
Fourth Quarter 2,440 58.00 50.00
Year Ended December 31, 1998:
First Quarter 381 59.00 58.00
Second Quarter 384 66.00 61.00
Third Quarter 1,329 90.00 53.00
Fourth Quarter 1,985 72.00 70.00
Year Ending December 31, 1999:
First Quarter 971 96.00 72.00
Second Quarter 1,516 126.00 60.00
Third Quarter (through ______, 1999)
<CAPTION>
UNION
No. of Shares Stock Prices(1)
Traded(1) High Low
------------- ---- ---
<S> <C> <C> <C>
Year Ended December 31, 1997:
First Quarter 100 $ 8.88 $ 8.88
Second Quarter 4,150 11.25 10.00
Third Quarter 4,854 25.00 13.00
Fourth Quarter 2,120 18.00 16.75
Year Ended December 31, 1998:
First Quarter 1,130 18.50 18.00
Second Quarter 580 21.50 20.00
Third Quarter 1,800 24.00 22.00
Fourth Quarter 2,500 24.00 22.75
Year Ending December 31, 1999:
First Quarter 700 23.00 18.50
Second Quarter 3,350 22.00 21.50
Third Quarter (through ______, 1999)
<FN>
- --------------------
<F1> Adjusted to reflect 2-for-1 stock split completed on June 6, 1997,
effected in the form of a 100% stock dividend.
</FN>
</TABLE>
<PAGE> 15
The following table shows the stock prices and number of shares traded in
the last trades known to the managements of Union and Citizens occurring
before public announcement of the proposed merger on February 18, 1999, and
on __________, 1999, the last practicable date before printing and mailing
of this document. The table also shows for the Citizens common stock the
pro forma equivalent Union common stock price, which is determined by
multiplying the Union stock price times the merger conversion ratio
(6.5217).
<TABLE>
<CAPTION>
Stock Price per Share/No. of Shares Traded
February 18, 1999 __________, 1999
----------------- ----------------
<S> <C> <C>
Union common stock $18.50/ 100 shares $_____/ _____ shares
Citizens common stock(1) $73.00/ 14 shares $_____/ _____ shares
Citizens equivalent pro forma(2) $120.65/ 14 shares $_____/ _____ shares
<FN>
- --------------------
<F1> There are no publicly available quotations for the common stock of
Union or Citizens and the stock prices per share as of the dates
shown in the table represent the purchase prices paid for the common
stock in the last transaction prior to the dates specified of which
the managements of Union and Citizens were aware.
<F2> Citizens equivalent pro forma amounts represent the historical Union
stock price per share, multiplied by the merger conversion ratio.
</FN>
</TABLE>
Union (through its subsidiary, Union Bank) and Citizens each act as their
own transfer agent. Union Bank will continue to act as the transfer agent
for Union after completion of the merger.
Dividends
In the past Union has ordinarily paid cash dividends quarterly, while
Citizens has paid cash dividends annually. The following table shows
quarterly dividends declared per share of Union common stock for the
periods indicated. It also shows, solely for the purposes of comparison,
the annual dividends declared by Citizens in the last two fiscal years,
restated as though they had been declared in four equal quarterly amounts.
Citizens ordinarily declares its annual dividend in December. Accordingly,
no dividend is shown in the table below for the first three quarters of
1999.
<TABLE>
<CAPTION>
Union Citizens
Dividends(1) Dividends(2)
------------ ------------
<S> <C> <C>
Year Ended December 31, 1997:
First Quarter $0.175 $0.50
Second Quarter 0.175 0.50
Third Quarter 0.20 0.50
Fourth Quarter 0.20 0.50
Year Ended December 31, 1998:
First Quarter $0.20 $0.5625
Second Quarter 0.20 0.5625
Third Quarter 0.20 0.5625
Fourth Quarter 0.22 0.5625
<PAGE> 16
Year Ending December 31, 1999:
First Quarter $0.22 --
Second Quarter 0.22 --
Third Quarter 0.22 --
<FN>
- --------------------
<F1> Adjusted to reflect 2-for-1 stock split completed June 6, 1997,
effected in the form of a 100% stock dividend.
<F2> Adjusted to restate Citizens' annual dividends as substantially equal
quarterly dividends, solely for purposes of comparison. The Citizens
Board of Directors ordinarily declares an annual dividend in December
of each year. Therefore, the table does not show any Citizens
dividend for 1999.
</FN>
</TABLE>
The affiliation agreement provides that unless the merger is completed on
or before the record date for Union's regular dividend for the fourth
quarter of 1999 (typically in October), Citizens may declare and pay a
dividend to its shareholders equivalent to approximately one-fourth of its
regular annual dividend.
The ability of Union and Citizens to pay dividends to their shareholders is
subject to certain limitations under state and federal banking laws. See
"REGULATION AND SUPERVISION."
If the merger is completed, the combined company will pay dividends at a
rate to be determined by its Board of Directors. We cannot give you any
assurance that our dividend policy will continue that of either Union or
Citizens. Future dividends will depend upon business conditions, operating
results, capital and reserve requirements and other relevant business
considerations. Nevertheless, at this time we expect that the initial
dividend rate after the merger will be equal to the current quarterly
dividend rate of Union ($0.22 per share). After adjustment to give effect
to the conversion ratio, that rate equates to a quarterly dividend of
approximately $1.43 and an annual dividend of approximately $5.73, per
share of Citizens common stock. See "UNAUDITED COMPARATIVE PER SHARE
DATA."
<PAGE> 17
UNAUDITED COMPARATIVE PER SHARE DATA
The following table shows information about our income per share, dividends
per share and book value per share, and similar information reflecting the
merger (which we refer to as "pro forma" information). In presenting the
comparative pro forma information for certain time periods, we assumed that
we had been merged throughout those periods.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes (a method known as
"pooling of interests" accounting). The information listed as "equivalent
pro forma" was obtained by multiplying the pro forma amounts by the
conversion ratio of 6.5217. We present this information to reflect the
fact that Citizens shareholders will receive 6.5217 shares of Union's
common stock for each share of Citizens common stock converted in the
merger. We expect that we will incur one-time merger and integration
charges as a result of combining our companies. We also expect that the
merger will provide the combined company with financial benefits that
include reduced operating expenses and the opportunity to earn more
revenue. See "THE MERGER --- Management and Operations after the Merger,"
" --- Union Board's Recommendation and Reasons for the Merger" and "---
Citizens Board's Recommendation and Reasons for the Merger." The pro forma
information, while helpful in illustrating the financial characteristics of
the combined company under one set of assumptions, does not reflect these
expected expenses or benefits and, therefore, does not attempt to predict
or suggest future results. It also does not necessarily reflect what the
historical results of the combined company would have been had our
companies been combined during the periods shown.
The information in the following table is based on, and should be read
together with:
* the Union and Citizens historical financial information that we've
presented elsewhere in this document, beginning on page F-1; and
* the pro forma combined balance sheet, income statements and notes
under "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS"
beginning on page ___.
<PAGE> 18
<TABLE>
<CAPTION>
Historical Pro Forma(2)
Combined Citizens
Per Common Share: Union(1) Citizens Company Equivalent
- ----------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Basic Earnings(3)
Year-Ended
December 31, 1996 $ 1.49 $ 6.04 $ 1.31 $ 8.54
December 31, 1997 1.64 6.64 1.44 9.39
December 31, 1998 1.70 7.25 1.51 9.85
For the three months ended March 31, 1999 0.37 1.44 0.32 2.09
Cash Dividend Declared(4)
Year-Ended
December 31, 1996 $ 0.69 $ 1.65 $ 0.69 $ 4.50
December 31, 1997 0.75 2.00 0.75 4.89
December 31, 1998 0.82 2.25 0.82 5.35
For the three months ended March 31, 1999 0.22 -- 0.22 1.43
Book Value(5)
As of:
December 31, 1998 $10.46 $68.99 $10.50 $68.48
March 31, 1999 10.49 69.57 10.46 68.21
<FN>
- --------------------
<F1> Adjusted to reflect a two-for-one stock split completed June 6, 1997,
effected in the form of a 100% stock dividend.
<F2> The combined company pro forma information in the table does not
reflect anticipated merger and integration costs, or potential post-
merger expense reductions or revenue enhancements. The Citizens
equivalent pro forma amounts are computed by multiplying the related
pro forma amounts for the combined company by 6.5217, to reflect the
merger conversion ratio.
<F3> Union has only an immaterial number of stock options outstanding and
no other outstanding warrants or other rights or convertible
securities which might result in future stock issuances. Citizens
does not have outstanding any stock options or other warrants or
rights or convertible securities which might result in future stock
issuances. Therefore, the table does not include any computation of
diluted earnings per share for Union, Citizens or the combined
company.
<F4> The combined company will pay dividends at a rate to be determined by
its Board of Directors, but we expect the initial dividend rate will
be the same as Union's current dividend rate. Therefore, pro forma
cash dividends shown in the table for the combined company represent
the historical cash dividends declared on Union common stock. See
"STOCK PRICE AND DIVIDEND INFORMATION."
<F5> The pro forma combined book value per share information as of March
31, 1999 and December 31, 1998 is calculated by dividing the
historical total shareholders' equity for Union and Citizens by the
total pro forma common shares of the combined company, after giving
effect to the merger conversion ratio. The pro forma combined book
value per share is based upon total pro forma common shares
outstanding of 3,029,438 at March 31, 1999 and 3,025,438 at December
31, 1998. Shareholders' equity includes unrealized gains and losses,
net of applicable income taxes, on investment securities classified
as "available for sale."
</FN>
</TABLE>
<PAGE> 19
SELECTED FINANCIAL DATA
The following tables show summarized historical financial data for each of
us and also show similar pro forma information for the combined company.
The pro forma information reflects completion of the merger, using the
pooling of interests method of accounting.
We expect that we will incur one-time merger and integration charges as a
result of combining our companies. We also believe that the merger will
likely provide the combined company with financial benefits that include
reduced operating expenses and the opportunity to earn more revenue. See
"THE MERGER --- Management and Operations After the Merger", "--- Union
Board's Recommendations and Reasons for the Merger" and "--- Citizens
Board's Recommendation and Reasons." The pro forma information, while
helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, doesn't reflect these expected future
expenses or benefits and, therefore, doesn't attempt to predict or suggest
future results. It also doesn't necessarily reflect what the historical
results of the combined company would have been had our companies been
combined during the periods shown.
The information in the following tables for the three month period ended
March 31, 1999 is based on unaudited historical financial information for
Union and Citizens. The information for each of the five years ended
December 31, 1998, 1997, 1996, 1995 and 1994 is based on audited historical
financial information for Union and Citizens. Some of this audited
financial information is included in this document, beginning on page F-1.
The information in the following tables is based on, and should be read
together with:
* the Union and Citizens historical financial information that we've
presented elsewhere in this document, beginning on page F-1; and
* the pro forma combined balance sheet, income statements and notes
under "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS"
beginning on page ___.
<PAGE> 20
Selected Historical Financial Information of Union
<TABLE>
<CAPTION>
At or for the Three
Months Ended March 31, At or For The Years Ended December 31,
---------------------- ------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Unaudited) (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $191,490 $191,162 $180,713 $168,043 $160,236 $144,840
Investment securities
available-for-sale 38,238 38,411 28,012 28,186 23,404 12,587
Loans, net of unearned
income 130,469 133,439 134,140 124,039 120,581 115,869
Allowance for loan losses (1,841) (1,805) (1,794) (1,850) (1,753) (1,396)
Total nonperforming loans 1,131 1,401 2,765 2,512 2,041 1,882
Total nonperforming assets 1,630 1,926 3,323 2,905 2,267 2,603
Other real estate owned 499 525 558 393 226 721
Deposits 162,502 162,517 156,797 146,033 139,209 126,072
Borrowed funds 4,503 4,538 1,636 1,693 1,747 1,797
Shareholders' equity(1) 21,375 21,275 19,368 17,502 16,593 14,809
Income Statement Data:
Net interest and dividend
income $ 2,211 $ 8,953 $ 8,685 $ 8,403 $ 8,608 $ 7,745
Provision for loan losses 37 100 125 300 450 200
Noninterest income 455 2,168 1,730 1,864 1,878 1,382
Noninterest expense 1,594 6,064 5,494 5,528 5,643 5,501
Net income 754 3,450 3,346 3,125 3,066 2,400
Per Common Share Data:(4)
Net income(2) $ 0.37 $ 1.70 $ 1.64 $ 1.49 $ 1.46 $ 1.13
Cash dividends paid 0.22 0.82 0.75 0.69 0.62 0.55
Book value(1) 10.49 10.46 9.53 8.59 7.92 6.98
Selected Ratios:
Return on average assets(3) 1.60% 1.90% 1.94% 1.89% 2.01% 1.70%
Return on average equity(3) 14.21% 17.18% 18.33% 18.13% 19.53% 16.78%
Dividend payout 59.35% 48.28% 45.60% 46.27% 42.55% 48.68%
Interest rate spread 4.45% 4.64% 4.78% 4.87% 5.56% 5.80%
Net interest margin 5.21% 5.48% 5.58% 5.67% 6.33% 6.28%
Operating expenses to
average assets(3) 3.39% 3.35% 3.18% 3.35% 3.70% 3.89%
Average interest earning
assets to average interest
bearing liabilities 124.34% 124.66% 123.87% 122.32% 122.53% 117.35%
Efficiency ratio 55.43% 53.25% 51.70% 53.50% 53.03% 59.24%
Tier 1 leverage capital ratio 11.25% 11.14% 10.93% 10.44% 10.24% 10.22%
Tier 1 risk-based capital ratio 17.74% 17.09% 17.05% 16.41% 14.96% 14.16%
Total risk-based capital ratio 19.08% 18.47% 18.30% 17.67% 15.99% 15.41%
Asset Quality Ratios:
Non-performing loans to
total loans 0.87% 1.05% 2.06% 2.03% 1.69% 1.62%
Non-performing assets to
total assets 0.85% 1.01% 1.84% 1.73% 1.41% 1.80%
Allowance for loan losses to
non-performing loans 162.78% 128.84% 64.88% 73.65% 85.89% 74.18%
Allowance for loan losses as a
percentage of loans 1.41% 1.35% 1.34% 1.49% 1.45% 1.20%
<FN>
- --------------------
<F1> Shareholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale".
<F2> Computed using the weighted average number of shares outstanding for
the period.
<F3> Results for the three months ended March 31, 1999 are calculated on
an annualized basis.
<F4> Restated to reflect a two-for-one stock split completed on June 6,
1997 and effected in the form of a 100% stock dividend.
</FN>
</TABLE>
<PAGE> 21
Selected Historical Financial Information of Citizens
<TABLE>
<CAPTION>
At or for the Three
Months Ended March 31, At or For The Years Ended December 31,
---------------------- ------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Unaudited) (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 98,097 $ 98,967 $ 92,567 $ 87,704 $ 86,910 $ 76,540
Investment securities
available-for-sale 20,959 20,174 17,888 16,155 15,212 16,010
Loans, net of unearned income 70,485 69,030 67,778 65,012 61,855 54,951
Allowance for loan losses (1,044) (1,040) (1,017) (994) (958) (942)
Total nonperforming loans 969 1,006 1,396 1,516 533 631
Total nonperforming assets 989 1,006 1,506 1,557 533 631
Other real estate owned 20 -0- 110 41 -0- -0-
Deposits 85,735 86,402 82,432 78,386 78,176 67,673
Borrowed funds 1,490 1,546 -0- -0- -0- 1,100
Shareholders' equity(1) 10,574 10,487 9,655 8,891 8,328 7,235
Income Statement Data:
Net interest and dividend income $ 1,065 $ 4,420 $ 4,199 $ 3,888 $ 3,577 $ 3,467
Provision for loan losses 63 300 300 280 180 290
Noninterest income 170 743 682 691 544 409
Noninterest expense 833 3,214 3,074 2,902 2,731 2,480
Net income 219 1,101 1,009 918 817 754
Per Common Share Data:
Net income(2) $ 1.44 $ 7.25 $ 6.64 $ 6.04 $ 5.38 $ 4.96
Cash dividends paid(4) -0- 2.25 2.00 1.65 1.50 1.35
Book value(1) 69.57 68.99 63.52 58.49 54.79 47.60
Selected Ratios:
Return on average assets(3) 0.89% 1.15% 1.12% 1.05% 1.00% 0.98%
Return on average equity(3) 8.28% 10.72% 10.71% 10.54% 10.13% 10.42%
Dividend payout(4) N/A 31.06% 30.13% 27.32% 27.91% 27.21%
Interest rate spread 3.90% 4.22% 4.26% 4.14% 4.01% 4.37%
Net interest margin 4.54% 4.86% 4.90% 4.73% 4.57% 5.03%
Operating expenses to
average assets(3) 3.38% 3.36% 3.40% 3.33% 3.34% 3.24%
Average interest earning assets
to average interest bearing
liabilities 117.79% 117.00% 116.26% 114.98% 114.54% 122.26%
Efficiency ratio 64.68% 62.30% 63.00% 62.60% 65.60% 62.70%
Tier 1 leverage capital ratio 10.70% 10.37% 10.23% 10.45% 9.66% 10.00%
Tier 1 risk-based capital ratio 14.90% 14.77% 14.15% 13.81% 11.20% 11.20%
Total risk-based capital ratio 16.15% 16.02% 15.40% 15.06% 12.45% 12.00%
Asset Quality Ratios:
Non-performing loans to
total loans 1.37% 1.46% 2.06% 2.33% 0.86% 1.15%
Non-performing assets to
total assets 1.01% 1.02% 1.63% 1.78% 0.61% 0.82%
Allowance for loan losses to
non-performing loans 107.74% 103.38% 72.85% 65.57% 179.74% 149.29%
Allowance for loan losses
as a percentage of loans 1.48% 1.51% 1.50% 1.53% 1.55% 1.71%
<FN>
- --------------------
<F1> Shareholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale".
<F2> Computed using the weighted average number of shares outstanding for
the period.
<F3> Results for the three months ended March 31, 1999 are calculated on
an annualized basis.
<F4> Citizens has historically declared annual cash dividends in December
of each year. Accordingly, no dividend payout information is
presented for the first quarter of 1999.
</FN>
</TABLE>
<PAGE> 22
Selected Pro Forma Combined Financial Information
<TABLE>
<CAPTION>
At or for the Three
Months Ended March 31, At or For The Years Ended December 31,
---------------------- ------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Unaudited) (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $289,587 $290,129 $273,280 $255,747 $247,146 $221,380
Investment securities
available-for-sale 59,197 58,585 45,900 44,341 38,616 28,597
Loans, net of unearned
income 200,954 202,469 201,918 189,051 182,436 170,820
Allowance for loan losses (2,885) (2,845) (2,811) (2,844) (2,711) (2,338)
Total nonperforming loans 2,100 2,407 4,161 4,028 2,574 2,513
Total nonperforming assets 2,619 2,932 4,829 4,462 2,800 3,234
Other real estate owned 519 525 668 434 226 721
Deposits 248,237 248,919 239,229 224,419 217,385 193,745
Borrowed funds 5,993 6,084 1,636 1,693 1,747 2,897
Shareholders' equity(1)(5) 31,677 31,762 29,023 26,393 24,921 22,044
Income Statement Data:
Net interest and dividend
income $ 3,276 $ 13,373 $ 12,884 $ 12,291 $ 12,185 $ 11,212
Provision for loan losses 100 400 425 580 630 490
Noninterest income 625 2,911 2,412 2,555 2,422 1,791
Noninterest expense 2,427 9,278 8,568 8,430 8,374 7,981
Net income 973 4,551 4,355 4,043 3,883 3,154
Per Common Share Data:(4)
Net income(2)(5) $ 0.32 $ 1.51 $ 1.44 $ 1.31 $ 1.26 $ 1.01
Cash dividends paid(6) 0.22 0.82 0.75 0.69 0.62 0.55
Book value(1)(5) 10.46 10.50 9.60 8.72 8.07 7.08
Selected Ratios:
Return on average assets(3) 1.36% 1.64% 1.66% 1.60% 1.66% 1.45%
Return on average equity(3) 11.67% 14.99% 15.73% 15.58% 16.34% 14.64%
Dividend payout(6) 68.49% 54.52% 52.07% 51.74% 49.33% 54.28%
Interest rate spread 4.25% 4.50% 4.61% 4.62% 5.00% 5.32%
Net interest margin 4.99% 5.28% 5.35% 5.35% 5.69% 5.84%
Operating expenses to
average assets(3) 3.38% 3.35% 3.26% 3.34% 3.57% 3.66%
Average interest earning
assets to average interest
bearing liabilities 121.97% 121.87% 121.11% 119.66% 119.52% 119.05%
Tier 1 leverage capital ratio 11.05% 10.87% 10.68% 10.45% 10.23% 10.11%
Tier 1 risk-based capital ratio 16.71% 16.24% 15.95% 15.43% 14.09% 13.35%
Total risk-based capital ratio 18.02% 17.57% 17.21% 16.68% 15.21% 14.68%
Asset Quality Ratios:
Non-performing loans to total
loans 1.05% 1.19% 2.06% 2.13% 1.41% 1.47%
Non-performing assets to total
Assets 0.90% 1.01% 1.77% 1.74% 1.13% 1.46%
Allowance for loan losses to
non-performing loans 137.38% 118.20% 67.56% 70.61% 105.32% 93.04%
Allowance for loan losses
as a percentage of loans 1.44% 1.41% 1.39% 1.50% 1.49% 1.37%
<FN>
- --------------------
<F1> Shareholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale".
<F2> Computed using the weighted average number of shares outstanding for
the period.
<F3> Results for the three months ended March 31, 1999 are calculated on
an annualized basis.
<F4> 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.
<F5> Reflects the balance of estimated one-time merger costs not yet
incurred through March 31, 1999, of approximately $272,000.
<F6> Pro forma dividends paid per share and the resulting pro forma
dividend payout ratio for the combined company are based on Union's
historical dividends paid per share.
</FN>
</TABLE>
<PAGE> 23
INFORMATION ABOUT THE MEETINGS AND VOTING
Citizens' Board is using this document to solicit proxies from the holders
of Citizens common stock for use at the Citizens special meeting. Union's
Board is using this joint proxy statement/prospectus to solicit proxies
from the holders of Union common stock for use at the Union special
meeting. Union is also using this document to offer its common stock to
the Citizens shareholders in the merger. We are first mailing this joint
proxy statement/ prospectus and accompanying form of proxy to Union and
Citizens shareholders on or about ________, 1999.
Matters Relating to the Special Meetings
<TABLE>
<CAPTION>
Union Meeting Citizens Meeting
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Time and Place: October 6, 1999 October 6, 1999
10:00 a.m., Eastern Time 10:00 a.m., Eastern Time
___________________ ___________________
___________________ ___________________
Morrisville, Vermont St. Johnsbury, Vermont
- ---------------------------------------------------------------------------------------------------
Purpose of the Meetings is to 1. An amendment to Section 1. The merger of Citizens
Vote on the Following Items: 7 of Union's Amended and and Interim Bank, under the
Restated Articles of terms in the affiliation
Association, described under agreement between Citizens
"INCREASE IN UNION'S and Union and the related
AUTHORIZED COMMON Agreement and Plan of
STOCK" beginning on page Merger, described under
___; and "THE MERGER" beginning
on page ___; and
2. any other matters that may
properly come before the
Union meeting, including 2. any other matters that may
approval of any adjournment properly come before the
of the meeting. Citizens meeting, including
approval of any adjournment
of the meeting.
- ---------------------------------------------------------------------------------------------------
Record Date: The record date for shares The record date for shares
entitled to vote is August 11, entitled to vote is August 11,
1999. 1999.
- ---------------------------------------------------------------------------------------------------
<PAGE> 24
<CAPTION>
Union Meeting Citizens Meeting
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding Shares Held on As of August 11, 1999, there As of August 11, 1999, there
Record Date: were ____________ shares of were 152,000 shares of
Union common stock Citizens common stock
outstanding. Union has no outstanding. Citizens has no
other authorized class of other authorized class of
stock. stock.
- ---------------------------------------------------------------------------------------------------
Shares Entitled to Vote: Each share of Union common Each share of Citizens
stock that you own on August common stock that you own
11, 1999 entitles you to one on August 11, 1999 entitles
vote. Shares held for you by you to one vote. A broker
a broker "in street name" may may only vote shares held for
be voted by the broker you "in street name" if the
without instructions from broker receives voting
you, although some brokers instructions from you. See
may choose to seek " --- Broker Non-Votes"
instructions because the vote below.
relates indirectly to a merger.
See " --- Broker Non-Votes" Citizens does not hold any
below. shares in its treasury.
Shares held by Union in its
treasury are not voted.
Treasury shares are shares
that were outstanding at one
time but were later reacquired
by the company.
- ---------------------------------------------------------------------------------------------------
<PAGE> 25
<CAPTION>
Union Meeting Citizens Meeting
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Quorum Requirement: A quorum of shareholders is A quorum of shareholders is
necessary to hold a valid necessary to hold a valid
meeting. meeting.
A quorum will exist if the A quorum will exist if the
holders of at least a majority holders of at least a majority
of Union's outstanding of Citizens' outstanding
common stock are present in common stock are present in
person at the meeting or are person at the meeting or are
represented by proxy. represented by proxy.
Abstentions and broker non- Abstentions and broker "non-
votes (if any) count as present votes" count as present for
for establishing a quorum. establishing a quorum. See
Shares held by Union in its " --- Broker Non-Votes"
treasury do not count toward below.
a quorum.
- ---------------------------------------------------------------------------------------------------
Shares Beneficially Owned As of the record date, the As of the record date, the
by Union and Citizens directors and executive directors and executive
Directors and Executive officers of Union owned officers of Citizens owned
Officers as of the Record beneficially ___________ beneficially ___________
Date: shares of Union common shares of Citizens common
stock, including exercisable stock. There are no
employee stock options. outstanding options to
These shares represent in purchase Citizens common
total approximately ___% of stock. These shares represent
the voting power of Union's in total approximately ___%
outstanding common stock. of the voting power of
Citizens' outstanding
These individuals have common stock.
agreed in writing to vote in
favor of the amendment to These individuals have
Union's Amended and agreed in writing to vote in
Restated Articles of favor of the merger and the
Association. affiliation agreement.
- ---------------------------------------------------------------------------------------------------
</TABLE>
Broker Non-Votes. Under stock exchange rules, if your broker holds your
shares in its name, your broker may vote your shares on the Union proposal
without instructions from you but may not vote your shares on the Citizens
proposal without instructions. This is because the Union proposal is
considered "routine" and the Citizens proposal is considered "non-routine."
A broker may be the nominee holder for several Citizens shareholders and it
is possible that it would
<PAGE> 26
receive voting instructions from some, but not all, of those beneficial
owners. If a broker returns a proxy on the Citizens proposal showing that
it is voting fewer than all of the shares represented by the proxy, the
shares not voted would be considered "broker non-votes." Because the
affirmative vote of at least two-thirds of the outstanding Citizens' common
stock is required to approve the merger, a broker non-vote would have the
effect of a vote AGAINST the merger. It is therefore important that
beneficial owners of Citizens common stock give voting instructions
promptly to their brokers.
It is also possible that a broker would not vote Union shares without
instructions from the beneficial owner, even though entitled to do so under
applicable stock exchange rules, because the Union proposal relates
indirectly to a merger. In that case, Union may have broker non-votes.
Because the proposed amendment to Union's Amended and Restated Articles of
Association will be approved if more votes are cast "for" the proposal than
"against," broker non-votes will not have any effect on the outcome of the
vote.
Vote Necessary to Approve the Union and Citizens Proposals
The following votes are required to approve the proposals:
<TABLE>
<CAPTION>
Union Proposal Citizens Proposal
<C> <C>
Approval of the amendment to Section 7 of Approval of the merger and the affiliation
Union's Amended and Restated Articles of agreement requires the affirmative vote of
Association requires that more votes be cast 66 2/3% of all of the outstanding shares of
"for" the proposal than against it. Citizens common stock.
</TABLE>
Voting Instructions. You should indicate on your proxy card how you want
your shares to be voted. If you submit your proxy but do not make specific
choices, your proxy will follow the Board's recommendations and your shares
will be voted:
<TABLE>
<CAPTION>
Union Citizens
<C> <C>
* FOR" the amendment to Union's * "FOR" the merger with Interim Bank
Amended and Restated Articles of under the terms in the affiliation
Association increasing the authorized agreement; and
shares; and
* in management's discretion, as to any
* in management's discretion, as to any other business as may properly come
other business as may properly come before the Citizens meeting, including
before the Union meeting, including any any proposal by the Citizens Board to
proposal by the Union Board to adjourn adjourn the meeting.
the meeting.
</TABLE>
<PAGE> 27
Revoking Your Proxy. You may revoke your proxy before it is voted by doing
any of the following:
* submitting a new proxy with a later date
* notifying your company's Secretary in writing before the
meeting that you have revoked your proxy. Here are the
addresses to mail your notice:
Union Shareholders: Citizens Shareholders:
Mr. Peter M. Haslam, Ms. Wendy McReynolds Somers,
Secretary Clerk/Secretary
c/o Union Bankshares, Inc. c/o Citizens Savings Bank and
20 Main Street Trust Company
P.O. Box 667 364 Railroad Street
Morrisville, VT 05661-0667 P.O. Box 219
St. Johnsbury, VT 05819-0219
You may also request another proxy card by writing to the above
address or by calling your company at 802-888-6600 (for Union
shareholders) or 802-748-3131 (for Citizens shareholders).
* revoking your proxy orally or in writing at the meeting
* voting in person, by ballot or by proxy, at the meeting.
Voting in person. If you plan to attend your company's special meeting and
wish to vote in person, we will give you a ballot or proxy card at the
meeting. However, if your shares are held in the name of your broker, bank
or other nominee, you must bring an account statement or letter from the
nominee indicating that you are the beneficial owner of the shares on
August 11, 1999, the record date for voting.
Proxy Solicitation. We have agreed to share equally the cost of printing
and mailing this document, but otherwise, we will pay our own costs of
soliciting proxies. We will reimburse brokers and other nominees for their
expenses in sending these materials to you and getting your voting
instructions.
In addition to this mailing, Union and Citizens directors, officers and
employees may solicit proxies personally, by mail, or by telephone. The
extent to which these proxy soliciting efforts will be necessary depends
entirely upon how promptly proxies are submitted. You should, therefore,
return your proxy by mail without delay.
Do not send in any stock certificates with your proxy cards. If the merger
is approved and completed, the exchange agent designated by Union will mail
transmittal forms with instructions
<PAGE> 28
for the surrender of stock certificates for Citizens common stock. It will
not be necessary for Union shareholders to surrender their certificates.
Other Business; Adjournments
We are not aware at this time of any other business to be acted upon at
either of the special meetings. Under the laws of Vermont, where Union and
Citizens are incorporated, no business other than procedural matters may be
raised at the special meetings unless proper written notice to the
shareholders has been given. If, however, other matters are properly
brought before either meeting, or any adjourned meeting, your proxies will
have discretion to vote or act on those matters according to their best
judgment, including to adjourn the meeting.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by
approval of the holders of shares representing a majority of the shares
present in person or represented by proxy at the meeting, whether or not a
quorum exists, without further notice, other than by an announcement made
at the meeting. Neither company intends at this time to seek an
adjournment of its special meeting.
THE MERGER
Structure of Transaction and Conversion of Citizens Stock
Subject to the terms and conditions of the affiliation agreement and in
accordance with Vermont banking and corporate laws, Citizens will merge
with Interim Bank, with Citizens as the surviving corporation. When the
merger takes effect:
* Citizens' Articles of Association and Bylaws will be
automatically deemed amended to conform to Interim Bank's
Articles of Association and Bylaws, but with the name "Citizens
Savings Bank and Trust Company;
* Citizens common stock will be converted into Union common stock
at the exchange ratio (6.5217), with former Citizens
shareholders (other than those exercising dissenters' rights of
appraisal) becoming Union shareholders;
* Interim Bank's common stock held by Union will be automatically
converted into the same number of shares that Citizens had
outstanding just before the effective time (152,000 shares);
and
* Union will be a two-bank holding company, owning all the common
stock of Citizens and of Union's existing subsidiary, Union
Bank.
Conversion Ratio. At the effective time of the merger, each share of
Citizens common stock outstanding (other than (1) shares as to which
statutory dissenters' rights are exercised, and (2)
<PAGE> 29
shares held by Union, Union Bank or Citizens, unless held by them as
fiduciary for another or held as collateral for third parties ("Trust
Account Shares") or for a debt previously contracted ("DPC Shares"), will
be converted into a number of shares of Union common stock equal to the
conversion ratio (6.5217), subject to customary antidilution adjustments
described below.
Because :
* the conversion ratio is fixed,
* there is no established public trading market in the common
stock of either Union or Citizens that might help to establish
a value for such stock at any point in time, and
* the price at which the common stock of Union or Citizens may
trade prior to the effective time is subject to fluctuation,
the value of the shares of Union common stock that Citizens shareholders
will receive in the merger, in absolute terms and relative to the value of
the Citizens stock surrendered in the merger, may increase or decrease,
both before and after the merger.
Each outstanding share of Citizens common stock owned by Union, Union Bank
or Citizens (other than Trust Account Shares or DPC Shares) will be
canceled at the effective time of the merger and will cease to exist, and
no Union common stock or other consideration will be delivered in exchange
for such shares, other than payment of cash for fractional shares
(described below) or for shares of dissenting shareholders who have
exercised their statutory appraisal rights. See "--- Dissenters Rights of
Appraisal."
No fractional shares of Union common stock will be issued in the merger to
any Citizens shareholder. For each fractional share that would otherwise
be issued, Union will pay cash in an amount equal to the fraction
multiplied by $23. No interest will be paid or accrued on the cash
payment.
Here is an example of how the conversion ratio would work for a
hypothetical Citizens shareholder who owns 100 shares of stock:
Citizens Stock multiplied by conversion ratio:
100 shares X 6.5217 = 652.17 shares
Union Stock to be issued (whole shares): 652 shares
Fractional Share Payment: .17 x $23.00 = $3.91
Each share of Union common stock issued and outstanding immediately prior
to the effective time of the merger will remain issued and outstanding
immediately after consummation of the merger.
<PAGE> 30
Antidilution Adjustment. The affiliation agreement includes typical
adjustments to the conversion ratio designed to protect the percentage of
common stock of the combined company that the Citizens shareholders will
receive when the merger is completed. Under these provisions, the
conversion ratio would be proportionately adjusted if the outstanding
shares of Citizens common stock or Union common stock were increased,
decreased, changed into or exchanged for or into a different number or kind
of shares or securities as a result of a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or
other similar change in capitalization.
Background of the Merger
Over the past several years, the Boards of Directors and managements of
Union and Citizens, have each considered a variety of strategic
alternatives concerning the direction their institutions should take. In
the case of Union, four options were available. They were:
* remain independent and grow as an independent institution,
* acquire,
* be acquired, or
* merge with another financial institution.
In October of 1997, Union's Board of Directors held a strategic planning
retreat facilitated by a professional financial advisory firm experienced
with the process of determining strategic alternatives.
After a series of discussions, Union's Board decided that Union should
remain independent and continue to grow through additional branch locations
and, if an appropriate match were found, to consider acquiring another
bank. The Board asked Bank Analysis Center, Union's financial advisor, to
further analyze the potential benefits of acquiring another bank and report
back to the Board. In January, 1998, Bank Analysis presented its analysis
to Union's Board and certain senior managers, which included an analysis of
several possible acquisition candidates, including Citizens. Following the
Union Board's and senior management's review of Bank Analysis' preliminary
analysis, Bank Analysis was instructed to further analyze a potential
acquisition of Citizens. Various Union Board discussions took place about
a potential acquisition of Citizens during January, February and March of
1998 but the Board took no formal action. Bank Analysis presented its
analysis of a possible acquisition of Citizens in which it expressed its
view that certain financial and strategic benefits could accrue to Union as
a result of a combination with Citizens.
<PAGE> 31
In April of 1998, Union's Board authorized Kenneth D. Gibbons, President
and Chief Executive Officer of Union, to meet informally with Jerry S.
Rowe, President and Chief Executive Officer of Citizens, to begin exploring
a potential affiliation of the two organizations.
Mr. Gibbons and Mr. Rowe knew each other reasonably well through their
membership in the Vermont Bankers Association (VBA), where in April of
1998, Mr. Rowe served as immediate past Chairman and Mr. Gibbons as
Chairman. They had also served together on various VBA committees in the
past and both were generally familiar with each other's bank and primary
market areas.
In late April 1998, Mr. Gibbons and Mr. Rowe met briefly and informally and
had a preliminary discussion of a potential affiliation of the two
institutions. Mr. Gibbons and Mr. Rowe met again in May and in June to
discuss, in general, the business philosophies of Union and Citizens, their
complementary geographic and product franchises, and the rationale for a
potential business combination between the two companies. It was apparent
to Messrs. Gibbons and Rowe from these discussions that both Union and
Citizens had strong local identities in their respective communities, and
that they agreed on the value of avoiding disruption to the strong
relationships that each had developed over the years with its customers and
community. Consequently, Messrs. Gibbons and Rowe agreed that any
transaction between the two companies would be most beneficial if
structured in a manner that would enable Union and Citizens to draw upon
the strengths of their individual organizations and to preserve Citizens'
franchise value, local focus and management. In July, Mr. Rowe informed Mr.
Gibbons that the Citizens Board would be willing to meet informally with
Union's Board to explore a possible affiliation.
In early August 1998, Union's Board met and discussed further the merits of
an affiliation with Citizens and reviewed various updated assumptions
regarding pricing and updated acquisition scenarios prepared by Bank
Analysis. The Board authorized Mr. Gibbons to retain legal and accounting
advisors and to set up a joint meeting of the Citizens and Union Boards.
On August 26, a joint informational meeting of the Citizens and Union
Boards of Directors was held in Berlin, Vermont. The purpose of this
meeting was to assess preliminarily the compatibility of the business
philosophies of the two Boards and to discuss informally the positive
aspects of further considering an affiliation of the two companies. At
this meeting no pricing was discussed and no decision was made by either
side regarding any proposed transaction between the two companies.
During early September, the Boards of both companies met separately at
their regularly scheduled meetings. At these meetings, the Union Board and
the Citizens Board each concluded that discussions should continue, and
each Board subsequently designated a committee to continue discussions for
that purpose. Union's committee consisted of Mr. Gibbons and directors,
Peter M. Haslam, Robert P. Rollins, and Union's Chairman of the Board, W.
Arlen Smith. Citizens' committee consisted of Mr. Rowe and directors, J.R.
Alexis Clouatre, Franklin G. Hovey II and Joseph M. Sherman.
<PAGE> 32
On September 29, 1998, the Board committees of Union and Citizens met to
evaluate a range of potential strategies, including the potential for
growth and expansion into contiguous markets, some ranges of possible
pricing or conversion ratio, and, in general and most important, how the
two banks would continue to prosper and grow using their combined
strengths. The committees also discussed potential staff changes and board
composition, the timing and structure of a business combination, and how
the two companies' customers and communities would likely perceive the
combination.
In October, Mr. Rowe informed Mr. Gibbons that the Citizens Board had
agreed to engage HAS Associates, Inc. as its financial advisor to assist
them further in their analysis.
On November 25, 1998, the Citizens Board met with a representative of HAS
to review and discuss the relevant issues related to a possible affiliation
with Union. The issues included fiduciary responsibility to Citizens'
shareholders and the interests of Citizens' employees, customers and the
communities it serves. Union's and Citizens's financial performance were
also reviewed. The Board and HAS also discussed possible transaction
structure, pricing alternatives, comparable bank merger transactions and
Union common stock trading history and valuations.
In late November 1998, Mr. Rowe contacted Mr. Gibbons and reported that his
Board had requested that the committees of both banks meet again in joint
session along with the financial advisors of each.
In early December, the Union Board met with its financial advisor, Bank
Analysis, again to review various strategies regarding a potential
affiliation with Citizens. Various topics were discussed, including an
update on Citizens financial performance, negotiation items, due diligence
requirements, updated financial impact on consolidated statements and a
draft bid letter. The Union Board authorized the committee to continue
discussions with Citizens.
On December 10, 1998, the Citizens Board met with its financial advisor,
HAS, to discuss the possible terms and conditions of a business
combination with Union. Issues discussed at that meeting included pricing,
valuation of Union common stock, analysis of earnings, pro forma
contribution of Citizens and Union to the combined company and other issues
related to transaction structure.
On December 11, 1998, the Union and Citizens Board committees, with their
respective financial advisors, met jointly to further discuss the potential
affiliation of the two companies. Various topics were discussed, including
staffing, timing, pricing and financial terms, but no firm agreements were
reached or commitments made.
On December 16, 1998, the Union Board met to discuss the transaction in
detail and to receive the report from its committee and Bank Analysis.
After much discussion about the financial impacts, cost savings and timing,
the Union Board authorized Mr. Gibbons to enter into a confidentiality
agreement for the purpose of sharing information necessary to discuss and
further
<PAGE> 33
evaluate a transaction with Citizens. The Board also authorized the
planning for due diligence activities and the drafting of a non-binding
letter of intent to acquire Citizens. On December 21, 1998, Mr. Gibbons
met with Union's legal counsel, accountants and financial advisor to
discuss due diligence planning, the regulatory and shareholder approval
process and related issues regarding the potential Citizens acquisition.
On December 23, 1998, the Citizens Board met with Citizens' legal counsel
to review a proposed confidentiality agreement in favor of Citizens. The
Citizens Board authorized Mr. Rowe to sign and deliver it to Union for
signature. The Citizens Board also authorized retention of special counsel
for the transaction, to work with local counsel.
On December 30, the Union Board held a special meeting to further review
the transaction, approve the letter of intent and the Citizens
confidentiality agreement with certain minor modifications. After
considerable discussion, the Union Board also approved the proposed
conversion ratio of 6.5217 shares of Union common stock for each share of
Citizens common stock and voted unanimously to move forward with the
transaction. The Board authorized Mr. Gibbons to sign and deliver to
Citizens the letter of intent and Citizens confidentiality agreement and to
plan for due diligence activities.
On December 31, 1998, Mr. Gibbons delivered the letter of intent to Mr.
Rowe. On January 5, 1999, the Citizens Board met with Citizens' legal
counsel and financial advisor present. The Citizens Board reviewed and
approved the changes to the confidentiality agreement requested by Union.
The Citizens Board also reviewed and discussed Union's letter of intent.
The Citizens Board authorized Mr. Rowe to execute the letter of intent with
minor modifications.
On January 6, 1999, the Union Board met at its regularly scheduled meeting
and unanimously approved minor changes to the letter of intent and
confidentiality agreement in favor of Union and authorized Mr. Gibbons to
sign them and deliver them, as modified. The Board also authorized legal
counsel to begin drafting the affiliation agreement and related documents.
Also on January 6, 1999, Mr. Gibbons executed the Citizens confidentiality
agreement.
On January 7, 1999, Mr. Gibbons and Mr. Rowe met in Montpelier, Vermont to
sign and exchange the letter of intent and Union confidentiality agreement.
On that date, Mr. Gibbons and Mr. Rowe met with representatives of the
Vermont Banking Department to advise them of the proposed affiliation and
that Citizens and Union's subsidiary, Union Bank, would retain their
separate, Vermont banking charters.
During the period of January 9 through 15, 1999, representatives of Union,
and its legal and accounting advisors performed a due diligence review of
Citizens. During the period of January 16 through 20 representatives of
Citizens, and its financial, legal and accounting advisors performed a due
diligence review of Union.
<PAGE> 34
During January and early February, various drafts of a definitive agreement
were circulated among the respective bank boards, legal counsel and
financial advisors and the final terms negotiated. Both Union and Citizens
scheduled separate board meetings during this time to act upon the various
issues addressed in the definitive agreement, including the break-up fee,
stock registration rights in favor of the Hovey family, indemnification and
insurance for directors and officers, and other matters.
On January 20, 1999, the Union Board met to discuss the findings of
management's due diligence review of Citizens. Following that report, the
Board authorized management to continue the merger process and negotiation
of a definitive agreement. On February 3, 1999, Union's Board met to
review the terms of the draft affiliation agreement and related transaction
documents and to discuss the status of negotiations with Citizens. On
February 5, 1999, Bank Analysis furnished to the Union Board its
preliminary opinion that the conversion ratio is fair to the shareholders
of Union, from a financial point of view.
On February 8, 1999, the Citizens Board met with its financial advisor to
further review a possible merger with Union and to discuss the results of
Citizens due diligence of Union. HAS rendered an oral fairness opinion,
subsequently confirmed in writing, that the proposed transaction is fair,
from a financial point of view, to the shareholders of Citizens. The Board
and HAS also discussed the next steps leading to the Citizens Board
approval of a definitive agreement.
On February 12, 1999, the Citizens Board met to approve the proposed merger
on the terms contained in the definitive agreement. Representatives of
Citizens' legal counsel and financial advisor were also present. Legal
counsel discussed the transaction documents, a copy of which had been
previously provided to each Director. Counsel outlined the purpose of each
document and the required regulatory approvals and securities registration
filings, and responded to questions. HAS reiterated that the proposed
conversion ratio is fair, from a financial point of view, to the
shareholders of Citizens. The Citizens Board voted unanimously to enter
into the proposed agreement with Union.
On February 16, 1999, a special board meeting of Union was held with all
directors present, except for Mr. Rollins, who was traveling, for the
purpose of considering and voting on the proposed affiliation with
Citizens. Also present in person or by telephone conference were
representatives of Union's financial, legal, and accounting advisors.
Legal counsel discussed the transaction documents, a copy of which had been
previously provided to each director. Counsel outlined the purpose of each
document and the required regulatory approvals and securities registration
filings, and responded to questions. A representative of Union's financial
advisor, Bank Analysis, discussed Bank Analysis' preliminary written
fairness opinion dated February 5, 1999 and reiterated the opinion that the
proposed conversion ratio is fair, from a financial point of view, to the
shareholders of Union. Union's accounting advisors discussed issues
relating to the accounting treatment of the proposed acquisition, including
issues relating to the pooling of interests accounting treatment. The
board also discussed the expected benefits to accrue to
<PAGE> 35
Union's shareholders, customers, communities and employees. Following its
discussions, the Union Board approved the definitive agreement presented to
the meeting and authorized Mr. Gibbons to execute the transaction documents
and proceed with the required regulatory filings and securities
registration. The Board also approved a proposed amendment to Union's
Amended and Restated Articles of Association to increase the authorized
shares of common stock from 2,400,000 to 5,000,000 and to recommend
approval of the increase to Union's shareholders.
Later on February 16, 1999, Messrs. Gibbons and Rowe executed the
transaction documents on behalf of their respective companies.
On February 18, 1999, both companies held separate employee meetings to
announce the proposed affiliation of the two companies. Immediately
following these meetings, press releases were distributed to the news
media.
Union Board's Recommendation and Reasons for the Merger
General. The Board of Directors of Union believes that the proposed
affiliation with Citizens is fair to, and in the best interests of, Union
and its shareholders and has approved the affiliation agreement and the
transactions called for in the agreement, including formation of the
Interim Bank and its merger with Citizens. The Union Board unanimously
recommends that Union's shareholders vote "FOR" the amendment to Union's
Amended and Restated Articles of Association to provide the additional
authorized shares of Union common stock needed to complete the merger and
for issuance from time to time for other corporate purposes.
In reaching its decision to approve the affiliation agreement with Citizens
and the related increase in Union's authorized shares of common stock, the
Board consulted with Union management and Union's financial, legal and
accounting advisors, and considered a number of factors, including those
discussed below. The following discussion of the information and factors
considered by the Union Board is not intended to be exhaustive, but
includes all material factors considered by the Union Board.
* Community Bank Philosophy. Union's Board considered the fact
that Union and Citizens share a strong focus on community
banking and desire to further strengthen their ability to serve
their local communities. Union's Board believes that the
proposed structure of the affiliation, with Citizens and Union
Bank operating as independent community banks under Union's
holding company umbrella, will facilitate this community bank
philosophy while also presenting the combined entity with
valuable market opportunities. As a result of mergers among
New England's regional banks and mergers among Vermont-based
banks, as well as the consolidation of smaller financial
institutions into the branch networks of such regional banks or
large Vermont-based banks, customers of smaller financial
institutions have sometimes been forced into banking
relationships with a small number of large, centralized banking
organizations.
<PAGE> 36
Union's Board believes that these centralized banking
organizations have difficulty maintaining the close
relationships that smaller financial institutions enjoy with
the businesses and residents in the communities they serve.
That is particularly the case with rural communities, such as
those in northern Vermont, which are often viewed as marginal
service territories by larger financial institutions. The
Union Board's objective in retaining the separate bank charters
of Union Bank and Citizens is not only to maintain, but to
enhance, the ability of each individual bank to identify and
satisfy its local community's banking needs. Union's Board
believes that both banks benefit from a true community bank
image in their respective markets, which is reinforced through
the personalized products and services, knowledge of and
involvement in the community, local decision-making and credit
underwriting, and commitment to employees. By preserving the
personalized approach to serving customers' financial needs,
keeping the decision making at the local level, and maintaining
close contacts with the community in general, the Union Board
believes that both Union and Citizens have the opportunity to
continue to fill an important niche in the market for financial
services in northern Vermont.
* Enhanced Competitiveness. Union's Board believes the combined
company will be a more effective competitor in the rapidly
changing financial services industry. Union's Board expects
that the combined company will provide a larger revenue base
over which to spread needed expenditures on such items as
management information systems and technological improvements
and enhancements, regulatory compliance, improved financial
products and services, and a more sophisticated marketing
program, and will provide the opportunity to realize cost
savings through consolidation of various "back office"
functions and other economies of scale. The Board expects
that these cost savings will help to place the combined company
in a stronger competitive position to meet the evolving
financial needs of its customers. The Board also believes that
the combined company will benefit from the sharing of expertise
in various areas of banking operations that have been conducted
successfully in the past by Union or Citizens, such as small
business and residential mortgage lending, in the case of
Union, and trust operations, in the case of Citizens. Union's
Board views a strengthening of Union's competitive posture as
especially important at this time in light of the fact that the
Vermont banking and financial services industry is becoming
increasingly concentrated and competitive and customers'
financial needs and expectations are constantly evolving.
* Geographic and Economic Diversification. Union's Board
believes that while there are many similarities in the market
areas served by Union Bank and Citizens, the merger will
nevertheless provide Union and Citizens with a measure of
geographic and economic diversification. The banks currently
serve contiguous markets in northern Vermont, but their
customer bases differ. Union has been particularly strong in
commercial, small business and municipal lending, while
Citizens has concentrated to a greater degree than Union on
services to individuals, including personal trust services.
Such added diversity is expected to assist the combined company
in addressing economic downturns in its
<PAGE> 37
constituent communities, decrease the reliance of Union and
Citizens on certain industries, and enable the combined company
to market its products and services to a greater variety of
demographic groups. The Union Board also considered the fact
that, due to Union's dominant position (in terms of percentage
of financial institution deposits) in Lamoille county, further
expansion of Union's deposit base would need to occur outside
its existing market area. The affiliation with Citizens
provides Union with a strong deposit base in a new, but
contiguous market.
* Expected Consolidation Economies. Union's Board believes that
the merger provides opportunities for earnings growth through
economies of scale in certain non-customer functions. By
eliminating redundant facilities and technology and
consolidating functions over approximately a two year period, the
Union Board anticipates that, beginning in the third full year
after completion of the merger, the combined entity could realize
annual pre-tax cost savings of approximately $450,000 ($297,000
after tax), net of incremental increased costs of combined
operations. The areas contributing to these potential cost
savings include management information systems; legal,
accounting, and other professional services and activities,
including audit and regulatory compliance; investor relations;
marketing; investment management; asset-liability management;
planning; and general corporate overhead.
* Expected Earnings Growth Through Revenue Enhancements. Union's
Board considered that the complementary nature of the
businesses of Union Bank and Citizens would provide
opportunities to leverage the expertise of both banks to their
mutual advantage, thereby increasing revenues in certain
segments of their business. For example, the Board expects
that Union's expertise in the areas of SBA and secondary market
residential lending will assist Citizens in developing those
segments of its business, which it has not previously
emphasized. Union also offers merchant credit card servicing
which could assist Citizens in cross-marketing to commercial
customers in Citizens' market area. Union's Board also
believes that the opportunity will exist for Union to further
develop its trust business by utilizing the expertise of
Citizens trust department personnel. Union's Board believes
that annual revenue enhancements of approximately $100,000 from
the merger are possible. Nevertheless, the Board believes the
merger is advisable, even without the generation of additional
revenues, and gave primary consideration in its analysis to the
expected annual cost savings that could result from the merger.
* Eventual Book Value and Earnings Accretion. Union's Board
considered the pro forma financial effects of the merger,
including the initial projected slight dilution to earnings per
share during the first and second calendar years of combined
operations, and the expected accretion to earnings per share by
the end of the third calendar year of combined operations. The
Board also considered that the projected level of book value
dilution, compared to the level Union could achieve on a
standalone basis, was slight and that the
<PAGE> 38
merger was expected to become accretive to book value per share
by the end of the fourth year of combined operations.
* Combined Management. Union's Board believes that the senior
management and boards of Union and Citizens share a compatible
culture and that their managements possess complementary skills
and expertise.
* Tax and Accounting Treatment of Merger. Union's Board
considered the anticipated treatment of the merger as a tax-
free reorganization for federal income tax purposes and as a
pooling of interest for financial accounting purposes.
* Increased Trading Activity. Union's Board considered that the
expanded shareholder base and increased number of shares
outstanding could have the effect of increasing trading
activity in Union's stock, thereby providing enhanced liquidity
to Union's shareholders. The Board also viewed the expanded
shareholder base and market capitalization as an opportunity to
apply for listing of Union's common stock on AMEX, and the
Union Board has undertaken in the affiliation agreement to seek
such a listing as soon as practicable after the merger.
* Fairness Opinion. Union's Board also considered Bank Analysis'
preliminary written opinion to the effect that the conversion
ratio is fair to the Union shareholders from a financial point
of view. Bank Analysis has confirmed its opinion as to the
fairness of the conversion ratio in writing as of the date of
this joint proxy statement/prospectus. See "--- Opinion of
Union's Financial Advisor."
* Strong Capital Position. Union's Board considered that both
Union and Citizens are, and the combined company would be,
well-capitalized institutions under regulatory capital
guidelines.
Union's Board did not identify any material disadvantages to the merger,
although certain potentially negative considerations were identified and
discussed. These included:
* Temporary Earnings Dilution. As noted above, Union's Board
considered the fact that the merger will result on a pro forma
basis in temporary earnings dilution and that the full amount
of annual cost savings cannot be realized immediately, but
would be phased in over the first two years of combined
operations, with resulting earnings accretion expected to occur
beginning in the third year.
* Temporary Book Value Dilution. Also as noted above, Union's
Board considered the temporary book value dilution projected to
result during the first three years after the merger.
<PAGE> 39
* Citizens Loan Loss Reserves. Union's Board considered the
adequacy of Citizens' loan loss reserves in light of its due
diligence review of Citizens' loan portfolio. See "Citizens
Management's Discussion and Analysis of Financial Condition and
Results of Operations --- Allowance for Loan Losses and Non-
Performing Assets."
* Ongoing Bank Regulatory Compliance. Union's Board considered
the fact that maintaining Citizens as a separate charter would
result in an increased regulatory compliance burden, due to the
fact that it would continue to be subject to separate
examination and supervision by the Vermont Banking Commissioner
and the FDIC.
* Other Regulatory and Legal Compliance. Union's Board
considered that, as a result of the merger, Union will become
subject to the informational requirements of the federal
Securities Exchange Act of 1934, and will be required to file
periodic reports, proxy statements and other information with
the Securities and Exchange Commission. Union will also be
required to file various reports and information with AMEX, on
an on-going basis, if its application to list Union's common
stock is successful. The Board considered the additional
operating costs and management burden that these changes would
entail.
* Management Resources and Experience. Union considered the
additional demand on Union's management resources likely to
result from the merger and integration of operations. In
addition, Union's Board considered the fact that the
managements of Union and Citizens do not have experience in
integrating banking operations, as neither company has
previously acquired a bank or any material bank branches.
In reaching its decision to approve and recommend the merger, Union's Board
did not assign relative or specific weights to the foregoing factors, and
individual directors may have given differing weights to different factors.
After careful study and evaluation of financial, market and other factors,
including the factors described above, and after consultation with its
financial, accounting and legal advisors, Union's Board has concluded that
the merger will provide Union with increased financial and operational
resources and greater opportunity and flexibility for expansion and
diversification. The Board believes the merger is in the best interests of
Union and its shareholders, and unanimously recommends that Union's
shareholders approve the proposed increase in Union's authorized common
stock, which is necessary to complete the merger.
Opinion of Union's Financial Advisor
In November, 1997, the Board of Directors of Union retained Bank Analysis
Center, Inc. as its financial advisor to assist the Board in its strategic
planning and consideration of various strategic alternatives, including the
possibility of growth through acquisition. The Union Board retained Bank
Analysis based on Bank Analysis' qualifications and experience in the
financial analysis of banking and financial service firms and its knowledge
of the New England banking
<PAGE> 40
industry. Bank Analysis has previously performed assignments for Union
including strategic analysis and stock valuation.
As a result of the strategic planning process which began in the late fall
of 1997 and extended into the first quarter of 1998, Union's Board
determined that Union should consider acquiring another bank. Bank
Analysis assisted the Board in identifying potential acquisition
candidates. Citizens emerged from this process as the most likely
candidate for a variety of financial and nonfinancial reasons. Union's
management commenced preliminary discussions with Citizens in April, 1998,
culminating with the vote of Union's Board in December, 1998 to approve in
principle an acquisition of Citizens, and the subsequent vote of the Board
on February 16, 1999, approving the specific terms of the merger and the
affiliation agreement, including the conversion ratio of 6.5217.
In December, 1998, the Union Board formally engaged Bank Analysis to act as
its financial advisor in connection with the possible acquisition of
Citizens, including for the purpose of advising with respect to the
conversion ratio and rendering an opinion as to the fairness, from a
financial point of view, of the conversion ratio eventually negotiated with
Citizens. To assist Union's Board in making its decision to pursue an
acquisition of Citizens in December, 1998, Bank Analysis made an oral
presentation to the Board of the principal parameters of the financial
attributes of fairness based on a range of valuations of Citizens stock and
associated conversion ratios for Union common stock. This presentation
included consideration of several acquisition scenarios based on a 100%
stock-for-stock exchange as well as an exchange for 50% stock and 50% cash.
The Union Board concluded at the December, 1998 meeting that the
transaction should be structured as a stock-for-stock exchange. Following
further negotiations between Union and Citizens during December, 1998
through early February, 1999 and determination of a proposed conversion
ratio of 6.5217 on February 5, 1999, Bank Analysis delivered its written
preliminary opinion to the Union Board that the conversion ratio is fair,
from a financial point of view, to the shareholders of Union. Bank
Analysis orally reiterated its opinion as to the fairness of the conversion
ratio at the meeting of Union's Board on February 16, 1999, at which the
final merger terms were approved by the Union Board.
Bank Analysis has updated its February 5, 1999 fairness opinion to the date
of this joint proxy statement/ prospectus. In connection with that update,
Bank Analysis has considered the final 1998 audited results of operations
for Union and Citizens and first quarter, 1999 unaudited results of
operations for both companies, and has reviewed the assumptions on which
its February 5 fairness opinion was based. Based on its evaluation of such
updated financial information, Bank Analysis has affirmed its February 5,
1999 preliminary fairness opinion.
The full text of Bank Analysis' fairness opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken by
Bank Analysis, is attached to this joint proxy statement/prospectus as
Appendix C and is incorporated herein by reference. Union shareholders are
urged to read the opinion in its entirety. Bank Analysis' opinion is
directed only to the fairness of the conversion ratio from a financial
point of view, and does not constitute a
<PAGE> 41
recommendation to any Union shareholder on how such shareholder should vote
at the Union special meeting or as to any other matter. The summary of
Bank Analysis' opinion, which is included in this joint proxy
statement/prospectus, is qualified in its entirety by reference to the full
text of the opinion.
The financial analysis of Bank Analysis, described below, including any pro
forma measures of book value per share, dividends per share, earnings per
share or the financial terms of other bank transactions, are not intended
to be indications of value or an estimate of the current or future price of
the common stock of Union, Citizens or the combined company. The sole
purpose of the following description of the valuation methodologies
utilized by Bank Analysis is to provide a summary of the financial
information relied upon by Bank Analysis in providing its opinion that the
conversion ratio is fair, from a financial point of view, to the
shareholders of Union, and for no other purpose.
As the basis for its opinion, Bank Analysis:
* reviewed the affiliation agreement and its exhibits;
* reviewed publicly available business and financial information
for Union and Citizens;
* prepared financial projections for Union and Citizens for the
years 1999-2002, which it discussed with management of Union;
* reviewed certain internal financial information and 1999 budget
information for Union and for Citizens prepared by the
respective managements of Union and Citizens;
* reviewed the historical price and trading volume of Union and
Citizens common stock;
* held discussions with the senior management of Union and
Citizens concerning the past, current and projected operations
and financial results of Union and Citizens;
* performed a limited review of certain internal information
about the assets, liabilities and business of Citizens;
* reviewed the current conditions of the Vermont economy in
general and the market area served by Union and Citizens;
* reviewed financial models relating to bank acquisitions as
deemed necessary by Bank Analysis;
* reviewed the reported terms of recent bank acquisitions;
* utilized such other measures of financial and nonfinancial
analysis as deemed necessary by Bank Analysis with respect to
this transaction (see below).
In connection with its financial analysis, Bank Analysis assumed and relied
upon the accuracy and completeness of publicly available information about
Union and Citizens. Bank Analysis does not assume any responsibility for
the independent verification of such information or for any independent
valuation or appraisal of any of the assets or liabilities of Union or
Citizens. Bank Analysis has assumed the reasonableness and achievability
of all financial forecasts or budget information prepared by management of
Union or Citizens, as the case may be, and has assumed that all forecasts
represent the most likely future performance of Union and Citizens.
However, Bank Analysis does not express any opinion on the achievability of
any such forecasts. In rendering its opinion, Bank Analysis also
considered general economic, market and financial
<PAGE> 42
conditions, relied upon its experience in other merger transactions, and
its familiarity with the banking industry.
In connection with its analysis and in formulating its projections for the
combined company, Bank Analysis made certain assumptions with respect to
banking industry performance, general business and economic conditions and
the future performance of Union and Citizens. These included anticipated
expense savings from consolidation of approximately $450,000 ($297,000
after taxes), fully realized by the end of the second full year of combined
operations; generation of $100,000 incremental annual income, primarily
through increased lending and trust operations, beginning in the first year
of combined operations; and other factors, many of which are beyond the
control of management of either Union or Citizens. In formulating its
projections, Bank Analysis relied on Union's 1999 budget information,
prepared by Union management and, for years after 1999, developed a series
of forecasts which it reviewed with management of Union. With respect to
Citizens, Bank Analysis utilized December 31, 1998 financial data and
developed a similar series of forecasts. In formulating its projections
for Citizens, Bank Analysis has also given consideration to the results of
its limited review of certain internal information about the assets,
liabilities and business of Citizens, which review did not indicate the
existence of any material adverse conditions or the expectation of the
development of such material adverse conditions, which would materially
impact the financial condition of Citizens. The forecasts for Union and
Citizens reflected growth rates for loans, deposits, income and expenses
which were consistent with their recent historical growth rates in these
categories.
Readers are cautioned that any estimates or projections which are referred
to in Bank Analysis' analyses are not necessarily indicative of actual
values or predictive of future results or values, which may vary
significantly from those set forth. To the extent the following
description of the Bank Analysis valuation methodologies includes financial
projections and other forward-looking statements, readers are advised of
the substantial uncertainties inherent in statements. See "A Warning About
Forward-Looking Statements" and "RISK FACTORS".
The following is a summary of the material analyses utilized by Bank
Analysis in rendering its fairness opinion. As a summary, it does not
purport to be a complete and comprehensive description of all the analyses
performed, or an enumeration of all the matters considered by Bank
Analysis. The preparation of a fairness opinion is a complicated process,
involving a judgment of the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, such an opinion is not readily susceptible to a
summary description. In arriving at its fairness opinion, Bank Analysis
did not attribute any particular weight to any one specific analysis or
factor, and made qualitative as well as quantitative judgments as to the
significance of each analysis and factor. Bank Analysis believes that its
analysis must be considered as a whole and that attributing undue weight to
any single analysis or factor considered could create a misleading or
incomplete view of the process leading to the formation of its opinion.
<PAGE> 43
In reaching its conclusion that the conversion ratio is fair, from a
financial point of view, to Union's shareholders, Bank Analysis evaluated
the conversion ratio under the following four methodologies:
* the operating performance and financial condition of Citizens;
* the relative contribution of Union and Citizens to the future
operating performance of the combined company;
* the financial effects on Union from the acquisition of
Citizens; and
* the financial terms of comparable transactions.
The results of each of Bank Analysis' evaluation methodologies, which
support Bank Analysis' fairness opinion, are summarized below.
Relative Operating Performance and Financial Condition of Citizens. Bank
Analysis compared the financial condition and financial operating
performance of Citizens with similarly sized banking institutions in
Vermont with total assets less than $100 million as of the year ended
December 31, 1998. In addition to Citizens, there were seven such
institutions (Bank of Woodstock, Brattleboro Savings & Loan Association,
First Brandon National Bank, First National Bank of Orwell, Randolph
National Bank, Wells River Savings Bank and Woodstock National Bank) .
Listed below are the results of this comparison and Citizens' ranking.
<TABLE>
<CAPTION>
Peer Group Citizens
PERFORMANCE CATEGORY Citizens Average Ranking
1=lowest
8=highest
- -------------------- -------- ---------- ---------
<S> <C> <C> <C>
Profitability
Net Income After Tax / Average Assets 1.15% .79% 7th
Net Interest Margin 4.92% 4.69% 6th
Non-Interest Income / Average Assets .77% .57% 8th
Asset Quality
Non-Performing Assets / Assets 1.0% 1.0% 4th
Loss Reserves / Non-Performing Loans 103% 106% 5th
Leverage
Tier 1 Leverage Ratio 10.4% 9.5% 6th
Liquidity
Loans / Total Deposits 80% 80% 5th
Expense Control
Efficiency Ratio 62.3% 73.4% 7th
<FN>
Source: FDIC Reports of Condition and Income for the year ended December
31, 1998.
</FN>
</TABLE>
<PAGE> 44
The overall condition and operating performance of Citizens compared
favorably relative to its indicated peer group. In five out of eight
indices Citizens performed in the upper quartile; in seven out of eight
indices, Citizens performed in the upper half.
Contribution of Union and Citizens to Future Operating Performance of the
Combined Company. Bank Analysis reviewed and compared the relative pro
forma contributions of Union and Citizens to the combined company based on
selected historical balance sheet and income statement data for the year
ended December 31, 1998. The results of that comparison are shown in the
following table:
<TABLE>
<CAPTION>
PRO FORMA
CATEGORY UNION CITIZENS COMBINED
(dollars in thousands) Amount Percent Amount Percent Amount Percent
- ---------------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $191,162 65.9% $98,967 34.1% $290,129 100%
Loans $133,439 65.9% $68,914 34.1% $202,353 100%
Deposits $162,516 65.3% $86,402 34.7% $248,918 100%
Total Equity $21,274 67.0% $10,488 33.0% $31,762 100%
Non-Int. Expenses $6,064 65.4% $3,214 34.6% $9,278 100%
Net Income After Tax $3,449 75.8% $1,102 24.2% $4,551 100%
Shares (year end) 2,034,140 152,000
Conversion ratio 6.5217
Shares 2,034,140 67.2% 991,298 32.8% 3,025,438 100%
outstanding/issued outstanding issued
<FN>
Source: FDIC Reports of Condition and Income for the year ended December
31, 1998 and Bank Analysis analysis of data.
</FN>
</TABLE>
The results of this contribution analysis indicated that in all categories
except net income, the pro forma contribution of financial resources of
Citizens to the combined company was approximately equivalent or greater
than the percentage ownership in the combined company that Citizens
shareholders would acquire, based on the conversion ratio.
In analyzing the relative pro forma contributions of Union and Citizens to
the net income of the combined company, Bank Analysis considered that Union
was the highest performing financial institution in Vermont based on
profitability for the year ended December 31, 1998. During that period,
there were twenty-six financial institutions headquartered in Vermont.
Using return on average assets as a standard (net income after tax as a
percentage of total average assets), the average for all institutions
headquartered in Vermont was 1.20%. Union ranked first with a return on
average assets of 1.91%, while Citizens ranked 12th, with a return on
average assets of 1.15%. Accordingly, Bank Analysis considered it
unreasonable to expect that Citizens' income contribution would be
proportional to the percentage of ownership of the combined company that
Citizen shareholders would derive under the conversion ratio. Instead, Bank
Analysis considered pro forma expected
<PAGE> 45
contribution of Citizens to the earnings of the combined company as a more
appropriate measure of comparison.
Based on a comparison of financial projections for the years 1999-2002 for
Union alone and for the combined company, by the end of the third full year
of combined operations, Citizens' contribution to the pro forma projected
net income of the combined company would exceed the ownership percentage of
Citizens shareholders in the combined company. The results of this
comparison are shown in the table below:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PROJECTED COMBINED
CONTRIBUTION ANALYSIS 1998 1999 2000 2001 2002
- --------------------- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Combined Company Pro Forma
Net Income $4,551 $4,443 $5,117 $5,616 $5,901
Union (Alone) Pro Forma Net
Income $3,450 $3,374 $3,546 $3,706 $3,873
Net Income Attributed to
Acquisition of Citizens 1,101 $1,069 $1,571 $1,910 $2,028
Percent of Combined Company
Net Income 24.2% 24.1% 30.7% 34.0% 34.4%
Citizens Percentage Ownership of
Combined Company 32.8% 32.8% 32.8% 32.8% 32.8%
<FN>
Source: Pro forma projections for Union for 1999-2002 and for the combined
company for 1999-2000 are based on projections prepared by Bank
Analysis and reviewed with the management of Union.
</FN>
</TABLE>
Impact on Union from the Acquisition of Citizens. Bank Analysis considered
the pro forma effect on Union's earnings per share and book value per share
from the acquisition of Citizens at the conversion ratio. The following
table shows that the merger is expected initially to have a pro forma
dilutive impact on both earnings per share and book value per share,
compared with the pro forma forecasted level Union may achieve on a stand-
alone basis. However, the table also shows accretion to earnings per
share, at higher levels than Union could have achieved on a stand-alone
basis, by the end of the third year of combined operations. In addition,
the analysis shows that the slight dilution to book value per share
resulting from the merger declines during the period of the forecast, with
slight accretion to book value per share projected by the end of the fourth
year of combined operations. Book values per share is initially slightly
dilutive, but this dilutive effect steadily decreases over the period of
the forecast. The dilutive effects in the initial years generally reflect
the one-time costs of the proposed transaction and the time period required
to generate the savings from eliminating duplicate operating costs. The
accretive effects generally reflect the realization of anticipated expense
synergies and incremental fee and interest income.
<PAGE> 46
<TABLE>
<CAPTION>
ACTUAL PRO FORMA FORECAST
----------- ----------------------------------------------------------------
Compound
1998 1999 2000 2001 2002 Growth %
---- ---- ---- ---- ---- --------
UNION ALONE
- -----------
(BASE FORECAST) (dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income After Tax $ 3,449 $ 3,374 $ 3,546 $ 3,706 $ 3,873 2.9%
Total Equity $ 21,274 $ 22,851 $ 24,366 $ 25,837 $ 27,254 6.4%
Total Assets $ 191,162 $ 198,515 $ 206,105 $ 213,964 $ 222,102 3.8%
Book value per share $ 10.46 $ 11.21 $ 11.95 $ 12.68 $ 13.37 6.3%
Earnings per share $ 1.70 $ 1.66 $ 1.74 $ 1.82 $ 1.90 2.9%
Tier 1 Leverage 11.13% 11.51% 11.82% 12.08% 12.27%
Shares (year-end)* 2,034,140 2,038,140 2,038,140 2,038,140 2,038,140
Shares (average outstanding) 2,030,862 2,037,140 2,038,140 2,038,140 2,038,140
Market Price / Share $ 23.00
Market Price / Book 220%
Market Price as X EPS 13.5
Dividend per Share $ 0.82 $ 0.90 $ 1.00 $ 1.10 $ 1.20 10.0%
Total Dividends Paid $ 1,838 $ 2,031 $ 2,235 $ 2,456
COMBINED COMPANY
Net Income After Tax $ 4,552 $ 4,433 $ 5,118 $ 5,615 $ 5,902 6.7%
Total Equity $ 31,763 $ 33,513 $ 35,611 $ 37,905 $ 40,157 6.0%
Total Assets $ 290,129 $ 303,219 $ 315,674 $ 328,922 $ 342,766 4.3%
Book Value Per Share $ 10.51 $ 11.06 $ 11.76 $ 12.51 $ 13.26 5.8%
Earnings Per Share $ 1.51 $ 1.47 $ 1.69 $ 1.85 $ 1.95 6.6%
Tier 1 Leverage Ratio 10.95% 11.05% 11.28% 11.52% 11.71%
Shares (year-end)* 3,025,438 3,029,438 3,029,438 3,029,438 3,029,438
Shares (average outstanding) 3,022,160 3,029,438 3,029,438 3,029,438 3,029,438
Total Dividends Paid $ 2,733 $ 3,019 $ 3,321 $ 3,650
TRANSACTION TERMS
Exchange Value/Citizens' Book
Value 217%
Total Value $22,800,000
Price Per Share $ 150.0
X 1998 Earnings Per Share 20.7X
Conversion Ratio 6.5217
Shares to be issued 991,298
(DILUTION) / ACCRETION &
CAPITAL ADEQUACY**
Book value per share $ 10.51 $ 11.06 $ 11.76 $ 12.51 $ 13.26
(Dilution)/Accretion $ $ 0.05 $ (0.15) $ (0.20) ($0.16) $ (0.12)
(Dilution)/Accretion % 0.5% -1.3% -1.7% -1.3% -0.9%
Earnings per share $ 1.51 $ 1.47 $ 1.69 $ 1.85 $ 1.95
(Dilution)/Accretion $ $ (0.19) $ (0.19) $ (0.05) $ 0.04 $ 0.05
(Dilution)/Accretion % -11.3% -11.4% -2.9% 1.9% 2.5%
Tier 1 Leverage 10.95% 11.05% 11.28% 11.52% 11.72%
<FN>
<F*> Outstanding shares for years 1999 through 2002 include 4,000 shares of
Union common stock issued in March 1999 upon the exercise of employee
stock options.
<F**> Compares the pro forma book value per share and earnings per share of
the combined company with the forecasted book value per share and
earnings per share of Union alone, if the merger were not completed.
</FN>
</TABLE>
The results of the above analysis suggest that the pro forma combined
effects of the acquisition have the potential for accretive impact to Union's
earnings per share by the end of the third full
<PAGE> 47
year of combined operations, and to book value per share over the longer
term. In addition, the combined company pro forma capital position shows
that it will be a well-capitalized institution, which will exceed all
regulatory minimums.
Comparable Transactions. Bank Analysis also reviewed the financial terms
of reported acquisition transactions for the period 1996-1998 involving
other New England financial institutions. Although no transaction can be
said to be truly comparable to the Union-Citizens merger due to numerous
variables, including differences in the financial history and
characteristics of the companies involved and the liquidity of their stock,
differences in the markets in which they operate and their market shares
and differences in their banking operations, such comparisons may sometimes
provide useful information. However, any such comparisons must be
evaluated as only part of Bank Analysis' overall analysis and in
conjunction with other methodologies, and should not be given undue weight
or consideration.
The following table shows the results of Bank Analysis' comparison of three
selected pricing measures for the Union-Citizens merger with merger
transactions involving New England financial institutions announced during
1996-1998:
<TABLE>
<CAPTION>
NEW ENGLAND BANK MERGER/ACQUISITION TRANSACTIONS SUMMARY
(CT, ME, MA, RI, VT, NH)
- --------------------------------------------------------------------------------------------------------
Number of Total Value of Average Average Price/ Average
Period Transactions Transactions Price/Book Earnings Price/Deposits
(dollars in millions)
- ------- ------------ --------------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1996 22 $2,393 175% 15.3X 16.9%
1997 28 $2,423 194% 18.2X 23.3%
1998 15 $1,619 252% 25.6X 31.3%
Union/
Citizens $ 22.8 217% 20.7X 26.4%
</TABLE>
The table shows a general trend of increasing prices over the 1996-1998
period under each of the three measures. The financial terms of Union's
acquisition of Citizens are comparable to the overall levels for
transactions in New England during 1998.
Compensation of Bank Analysis. Under an agreement dated December 11, 1998,
Union will pay Bank Analysis an advisory fee of $60,000 for its services in
connection with the merger. Through the date of this joint proxy
statement/prospectus, Union has made interim payments to Bank Analysis of
$10,000 which will be credited against the fee. Union has also agreed to
reimburse Bank Analysis for reasonable out-of-pocket expenses incurred in
connection with its engagement and to indemnify Bank Analysis and its
respective officers and employees against certain expenses and liabilities.
<PAGE> 48
Citizens Board's Recommendation and Reasons for the Merger
General. The Board of Directors of Citizens believes the proposed
affiliation with Union is in the best interest of Citizens and its
shareholders and has approved the affiliation agreement and the
transactions called for in the agreement, including the merger of Citizens
and Interim Bank. The Citizens Board also believes that the affiliation
agreement and merger are in the best interests of Citizens' customers,
employees and other constituencies. The Citizens directors unanimously
recommend that Citizens' shareholders vote "FOR" the affiliation agreement
and the transactions contemplated in the agreement, including the merger
with Interim Bank.
The Citizens Board conducted strategic planning sessions in 1997 and 1998
to evaluate the pros and cons of remaining independent, affiliating with a
community bank holding company or selling out to a larger organization.
The focal point of these strategic discussions was what would be in the
best interests of the shareholders, customers, and communities we serve and
our employees. Although initially no specific course of action was
identified, the Board's posture was to remain flexible and opportunistic,
trying to keep the best interest of all our constituencies in mind.
The Citizens Board considered a number of factors in determining that the
merger proposed by Union was in the best interest of Citizens shareholders
and in voting to recommend the merger to Citizens shareholders. The
material factors considered by the Citizens Board are discussed below.
The management of Citizens and the Citizens Board believe that the banking
industry will continue to undergo changes as banks respond to increasing
competition and continuing demand for technological improvements in the
nature and delivery of financial services. Competition for financial
products and services continues to intensify within a consolidating banking
industry and among financial service providers outside of the traditional
banking industry.
While large banks have very large customer bases over which to spread their
investments and costs relating to technology, compliance, advertising, and
similar functions, community banks like Citizens and Union must look for
alternatives which will allow them to continue to serve their customers
while controlling costs. A multi-bank holding company structure offers
some solutions to these problems. By joining together under a single bank
holding company, two or more community banks can pool their resources to
gain the economies of scale available to larger institutions.
Some of the savings potential offered by joining together will be delivered
by more efficiently utilizing resources owned by one of the member
institutions. This efficiency reduces the cost of servicing the accounts
of all the member banks of a multi-bank holding company, helping them to
remain competitive and keeping costs down for their customers. The
management of Citizens believes there are many such opportunities for
savings which can be achieved through joining with another institution as a
multi-bank organization.
<PAGE> 49
Within a multi-bank holding company, member banks maintain their identities
and charters. Each individual bank's directors and managers continue to be
responsible for the prudent and profitable operation of the bank. While it
is difficult to project the cost savings associated with the merger, the
management teams of Citizens and Union anticipate savings resulting from
combining aspects of operations and data processing related expenses, as
well as from improving efficiencies and economies in purchasing goods and
services such as insurance and professional services. These annual
combined cost savings are estimated at $450,000 ($297,000 after taxes), net
of additional incremental expenses anticipated from combined operations.
Economies may also arise from the sharing of specialized resources such as
compliance, marketing, advertising, audit, and finance, and from reduced
aggregate costs for regulatory reporting.
The Citizens Board believes that prudently operated, well-capitalized
community banks can continue to be successful providers of financial
services in the communities in which they operate, but such banks must
continually evaluate ways in which they can achieve efficiencies and
economies of scale without sacrificing their community focus and localized
decision making. It was this shared opinion that generated the interest
within both Citizens and Union to explore potential operations within a
multi-bank holding company structure.
The Citizens Board, with input from its financial advisor, determined that
the terms of the merger agreement are in the best interests of the
shareholders of Citizens. Among other things, shareholders are expected to
benefit, following the merger, from the opportunity to participate in the
performance of a larger and more diversified institution. The Citizens
Board also considered that the combined company would seek to have its
common stock listed for trading on the AMEX.
In the course of considering and approving the affiliation agreement, the
Citizens Board consulted with its legal and financial advisors, as well as
its management, and considered numerous factors including, among others,
the following:
* The oral and written presentations of its financial advisor
that the conversion ratio is fair to the shareholders of
Citizens from a financial point of view, as more fully
discussed below under "--- Fairness Opinion of Citizens
Financial Advisor";
* The fact that Citizens would retain its separate banking
franchise and local orientation;
* The terms of comparable transactions involving other financial
institutions based, among other things, on information supplied
by its financial advisor;
* The Citizens Board's familiarity with and review of the
business, results of operations, financial condition, and
prospects of Union on a separate and pro forma combined basis,
as well as industry conditions generally and the changing
environment for banking and financial services, including the
trend towards increasing industry consolidation and
efficiencies;
<PAGE> 50
* The effect of the proposed merger on the employees, customers,
and the communities in which Citizens operates;
* The Citizens Board's views, based in part on presentations by
management and advisors regarding the due diligence review of
the business, operations, earnings, and financial condition of
Union on both a historical and prospective basis, regarding the
enhanced opportunities for growth in shareholder values that
the merger would make possible, and the customer bases, product
lines, and other contributions the respective institutions
would bring to a combined institution;
* The likelihood of the merger being approved by applicable
regulatory authorities without undue conditions or delay;
* The Citizens Board's beliefs, based upon its analysis of the
anticipated financial effects of the merger, that, upon
completion of the merger, Citizens would continue to be well
managed and well-capitalized, and able to continue to serve the
banking needs of its customers and the communities in which it
operates;
* The fact that, based on Union's historical dividend payout
ratio (dividends paid as a percentage of net income), Citizens'
shareholders would not likely experience a decline in dividend
rates and would likely experience an increase in their dividend
rate; and
* The compatibility of the community-focused business
philosophies of the Boards, management and employees of
Citizens and Union.
The Citizens Board did not assign any specific or relative weight to the
factors it considered in reaching its determination. Further, the Citizens
Board did not identify any material disadvantages to the merger, although
certain potentially negative considerations were identified and discussed.
These included the current lack of an active and liquid trading market for
the Union common stock, the possibility that Citizens shareholders might
receive a higher premium or cash consideration in connection with an
acquisition by another party at some point in the future, and the uncertain
economic prospects for Union's market area. In addition, the Citizens
Board considered the fact that a new Board of Directors consisting of
directors predominantly of Union rather than Citizens would control the
combined bank holding company and that the executive management of Union
would consist of persons who, with the exception of Jerry S. Rowe, are not
members of the current executive management team of Citizens.
Based on the foregoing, the Citizens Board believes that the terms of the
affiliation agreement are in the best interests of Citizens and its
shareholders and other constituencies and unanimously recommends that
Citizens shareholders vote "FOR" the affiliation agreement and the
transactions contemplated in the agreement, including the merger with
Interim Bank.
<PAGE> 51
Opinion of Citizens' Financial Advisor
In October, 1998, Citizens' Board consulted with HAS Associates, Inc. about
a possible business combination between Union and Citizens, and for advice
generally on Citizens' strategic alternatives. Citizens formally engaged
HAS on December 24, 1998 to act as its financial advisor in connection with
the possible merger with Union. Under the terms of its engagement, HAS
agreed to assist Citizens in analyzing, structuring, negotiating and
effecting the merger. Citizens selected HAS because HAS is a regional
investment banking firm with experience in such transactions and is
familiar with Citizens and its business. As part of its investment banking
business, HAS is engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions.
As part of its engagement, representatives of HAS attended the meeting of
the Citizens Board held on February 12, 1999 at which the Citizens Board
considered and approved the affiliation agreement with Union. At the same
meeting, HAS rendered an oral opinion (subsequently confirmed in writing)
that, as of such date, the conversion ratio of 6.5217 was fair to the
holders of shares of Citizens common stock from a financial point of view.
That opinion was reconfirmed in writing as of the date of this joint proxy
statement/prospectus.
The full text of HAS' written opinion dated as of the date of this joint
proxy statement/ prospectus is attached as Appendix D to this document and
is incorporated into this document by reference. The description of HAS'
opinion that follows is qualified in its entirety by reference to Appendix
D. Citizens shareholders are urged to read HAS' opinion in its entirety
for a description of the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review undertaken by
HAS in connection with rendering its opinion.
HAS' opinion is directed to the Citizens Board and addresses only the
fairness, from a financial point of view, of the conversion ratio to the
Citizens shareholders. It does not address the underlying business
decision to proceed with the merger and is not a recommendation to any
Citizens shareholder as to how such shareholder should vote on the merger
at the Citizens special meeting, or on any other matter related thereto.
HAS has informed Citizens that in arriving at its written opinion, HAS,
among other things:
* reviewed Citizens' Annual Reports and related audited financial
information for the three fiscal years ended December 31, 1998;
* reviewed Union's Annual Reports and related audited financial
information for the three fiscal years ended December 31, 1998;
* reviewed certain limited financial information relating to the
respective businesses, earnings, assets and prospects of
Citizens and Union furnished to HAS by senior management of
Citizens and Union, as well as projected cost savings and
related
<PAGE> 52
expenses expected to result from the merger, furnished to HAS
by senior management of Citizens and Union;
* conducted certain limited discussions with members of senior
management of Citizens and Union concerning the respective
businesses, financial condition, earnings, assets, liabilities,
operations, regulatory condition, contingencies and prospects
of Citizens and Union and their respective views as to the
future financial performance of Citizens, Union and the
combined company, as the case may be, following the merger;
* reviewed the historical trading prices and trading activity for
the common stock of Citizens and Union and compared them with
that of certain publicly traded companies which HAS deemed to
be relevant;
* compared the respective results of operations of Citizens and
Union with those of certain companies which HAS deemed to be
relevant;
* compared the proposed financial terms of the merger with the
financial terms of certain other mergers and acquisitions which
HAS deemed to be relevant;
* reviewed the amount and timing of the expected savings
following the merger as prepared by, and discussed with the
managements of Citizens and Union;
* considered, based upon information provided by Union's senior
management, the pro forma impact of the merger on the earnings
and book value per share, consolidated capitalization and
certain balance sheet and profitability ratios of Union;
* reviewed the affiliation agreement and related transaction
documents; and
* reviewed such other financial studies and analyses and
performed such other investigations and took into account such
other matters as HAS deemed necessary.
In preparing its opinion, HAS, with Citizens' consent, assumed and relied
on the accuracy and completeness of all financial and other information
supplied or otherwise made available to it by Citizens and Union, including
the information referred to in the preceding paragraph, and HAS has not
assumed responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of the assets or
liabilities, contingent or otherwise, of Citizens or Union, nor has it been
furnished any such evaluation or appraisal. HAS' opinion is predicated on
the merger receiving the tax and accounting treatment contemplated in the
affiliation agreement. HAS' opinion was necessarily based on economic,
market and other conditions as in effect on, and the information made
available to it as of, the date of its opinion. HAS' opinion was rendered
without regard to the necessity for, or level of, any restrictions,
obligations, undertakings or divestitures which may be imposed or required
in the course of obtaining regulatory approval for the merger.
<PAGE> 53
In connection with rendering its oral opinion on February 12, 1999, HAS
performed a variety of financial analyses, consisting of those summarized
below. The summary set forth below does not purport to be a complete
description of the analyses performed by HAS in this regard, although it
describes all material analyses performed by HAS. The preparation of a
fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these
methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to a partial analysis or summary description.
Accordingly, HAS believes that its analysis must be considered as a whole
and undue focus on one or more separate analyses performed or on selected
portions of its analyses and factors it considered, without considering all
analyses and factors, or attempting to ascribe relative weights to some or
all such analyses and factors, could create an incomplete view of the
evaluation process underlying HAS' opinion.
In performing its analyses, HAS made numerous assumptions about industry
performance, general business and economic conditions and other matters,
many of which are beyond the control of Citizens, Union or HAS. The
analyses performed by HAS are not necessarily indicative of actual values
or future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
HAS' analysis of the fairness to the shareholders of Citizens of the
conversion ratio and were provided to the Citizens Board in connection with
the delivery of HAS' opinion. HAS gave the various analyses described
below approximately similar weight and did not draw any specific
conclusions from or with regard to any one method of analysis. With
respect to the comparison of selected companies analysis and the analysis
of selected merger transactions summarized below, no company utilized as a
comparison is identical to Citizens or Union. Accordingly, an analysis of
comparable companies and comparable business combinations is not
mathematical; rather it involves complex considerations and judgments
concerning the differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values
or announced merger transaction values, as the case may be, of the
companies concerned. The analyses do not purport to be appraisals or to
reflect the prices at which Citizens and Union might actually be sold or
the prices at which any securities may trade at the present time or at any
time in the future. In addition, as described above, HAS' opinion is just
one of many factors taken into consideration by the Citizens Board.
The following is a summary of the material analyses that HAS performed and
presented to the Citizens Board in connection with rendering its opinion.
Selected Merger Transactions Analysis. HAS reviewed certain financial data
related to all financial institution merger transactions in New England
announced since January, 1998, except for the proposed merger of Fleet
Financial Group and BankBoston Corporation, which would not be comparable
in this regional analysis due to the parties' size, multiple state and
international operations, and other operational factors.
<PAGE> 54
The transactions included in the comparable transaction group and the
location were: Washington Trust (RI)/Pier Bank (RI); Chittenden
(VT)/Vermont Financial (VT); Webster Financial (CT)/Village Bancorp (CT);
Webster Financial (CT)/Maritime Bank & Trust (CT); Androscoggin Savings
(ME)/Livermore Bankshares (ME); Summit (NJ)/New Canaan Bank & Trust (CT);
Peoples Heritage (ME)/SIS Bancorp (MA); Westbank (MA)/Cargill Bank (CT);
Summit (NJ)/NSS Bancorp (CT); Private Investor (CT)/Middlesex Bank & Trust
(MA); Citizens (RI)/Woburn National (MA); HUBCO (NJ)/Dime Financial (CT);
New England Community (CT)/Bank of South Windsor (CT); New England
Community (CT)/Olde Port Bank & Trust (NH); and Seacoast Financial (MA)/
Sandwich Bancorp (MA).
The results of that analysis are shown below.
<TABLE>
<CAPTION>
Comparable
Transaction Group Comparable
Multiple Average Group Median
----------- ---------- ------------
<S> <C> <C> <C>
Deal Price/ Earnings Per Share 20.60x 24.01x 25.14x
Deal Price/Book Value 209% 253% 265%
Deal Price/Tangible Book Value 209% 259% 269%
Deal Price/Total Assets 22.55% 24.46% 23.37%
Core Deposit Premium 15.09% 18.58% 18.90%
</TABLE>
No company or transaction used as a comparison in the above analysis is
identical to Citizens, Union, the combined company or the merger .
Accordingly, an analysis of the results of the above information is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading value of
the companies to which they are being compared.
Selected Peer Group Analysis. HAS compared the financial performance and
market performance of Citizens and Union based on various financial
measures of earnings performance, capital adequacy and asset quality to a
group of comparable small New England banks located in Vermont and New
Hampshire. This group has stock that is thinly traded, so market
comparisons were not done. For purposes of such analysis, the financial
information used by HAS was as of year ended December 31, 1998.
The companies in this peer group were Connecticut River Bank (NH), First
Colebrook (NH), Granite Savings Bank and Trust Company (VT), Lyndonville
Savings Bank (VT), National Bank of Middlebury (VT), Pemigewasset National
Bank (NH), Randolph National Bank (VT), Southern NH (NH) and Woodstock
National Bank (VT).
<PAGE> 55
The results of HAS' comparisons are shown below.
<TABLE>
<CAPTION>
Peer Group Peer Group
Citizens Union(1) Average Median
-------- -------- ---------- ----------
<C> <C> <C> <C>
Return on Average Assets (ROAA) 1.15 1.90 1.10 1.04
Return on Average Equity (ROAE) 10.72 17.18 12.01 11.11
Net Interest Margin 4.88 5.48 5.00 5.23
Equity/Assets 10.60 11.13 8.22 7.55
Loan Loss Reserves/ Nonperforming Loans 103% 129% 181% 99%
Net Charge Offs/Average Loans 0.40 0.06 0.24 0.11
Nonperforming Assets/Equity and Loan Loss
Reserves 8.73 8.34 7.85 7.75
Loan Loss Provision/Charge Off 108.3 112.4 314.5 112.4
Nonperforming Assets/Loans and OREO 1.46 1.44 1.10 0.85
<FN>
<F1> Union Bank only, based on publicly available data (Uniform Bank
Performance Reports)
</FN>
</TABLE>
Contribution Analysis. HAS analyzed the pro forma contribution of Citizens
and Union to the combined company, assuming a 100% stock exchange at 6.5217
shares of Union common stock for each share of Citizens common stock, with
the following results:
<TABLE>
<CAPTION>
Union(1) Citizens Total
-------- -------- -----
<S> <C> <C> <C>
Assets 65.9% 34.1% 100.0%
Equity 67.0% 33.0% 100.0%
Earnings 76.1% 23.9% 100.0%
Union common stock 67.2% 32.8% 100.0%
<FN>
<F1> Union Bank only, based on publicly available data (Uniform Bank
Performance Reports)
</FN>
</TABLE>
Imputed Value of Union Common Stock. The Union common stock is not listed
on the NASDAQ National Market or any exchange. The lack of liquidity and
trading history required HAS to develop an imputed value for the Union
common stock. HAS performed certain analyses on 17 publicly traded New
England banks and thrifts with assets between $100 and $300 million. HAS
analyzed the price to book value, price to tangible book value, price to
current earnings and price to last twelve months earnings for the selected
banks and thrifts, based on data at and as of the twelve months ended
December 31, 1998, with the following results:
<TABLE>
<S> <C>
Average Market Price to Book Value 144.40%
Average Market Price to Tangible Book Value 143.84%
Average Price to Current Earnings 14.61x
Average Price to Last Twelve Month Earnings 14.02x
Average Dividend Yield 2.21%
</TABLE>
<PAGE> 56
The above values applied to the Union common stock resulted in the
following valuations:
<TABLE>
<S> <C>
Price to Book Value $15.13
Price to Tangible Book Value 15.07
Price to Current Earnings 24.84
Price to Last Twelve Month Earnings 23.83
Price to Dividend Yield 37.10
</TABLE>
The calculated average of the above is $23.19. HAS applied a discount
factor of 5% to account for the historical illiquidity of the Union common
stock resulting in an imputed valuation in the range of $22.03 to $23.19
per share. The imputed value of $23.00 per share of Union common stock is
within the imputed value range.
Discounted Cash Flow and Terminal Value Analysis. HAS estimated the
present value of the future cash flows that would accrue to a holder of a
share of Citizens common stock assuming the shareholder held the stock
through the year 2003 and then sold it at the end of that period. HAS
based this standalone analysis on several assumptions, including earnings
per share for Citizens of $7.25 in 1998 and $7.61 in 1999 and a 3% earnings
per share growth rate thereafter. The current 28.5% dividend payout ratio
was assumed for Citizens through the year 2003. A terminal value was
calculated at December 31, 2003 by multiplying Citizens' projected 2003
earnings by a price/earnings multiple of 13x trailing twelve month
earnings. The terminal valuation and the estimated dividends were
discounted at a rate of 10%, producing a present value of $83.70 per share.
HAS also presented an analysis showing the foregoing analysis with a price
to earnings multiple of 15x, resulting in a present value for a share of
Citizens common stock of $95.19. These values were determined by adding
(1) the present value of the estimated future dividend stream that Citizens
could generate on a standalone basis over the period beginning January 1,
1999 and ending December 31, 2003 and (2) the present value of the December
31, 2003 "terminal value"of the Citizens common stock.
HAS has stated to the Citizens Board that the discounted cash flow and
terminal value analysis is a widely used valuation methodology but has
noted that it relies on numerous assumptions, including asset and earnings
growth rates, dividend payout rates, terminal values and discount rates.
HAS also indicated that the analysis did not purport to be indicative of
the actual values or expected values of Citizens common stock.
In connection with its opinion dated as of the date of this joint proxy
statement/ prospectus, HAS performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on
which such analyses described above were based and the factors considered
in connection therewith. Some ratios did change due to updated information
and pricing, but such changes were immaterial.
HAS has been retained by the Citizens Board as an independent contractor to
act as financial advisor to Citizens with respect to the proposed merger
with Union. HAS, as part of its
<PAGE> 57
investment banking business, is engaged in the valuation of banking
businesses and bank securities in connection with mergers and acquisitions,
and valuations of bank and bank holding company stock for estate, corporate
and other purposes. As specialists in the securities of banking companies,
HAS has experience in, and knowledge of, the valuation of banking
enterprises.
HAS and Citizens entered into a letter agreement dated December 24, 1998,
relating to the services HAS would provide in connection with the merger.
Under the agreement, Citizens agreed to pay HAS a fee of $80,000, plus
various out-of-pocket expenses. Citizens also agreed to indemnify HAS
against certain liabilities related to engagement, including liabilities
under the federal securities laws.
Exchange of Certificates; Fractional Shares
As soon as is practicable after the merger is completed, Union Bank, acting
as the exchange agent for Union and Citizens, will mail a form of
transmittal letter to Citizens shareholders. The form of transmittal
letter will contain instructions for surrender of Citizens stock
certificates for certificates representing Union common stock.
Citizens common stock certificates should not be returned with the enclosed
proxy and should not be forwarded to the exchange agent unless and until
the merger is approved and the Citizens shareholder receives a letter of
transmittal after the merger is completed.
Assuming the merger is completed, Citizens shareholders will accrue dividends
on their Union common stock but will not receive payment until they surrender
their Citizens stock certificates for exchange. Payment of accrued dividends
or other distributions will not include any interest. When the merger is
completed, the stock transfer books of Citizens will be closed and no further
transfers allowed. If certificates representing shares of Citizens common
stock are presented after the effective time of the merger, they will be
canceled and exchanged for certificates representing shares of Union common
stock.
Neither Union, Citizens nor any other person, will be liable to any former
Citizens shareholder for any amount properly delivered to a public official
under applicable abandoned property, escheat or similar laws.
If a certificate for Citizens common stock has been lost, stolen or
destroyed, the holder must give Union appropriate evidence as to such loss,
theft or destruction and appropriate evidence as to the ownership of such
certificate by the claimant. The exchange agent may require the holder to
post bond in any amount Union determines is necessary as indemnity against
any claim that may be made against Union with respect to the shares
represented by the certificate.
<PAGE> 58
Union shareholders will not be required to exchange certificates
representing their shares of Union common stock or otherwise take any
action as a result of completion of the merger. There is no need for Union
shareholders to submit their share certificates to Union, Citizens, the
exchange agent or to any other person in connection with the merger.
The Union common stock is described elsewhere in this document under the
caption "DESCRIPTION OF UNION'S COMMON STOCK." The differences between the
rights of Citizens shareholders, on the one hand, and Union shareholders,
on the other, are described elsewhere in this document under "COMPARISON OF
SHAREHOLDER RIGHTS."
Effective Time
The effective time of the merger will be stated in the certificate of
merger filed with the Vermont Secretary of State. The effective time will
be within five business days after the satisfaction or waiver (subject to
applicable law) of all of the conditions to the merger listed in Article 5
of the affiliation agreement, unless Union and Citizens agree to a later
date. Union and Citizens each expect that the merger will be completed as
soon after September 30, 1999 as is practicable. However, completion of
the merger could be delayed if there is a delay in satisfying some of the
conditions, including receipt of regulatory approvals. We cannot give any
assurances that we will obtain all the required approvals in a timely
fashion; or that the merger will be completed. If the merger is not
completed on or before December 31, 1999, the merger agreement may be
terminated by either Union or Citizens, unless the failure to complete the
merger by such date is due to the failure of the party seeking to terminate
to perform or observe its obligations under the agreement. See "THE MERGER
- --- Amendment or Termination."
Conditions to Completing the Merger; Regulatory Approvals
Completion of the merger is subject to various conditions described in
Article 5 of the affiliation agreement. Union and Citizens cannot provide
any assurance that all of these conditions will be satisfied or waived (to
the extent permitted by law). Therefore, neither Union nor Citizens can
give any assurance that the merger will in fact be completed. If
conditions to the merger remain unsatisfied as of December 31, 1999, then
the Boards of either Union or Citizens may terminate the affiliation
agreement. The material conditions to completion of the merger are
discussed below.
Regulatory Approvals. Union must obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act of 1956, as amended, in
order to acquire control of Citizens. In addition, the formation of
Interim Bank for the purpose of completing the merger must be approved by
the Vermont Banking Department and both the Vermont Banking Department and
the FDIC must approve the Citizens-Interim Bank merger. We have filed
applications for the prior approval of the Federal Reserve Board, FDIC and
Vermont Banking Department. Although we cannot give any assurance that we
will eventually receive all the required regulatory approvals, at this time
we have no reason to believe that any of our applications will
<PAGE> 59
be denied or that processing will be delayed. We also do not expect that
any of the regulatory approvals will contain any condition or requirement
that would, in our reasonable good faith opinion, materially and adversely
affect the anticipated economic and business benefits of the transaction so
as to render completion of the merger inadvisable.
Shareholder Approvals. As described under "INFORMATION ABOUT THE MEETINGS
AND VOTING," the merger cannot be completed unless (1) the Citizens
shareholders approve the merger and (2) the Union shareholders approve the
proposed increase in Union's authorized common stock.
Other Conditions. In addition to regulatory and shareholder approvals,
completion of the merger is subject to satisfaction (or waiver, if
permitted by law) of a number of other conditions. Those conditions
include the following:
* Tax Opinion. Union and Citizens must receive a satisfactory opinion
from their tax advisor to the effect that the merger will qualify as
a tax free reorganization under Section 368(a) of the Internal
Revenue Code and that Citizens shareholders will not recognize any
gain or loss in connection with the conversion of their Citizens
common stock into Union common stock, except to the extent of any
cash payment for fractional shares or receipt of cash by dissenting
shareholders in cancellation of their Citizens stock. The tax
opinion must also address any other federal income tax effects of the
merger that the parties may reasonably require, including assurances
that neither Union, Citizens nor Interim Bank will recognize any gain
or loss as a result of the merger;
* Pooling of Interests Accounting. Union and Citizens must each
receive from their independent accountants a letter to the effect
that such accountants are not aware of any reason why the merger may
not be accounted for as a pooling of interests;
* Litigation. Neither Union nor Citizens must be subject to any order,
decree or injunction of any court or agency enjoining or prohibiting
completion of the merger and related transactions;
* Representations and Warranties. The representations and warranties
of Union and Citizens must then be true and correct in all material
respects to the same extent as when the affiliation agreement was
signed (February 16, 1999);
* Affiliate Letters. The affiliates of Union and Citizens must have
agreed in writing to certain restrictions on the sale of Union and
Citizens stock prior to and following the merger; and
* No Material Adverse Change. Neither Union nor Citizens must have
experienced a material adverse change in its assets, financial
condition, results of operations or future prospects.
<PAGE> 60
Either Union or Citizens may waive any of the other party's conditions,
except those that are required by law, such as shareholder and regulatory
approvals. Either Union or Citizens may also grant to the other party an
extension of time to complete an obligation or condition.
Shareholder Agreements
As of the record date for Union's special meeting
* the executive officers and directors of Union owned beneficially, in
the aggregate, _______ shares, representing approximately _____% of
Union's outstanding common stock and
* the executive officers and directors of Citizens owned beneficially,
in the aggregate, ______ shares, representing approximately _____% of
Citizens' outstanding common stock.
In order to help ensure that the required shareholder approvals for the
transaction will be obtained, the executive officers and directors of Union
and Citizens have executed written shareholders' agreements in which they
have agreed to vote all of their shares in favor of the items to be
presented at their company's special meeting. The shareholders' agreements
will remain effective until the merger is completed or abandoned before
completion.
Amendment or Termination
Union and Citizens may agree, in writing, at any time to amend or
supplement the affiliation agreement, so long as the amendment or
supplement is approved by the Boards or authorized officers of Union and
Citizens. However, the parties may not amend the affiliation agreement
after approval by the shareholders of Citizens if the amendment materially
reduces or modifies the consideration the Citizens shareholders will
receive in the merger, unless the Citizens shareholders have voted to
approve the change.
Union and Citizens may also agree to terminate the affiliation agreement,
before or after approval by the Union and Citizens shareholders in the
following circumstances:
* at any time before the effective date of the merger, by mutual
written agreement;
* at any time before the closing date, by either party if the other
party has breached any of its obligations or representations and
warranties and the breach has not been cured within 30 days, or
before the closing date, if earlier. In order to justify
termination, a breach must be material;
* on the closing date, by either party, if any of the conditions to
such party's obligations in Article 5 of the affiliation agreement
have not been satisfied or fulfilled;
<PAGE> 61
* at any time, by either party, if a required regulatory approval is
denied and the time for appeals and reconsideration request has run;
* at any time, by either party, if the shareholders of Union or
Citizens do not approve the matters presented for vote at the special
meetings; or
* by either party, if the closing date has not occurred on or before
the close of business on December 31, 1999.
A party may terminate the affiliation agreement under any of the
circumstances listed above only if that party is not itself in material
breach of the agreement at the time it seeks to terminate.
Termination Fees
Citizens Fee. The affiliation agreement provides that Citizens will pay to
Union a termination fee of $2 million dollars if Union terminates the
agreement due to a breach by Citizens of its obligations or representations
and warranties or if Citizens terminates the agreement at a time when any
person or entity other than Union has made (or makes within six months) a
proposal to Citizens or its shareholders to merge, consolidate, purchase or
acquire 25% or more of Citizens' assets or common stock.
Union Fee. The affiliation agreement provides that Union will pay to
Citizens a termination fee of $1.25 million dollars if Citizens terminates
the agreement due to a breach by Union of its obligations or
representations and warranties or if Union terminates the agreement at a
time when any person or entity other than Citizens has made (or makes
within six months) a proposal to Union or its shareholders to merge,
consolidate, purchase or acquire 25% or more of Union's assets or common
stock.
Conduct of Business Pending the Merger
Union and Citizens have each agreed to use their best efforts, pending
completion of the merger, to preserve its properties and business
relationships with customers, employees and other persons and to carry on
its business in the usual, regular and ordinary course. Both have also
agreed not to take certain actions without the prior approval of the other
party. Among other things, pending completion of the merger, Union and
Citizens may not:
* issue or sell any of their common stock, except, with respect to
Union, issuance of common stock if outstanding employee stock options
are exercised;
* declare any dividends, except
* with respect to Union, regular quarterly cash dividends
consistent with past practice, and,
* with respect to Citizens, a regular annual dividend with
respect to 1998 operations, consistent with past practice. The
affiliation agreement also permits Citizens to pay a dividend
equal to one fourth of Citizens' regular annual dividend if the
effective date of
<PAGE> 62
the merger occurs after the record date for payment of Union's
1999 fourth quarter dividend (which is typically in October);
* amend their corporate documents or by-laws, except as contemplated in
the affiliation agreement;
* issue, grant or authorize any options, warrants or rights to purchase
shares of Citizens common stock or Union common stock, other than,
in the case of Union, employee stock option grants in amounts and on
terms consistent with past practice;
* effect any recapitalization, reclassification, stock dividend, stock
split or similar change in capitalization, or redeem or repurchase
any of the common stock;
* change accounting methods, except as may be required by generally
accepted accounting principles or regulatory accounting principles;
* merge or consolidate with any other entity or sell, lease, liquidate
or dispose of any material assets or business, or acquire any
substantial portion of the business or assets of any other person or
entity, except in a credit-related transaction;
* solicit or encourage any competing proposal for an acquisition or
purchase of all or substantially all of the assets or stock,
including by way of merger, of any other person or entity; or
* purchase or acquire, or agree to purchase or acquire, any of the
other party's common stock, other than as contemplated in the
affiliation agreement.
Management and Operations After the Merger
Upon completion of the Citizens-Interim Bank merger, Citizens, as the
surviving corporation, will continue to operate as a separate bank, under
its own name and banking charter, but as a subsidiary of Union. Even
though Citizens and Union Bank will operate separately, we expect that the
affiliation will present opportunities to enhance our banking franchises by
drawing on our mutual expertise in complementary business segments. For
example, Union's expertise in small business lending will provide Citizens
with a substantial resource to assist it in expanding that segment of its
lending activities. Similarly, Citizens' expertise in providing personal
trust and fiduciary services will benefit Union in developing further that
segment of its business. By drawing on each others' strengths, we hope to
enhance the combined company's revenues. We also expect that our
affiliation will permit us to reduce overall operating expenses by, for
example, eliminating duplicative functions and technologies. See "---
Background of the Merger," "--- Union Board's Recommendation and Reasons
for the Merger" and " --- Citizens Board's Recommendation and Reasons for
the Merger."
The affiliation agreement provides that at the effective time of the
merger, Union's Board of Directors will be expanded from ten to thirteen
persons and that Citizens' President and Chief Executive Officer, Jerry S.
Rowe, and two other Citizens' directors designated by the Citizens Board
will be added to the Union Board. The Citizens Board has designated
Directors Franklin G. Hovey, II and William T. Costa, Jr. to serve as Union
Directors along with Mr. Rowe. All three individuals will also remain on
the Citizens Board.
<PAGE> 63
The affiliation agreement also provides that the Board of Directors of
Citizens will be expanded from seven to nine persons at the effective time
of the merger and Union President and Chief Executive Officer, Kenneth D.
Gibbons, and one other Union Director designated by the Union Board will be
added to the Citizens Board. The Union Board has designated Union Senior
Vice President and Director Cynthia D. Borck to serve as a Citizens
Director along with Mr. Gibbons. Both Mr. Gibbons and Ms. Borck will also
remain on the Boards of Union and its subsidiary, Union Bank.
Information about the Boards of Directors of Union and Citizens is
contained elsewhere in this document under the headings, "INFORMATION ABOUT
UNION --- Directors and Management" and "INFORMATION ABOUT CITIZENS ---
Directors and Management."
Mr. Rowe will continue to serve as Citizens' President and Chief Executive
Officer and will be appointed as a Vice President of Union, with such
duties and responsibilities as the Union Board may delegate to him from
time to time. Except for the changes described above, the merger is not
expected to result in any changes to the directors or executive officers of
either company.
Employee Compensation and Benefits
The affiliation agreement provides that Union will initially maintain
Citizens' vacation, leave and sick day policies, but has retained the right
in its discretion to modify, amend or terminate such policies after the
effective time of the merger. Similarly, the officers and employees of
Citizens will be entitled to continue to participate in all compensation,
benefit and related plans and programs of Citizens in effect when the
merger is completed. However, Union has the right in its discretion to
modify, amend or terminate any such plans or programs after the merger.
Although we are not yet considering any specific proposals, we expect that
we will strive over time to integrate our various employee benefit plans
and programs into a uniform set of company-wide employee benefits in order
to comply with applicable employment and tax laws and to ensure more
efficient and cost-effective administration. We also believe that a
uniform system of benefits will assist us in the long-term in forging a
cohesive, integrated workforce for the combined company.
Although we do not anticipate any significant staff reductions, Union has
agreed that any employee of Citizens whose employment is terminated (other
than voluntary terminations or terminations for cause) within ten months
after completion of the merger will be entitled to a lump sum cash
severance payment equal to two weeks salary for each year of employment
with Citizens, up to an amount equal to one year's base compensation. The
lump sum severance payment for a part-time employee would be
proportionately reduced.
Interests of Certain Persons in the Merger
We do not have in effect any change in control or similar contracts that
entitle any officers of Citizens or Union to receive any change in control
or "golden parachute" payment in connection
<PAGE> 64
with merger. However, certain of our directors and officers have interests
in connection with the merger that are different from the interests of the
shareholders generally. Those interests are as follows:
Stock Registration Agreement. Citizens' Chairman of the Board, Genevieve
L. Hovey, her son, Citizens director Franklin G. Hovey, II, and two family
trusts of which Mrs. Hovey is the trustee, owned beneficially as of the
record date 79,484 shares of Citizens stock, representing approximately
52.29% of the outstanding shares. Following completion of the merger,
these Hovey family interests will own approximately 518,370 shares (or
17.11%) of Union's outstanding common stock. In recognition of the fact
that this concentration of ownership may cause liquidity and estate
settlement problems for the Hovey family, Union, Mrs. Hovey, Franklin
Hovey, II and the family trust have entered into a stock registration
agreement. That agreement provides that Union will register up to 150,000
shares (but no less than 50,000 shares) of Union common stock with the
Securities and Exchange Commission and certain state securities regulators,
should the Hovey family require funds for the payment of estate taxes in
the event of Mrs. Hovey's death. The stock registration agreement provides
that registration of the shares would be at Union's expense, but the Hovey
family would be responsible for paying other resale expenses, such as any
underwriting or brokerage commissions. The agreement also contains various
other terms, including mutual indemnification provisions relating to the
registration, offer and sale of the shares, typical in agreements of this
kind.
Indemnification and Insurance. The affiliation agreement provides that for
a period of six years after the effective time of the merger, Union will
maintain Citizens' existing directors and officers liability insurance
covering those persons who are currently covered by such insurance on terms
no less favorable than those in effect on the date the affiliation
agreement was executed (February 16, 1999), with respect to claims arising
from acts or omissions that occurred before the effective time. Union has
the right to substitute similar policies providing comparable coverage.
Union has also agreed to provide the same rights of indemnification to
Citizens' officers and directors under the Union By-laws as it provides to
its own officers and directors, subject to any limitations under applicable
federal or state law.
Board Appointments. As described above under "--- Management and
Operations After the Merger"
* Messrs. Rowe, Costa and Hovey will be appointed to Union's Board at
the effective time, and
* Mr. Rowe will also be named as a Vice President of Union;
* Messrs. Rowe, Costa and Hovey may receive compensation for services
they render to Union.
* Mr. Gibbons and Union Vice President, Cynthia D. Borck, will be
appointed to the Citizens Board at the effective time. Mr. Gibbons
and Ms. Borck may receive compensation for services they render to
Citizens.
Material Federal Income Tax Consequences
<PAGE> 65
The following is a summary of the material federal income tax consequences
of the merger to shareholders of Citizens and Union. The federal income tax
laws are complex and the tax consequences of the merger may vary depending
upon each shareholder's individual circumstances or tax status. Moreover,
some shareholders such as foreign persons, financial institutions, tax-
exempt organizations, insurance companies, persons who acquired shares of
Citizens as part of a hedge, straddle or conversion transaction, may be
subject to special rules. Therefore, we urge each Citizens shareholder to
consult a tax advisor regarding the federal, state, local, foreign and
other tax consequences of the merger in light of their own particular
circumstances.
A.M. Peisch & Company has rendered an opinion to Citizens and Union
regarding the material income tax consequences of the merger under the
United States Internal Revenue Code ("Code"). The material issues covered
in that opinion are described below. A.M. Peisch's opinion is based on
laws, regulations, rulings and judicial decisions as they now exist. These
authorities are all subject to change and such change may be made with
retroactive effect. A.M. Peisch cannot give any assurance that, after any
such change, its opinion would not be different, and does not undertake any
responsibility to update or supplement its opinion. Moreover, A.M. Peisch's
opinion does not address the consequences of the merger under state, local,
foreign or other tax laws. A.M. Peisch's opinion is not binding on the
Internal Revenue Service and would not prevent the IRS from challenging the
U.S. federal income tax treatment of the merger.
We have each provided A.M. Peisch with the facts, representations and
assumptions on which A.M. Peisch has relied in rendering its opinion. On
the basis of these facts, representations and assumptions, A.M. Peisch has
given its opinion that for federal income tax purposes:
* the merger, when completed in accordance with the terms of the
affiliation agreement and its related documents, will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
* no gain or loss will be recognized by shareholders of Citizens upon
the exchange of their Citizens common stock solely for shares of
Union common stock in the merger (except, as described below, with
respect to cash received for any fractional share);
* the aggregate adjusted tax basis of the Union common stock received
by a Citizens shareholder, all of whose Citizens common stock is
converted solely into Union common stock in the merger (other than
cash to settle any fractional share) will be the same as the
aggregate adjusted tax basis of the Citizens common stock converted
in the merger, reduced by any amount allocable to a fractional share
interest for which cash is received;
* the holding period of the shares of Union common stock received upon
conversion of Citizens common stock will include the period during
which the Citizens shareholder held the converted Citizens common
stock, provided that the converted Citizens common stock was held by
such shareholder as a capital asset at the effective time of the
merger;
<PAGE> 66
* Citizens' shareholders who exercise dissenters' rights of appraisal
and who receive cash in cancellation of their Citizens common stock
generally will recognize taxable gain or loss, measured by the
difference between the amount of cash received and the shareholder's
cost or other basis in the Citizens common stock canceled in the
merger;
* cash received by a holder of Citizens common stock in lieu of a
fractional share interest in Union common stock will be treated as
received in exchange for such fractional share interest, and gain or
loss will be recognized for federal income tax purposes measured by
the difference between the amount of cash received and the portion of
the basis of the share of Citizens common stock allocable to such
fractional share interest;
* any gain or loss attributable to fractional share payments or
payments to dissenting shareholders would be long-term capital gain
or loss if the shares of Citizens common stock surrendered by the
holder are held as a capital asset and have been held for more than
one year at the effective time of the merger. If, however, the cash
received has the effect of the distribution of a dividend with
respect to a holder, part or all of the cash received may be treated
as a dividend; and
* neither Union, Citizens, Interim Bank nor any Union shareholder
(solely in the capacity of a Union shareholder) will recognize any
gain or loss as a result of the merger.
Accounting Treatment
We expect to account for the merger as a pooling of interests under
generally accepted accounting principles, and it is a condition to our
obligation to complete the merger that each of us receive a letter, dated
the effective time, from our independent public accountants stating that
they are not aware of any facts that would prevent us from treating the
merger as a pooling of interests. Under the pooling-of-interests method of
accounting, the historical basis of our assets and liabilities will be
combined and carried forward at their previously recorded amounts, and our
revenue and expenses will be combined at their historically recorded
amounts. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
In addition, balance sheets, income statements and other financial
statements of Union issued after completion of the merger would be restated
retroactively to reflect the combined financial position and results of
operations of Union and Citizens as if the merger had taken place as of the
beginning of the periods covered by such financial statements.
The unaudited pro forma condensed combined financial information contained
in this joint proxy statement/prospectus has been prepared using the
pooling-of-interests accounting method. See "SELECTED FINANCIAL DATA ---
Pro Forma Combined" and "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS." We have agreed that we will not take, cause or to the best of
our abilities, permit to be taken or caused, any action that would
adversely affect the qualification of the merger for pooling of interests
accounting treatment. In order to help ensure that the merger qualifies for
pooling of interests accounting treatment, each
<PAGE> 67
person who could be considered an affiliate of Citizens or Union has
executed an agreement restricting sales or other dispositions of Citizens
common stock and Union common stock during a specified period. See "THE
MERGER--Resale of Union Common Stock."
Dissenters' Rights of Appraisal
Citizens. As provided in Vermont banking laws, Section 1006 of Title 8 of
the Vermont Statutes Annotated, a Citizens shareholder has the right to
dissent from the merger and to receive payment in cash for the value of his
Citizens stock, if such shareholder follows the procedures required by law.
If dissenters' rights are properly exercised, the value of the dissenter's
Citizens common stock will be fixed by agreement between Citizens and the
shareholder, subject to approval of the Commissioner of the Vermont Banking
Department. If Citizens and the shareholder cannot agree on a value, or
the Commissioner does not approve the agreed upon value, the dissenting
shareholder has the right to seek valuation of his stock by petitioning the
Caledonia County Superior Court. The statute provides that for purposes of
valuation, the last examination made by the Commissioner will be prima
facie evidence of the value of the bank's assets, liabilities and stock,
but this presumption does not prevent another valuation from being agreed
upon or ordered by the Court.
Upon payment to a dissenter for his stock, the merging bank must either
cancel the stock or sell it to a third party at an amount not less than the
amount paid to the dissenting holder. The Citizens Board intends to cancel
any shares purchased from dissenters.
A shareholder who wishes to assert dissenter's rights must:
* not vote such shares in favor of the merger, and
* deliver to Citizens within five calendar days after the
Citizens shareholder vote approving the merger, a written
demand for payment of the shareholder's stock if the merger is
completed. In order to insure timely receipt by Citizens, the
dissenter should deliver by hand or courier the written demand
to the following address:
Attn: Jerry S. Rowe, President
Citizens Savings Bank & Trust Company
364 Railroad Street, PO Box 219
St. Johnsbury, Vermont 05819-0219
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the stock the shareholder owns or over which
the shareholder has power to direct the vote. However, if a record
shareholder is a nominee for several beneficial shareholders, some of whom
wish to dissent and some of whom do not, then the recordholder may dissent
with respect to all shares beneficially owned by one person, by notifying
Citizens in writing of the name and address of each such person on whose
behalf the record shareholder asserts dissenters' rights. A
<PAGE> 68
beneficial shareholder may assert dissenter's rights directly by submitting
to Citizens the record shareholder's written consent and by dissenting with
respect to all the shares of which such shareholder is the beneficial owner
or over which such shareholder has the power to direct the vote.
Citizens and Union will insist on strict compliance with the statutory
requirements for exercising dissenters' rights. The above discussion is
merely a summary of the applicable requirements and is qualified by
reference to 8 V.S.A. [SECTION] 1006, the full text of which is included
as Appendix E to this joint proxy statement/prospectus.
The level of dissent by Citizens shareholders could cause us to abandon the
proposed merger, even if we receive all required shareholder and regulatory
approvals. That is because a high level of dissent (approaching 10% of the
shares issuable in the merger) could jeopardize our ability to use pooling
of interests accounting for the merger and would permit either party to
terminate the transaction. See "THE MERGER --- Amendment or Termination."
Union. Because Union is not a direct party to the merger of Interim Bank
into Citizens, but is merely furnishing the merger payment (shares of Union
common stock), shareholders of Union are not entitled to dissenter's rights
of appraisal under the Vermont Business Corporation law in connection with
the merger. Also, Vermont law does not provide dissenters' rights of
appraisal in connection with the vote to amend Union's Amended and Restated
Articles of Association because the additional shares that would be
authorized would be additional shares of common stock, which would not have
any special or preferential rights over the common shares already
authorized, issued and outstanding.
Resale of Union Common Stock
The Union common stock to be issued in the merger will be freely
transferable under the Securities Act, except for shares issued to any
Citizens shareholder who may be deemed to be an affiliate of Union for
purposes of federal Securities Act Rule 144 ("Rule 144") or who may be
deemed an affiliate of Citizens for purposes of federal Securities Act Rule
145 ("Rule 145"). Affiliates will include persons (generally executive
officers, directors and 10% or more shareholders) who control, are
controlled by or are under common control with (1) Union or Citizens at the
time of the Citizens special meeting or (2) Union at or after the effective
time.
Rules 144 and 145 will restrict the sale of Union common stock received in
the merger by affiliates and certain of their family members and related
interests. Generally speaking, during the year following the effective
time, those persons who are affiliates of Citizens at the time of the
Citizens special meeting (provided they are not affiliates of Union at or
following the effective time) may publicly resell any Union common stock
received by them in the merger, subject to certain limitations as to, among
other things, public availability of information about Union, the amount of
Union common stock sold by them in any three-month period and the manner of
sale. After such one-year period, those affiliates may resell their Union
common stock
<PAGE> 69
received in the merger without such restrictions so long as there is
adequate current public information about Union as required by Rule 144 and
they are not then affiliates of Union.
Persons who are affiliates of Union after the effective time may publicly
resell the Union common stock received by them in the merger (as well as
shares of Union acquired in any other manner), subject to similar
limitations and to certain filing requirements specified in Rule 144.
The ability of affiliates to resell shares of Union common stock under Rule
144 or 145 will be subject to Union's having satisfied applicable reporting
requirements under the Securities Exchange Act for specified periods before
the sale. In the past, Union has not been subject to the Exchange Act's
reporting and informational requirements, but will become subject to those
requirements in connection with the merger. Union will therefore be
required to file with the SEC the reports and information contemplated in
Rules 144 and 145.
In addition to sales under Rules 144 or 145, affiliates also would be
permitted to resell Union common stock pursuant to any other available
exemption or pursuant to an effective registration statement under the
Securities Act. This joint proxy statement/prospectus and the Registration
Statement of which it is a part do not cover any resales of Union common
stock by affiliates. However, as described above under the caption "THE
MERGER --- Interests of Certain Persons in the Merger," Union has
contractually undertaken to register up to 150,000 shares of its common
stock for resale by the family of Citizens' Chairman of the Board,
Genevieve Hovey, for estate settlement purposes.
SEC guidelines for the pooling of interests accounting will also
effectively limit sales of shares of Union's common stock by affiliates of
either Union or Citizens during the period beginning 30 days before the
merger and ending when financial results covering at least 30 days of post-
merger operations of the combined company have been published.
Affiliates of Union and Citizens have signed a letter agreement intended to
preserve our ability to treat the merger as a pooling of interests and, in
the case of affiliates of Citizens, to ensure compliance with Rule 145 and
the Securities Act.
No Solicitation
We are committed to completing the merger. The affiliation agreement
prohibits us from soliciting or encouraging any competing offers from, or
transactions with, any third parties, including any merger, consolidation,
share exchange or tender offer.
Expenses
The affiliation agreement provides that we will each bear and pay our own
costs and expenses incurred in connection with the proposed merger, whether
or not it is completed, including fees and expenses of our own financial
consultants, accountants and counsel, except that we will share equally in
expenses of printing and mailing this joint proxy statement/prospectus.
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information
and explanatory notes are presented to show the impact of the merger under
the "pooling of interests" method of accounting, on the historical
financial policies and results of operations of Union and Citizens. The
unaudited pro forma condensed combined financial information combines the
historical financial information of Union and Citizens as of March 31, 1999
and for the three months ended March 31, 1999 and for the twelve-month
periods ended December 31, 1998, 1997 and 1996, respectively. The
unaudited pro forma condensed combined statements of income give effect to
the merger as if the merger had been completed at the beginning of the
earliest period presented.
The pro forma condensed combined balance sheet assumes the merger was
consummated on March 31, 1999. The merger, which is expected to be
completed during the fourth quarter of 1999, provides for the exchange of
6.5217 shares of Union common stock for each outstanding share of Citizens
common stock. The pro forma condensed combined financial information as of
March 31, 1999 and for the three months ended March 31, 1999 and each of
the three years ended December 31, 1998, 1997 and 1996, is based on and
derived from, and should be read in conjunction with Union's and Citizens'
historical financial statements and the related notes, which are contained
in this joint proxy statement/prospectus, beginning on page F-1.
Pro forma combined stockholders' equity at March 31, 1999 includes the
effect of an estimated remaining non-recurring merger charge of $272,000
not yet incurred as of such date, out of the total estimated non-recurring
charge of $400,000 for the merger. See Note (d) to the unaudited pro forma
financial information on page ___ for further information. The pro forma
condensed combined financial statements do not give effect to any
anticipated cost savings or potential revenue enhancements in connection
with the merger. See "THE MERGER --- Management and Operations After the
Merger."
The pro forma data is presented for comparative purposes only and is not
necessarily indicative of the future financial position or results of
operations of the combined company or of the combined financial position or
the results of operations that would have been realized had the merger been
completed during the periods or as of the dates for which the pro forma
information is presented.
<PAGE> 71
Union Bankshares, Inc.
Pro Forma Combined Balance Sheet
March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Union/Citizens
Union Citizens Pro forma (Pro forma
Assets (Historical) (Historical) Adjustments(a) Combined)
------------ ------------ -------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and due from banks $ 8,333 $ 2,666 $ - $ 10,999
Federal funds sold and overnight deposits 6,470 1,660 - 8,130
Interest bearing deposits 1,951 52 - 2,003
Securities available-for-sale 38,238 20,959 - 59,197
Federal Home Loan Bank stock 642 280 - 922
Loans held for sale 7,950 -0- - 7,950
Loans 122,792 70,582 - 193,374
Unearned income (273) (97) - (370)
Allowance for loan losses (1,841) (1,044) - (2,885)
-------- ------- ------ --------
Loans, net 120,678 69,441 - 190,119
-------- ------- ------ --------
Accrued interest receivable 1,352 792 - 2,144
Premises and equipment, net 2,533 1,906 - 4,439
Other real estate owned 499 20 - 519
Other assets 2,844 321 - 3,165
-------- ------- ------ --------
Total assets $191,490 $98,097 $ - $289,587
======== ======= ====== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits $162,502 $85,735 $ - $248,237
Borrowed funds 4,503 1,490 - 5,993
Accrued interest and other liabilities 3,110 298 272 (d) 3,680
-------- ------- ------ --------
Total liabilities 170,115 87,523 (272) 257,910
-------- ------- ------ --------
Shareholders' Equity:
Common stock 4,544 152 1,831 (b) 6,527(b)
Paid-in-capital & Surplus 878 1,193 (1,831)(b) 240(b)
Retained earnings 17,338 9,217 (272)(d)(e) 26,283
Treasury stock (1,592) -0- - (1,592)
Accumulated other comprehensive income 207 12 - 219
-------- ------- ------ --------
Total Shareholders' Equity 21,375 10,574 (272) 31,677
-------- ------- ------ --------
Total liabilities and shareholders'
equity $191,490 $98,097 $ - $289,587
======== ======= ====== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE> 72
Union Bankshares, Inc.
Pro Forma Combined Income Statement
For the Quarter Ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Union/Citizens
Union Citizens Pro forma (Pro forma
(Historical) (Historical) Adjustments Combined)
------------ ------------ ----------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,963 $ 1,556 $ - $ 4,519
Interest and dividends on investment
securities 574 328 - 902
Interest on federal funds sold 42 33 - 75
Interest on interest bearing deposits 28 -0- - 28
--------- ------- ------ ---------
3,607 1,917 - 5,524
--------- ------- ------ ---------
Interest expense:
Interest on deposits 1,329 829 - 2,158
Interest on federal funds purchased -0- -0- - -0-
Interest on borrowed funds 67 23 - 90
--------- ------- ------ ---------
1,396 852 - 2,248
--------- ------- ------ ---------
Net interest income 2,211 1,065 - 3,276
Provision for loan losses 37 63 - 100
--------- ------- ------ ---------
Net interest income after provision
for loan losses 2,174 1,002 - 3,176
--------- ------- ------ ---------
Noninterest income:
Trust department income 6 30 - 36
Service fees 398 106 - 504
Security gains (losses) -0- 1 - 1
Gain on sale of loans 16 -0- - 16
Other 35 33 - 68
--------- ------- ------ ---------
455 170 - 625
--------- ------- ------ ---------
Noninterest expense:
Salaries and wages 703 331 - 1,034
Pension and other employee benefits 163 102 - 265
Occupancy expense, net 95 49 - 144
Equipment expense 178 71 - 249
Other operating expense 455 280 - 735
--------- ------- ------ ---------
1,594 833 - 2,427
--------- ------- ------ ---------
Income before income tax expense 1,035 339 - 1,374
Income tax expense 281 120 - 401
--------- ------- ------ ---------
Net income $ 754 $ 219 $ - $ 973
========= ======= ====== =========
Earnings per common share (basic) $ 0.37(c) $ 1.44(c) $ - $ 0.32(c)
========= ======= ====== =========
Weighted average number of common
shares outstanding 2,034,229 152,000 - 3,025,527
========= ======= ====== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE> 73
Union Bankshares, Inc.
Pro Forma Combined Income Statement
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Union/Citizens
Union Citizens Pro forma (Pro forma
(Historical) (Historical) Adjustments Combined)
------------ ------------ ----------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,326 $ 6,510 $ - $ 18,836
Interest and dividends on investment
securities 2,058 1,190 - 3,248
Interest on federal funds sold 268 193 - 461
Interest on interest bearing deposits 81 -0- - 81
--------- ------- ------ ---------
14,733 7,893 - 22,626
--------- ------- ------ ---------
Interest expense:
Interest on deposits 5,556 3,403 - 8,959
Interest on federal funds purchased 1 1 - 2
Interest on borrowed funds 223 69 - 292
--------- ------- ------ ---------
5,780 3,473 - 9,253
--------- ------- ------ ---------
Net interest income 8,953 4,420 - 13,373
Provision for loan losses 100 300 - 400
--------- ------- ------ ---------
Net interest income after provision
for loan losses 8,853 4,120 - 12,973
--------- ------- ------ ---------
Noninterest income:
Trust department income 7 113 - 120
Service fees 1,560 407 - 1,967
Security gains (losses) 147 3 - 150
Gain on sale of loans 302 -0- - 302
Other 152 220 - 372
--------- ------- ------ ---------
2,168 743 - 2,911
--------- ------- ------ ---------
Noninterest expense:
Salaries and wages 2,725 1,386 - 4,111
Pension and other employee benefits 666 392 - 1,058
Occupancy expense, net 343 159 - 502
Equipment expense 627 287 - 914
Other operating expense 1,703 990 - 2,693
--------- ------- ------ ---------
6,064 3,214 - 9,278
--------- ------- ------ ---------
Income before income tax expense 4,957 1,649 - 6,606
Income tax expense 1,507 548 - 2,055
--------- ------- ------ ---------
Net income $ 3,450 $ 1,101 $ - $ 4,551
========= ======= ====== =========
Earnings per common share (basic) $ 1.70(c) $ 7.25(c) $ - $ 1.51(c)
========= ======= ====== =========
Weighted average number of common
shares outstanding 2,030,925 152,000 - 3,022,223
========= ======= ====== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE> 74
Union Bankshares, Inc.
Pro Forma Combined Income Statement
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Union/Citizens
Union Citizens Pro forma (Pro forma
(Historical) (Historical) Adjustments Combined)
------------ ------------ ----------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,159 $ 6,324 $ - $ 18,483
Interest and dividends on investment
securities 1,761 1,107 - 2,868
Interest on federal funds sold 195 119 - 314
Interest on interest bearing deposits 1 -0- - 1
--------- ------- ------ ---------
14,116 7,550 - 21,666
--------- ------- ------ ---------
Interest expense:
Interest on deposits 5,302 3,350 - 8,652
Interest on federal funds purchased 1 1 - 2
Interest on borrowed funds 128 -0- - 128
--------- ------- ------ ---------
5,431 3,351 - 8,782
--------- ------- ------ ---------
Net interest income 8,685 4,199 - 12,884
Provision for loan losses 125 300 - 425
--------- ------- ------ ---------
Net interest income after provision
for loan losses 8,560 3,899 - 12,459
Noninterest income:
Trust department income 8 86 - 94
Service fees 1,504 357 - 1,861
Security gains (losses) (23) 5 - (18)
Gain on sale of loans 158 -0- - 158
Other 83 234 - 317
--------- ------- ------ ---------
1,730 682 - 2,412
--------- ------- ------ ---------
Noninterest expense:
Salaries and wages 2,563 1,352 - 3,915
Pension and other employee benefits 693 370 - 1,063
Occupancy expense, net 328 178 - 506
Equipment expense 436 269 - 705
Other operating expense 1,474 905 - 2,379
--------- ------- ------ ---------
5,494 3,074 - 8,568
--------- ------- ------ ---------
Income before income tax expense 4,796 1,507 - 6,303
Income tax expense 1,450 498 - 1,948
Net income $ 3,346 $ 1,009 $ - $ 4,355
========= ======= ====== =========
Earnings per common share (basic) $ 1.64(c) $ 6.64(c) $ - $ 1.44(c)
========= ======= ====== =========
Weighted average number of common
shares outstanding 2,034,680 152,000 - 3,025,978
========= ======= ====== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE> 75
Union Bankshares, Inc.
Pro Forma Combined Income Statement
For the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Union/Citizens
Union Citizens Pro forma (Pro forma
(Historical) (Historical) Adjustments Combined)
------------ ------------ ----------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,145 $ 6,030 $ - $ 18,175
Interest and dividends on investment
securities 1,443 1,036 - 2,479
Interest on federal funds sold 284 122 - 406
Interest on interest bearing deposits 1 -0- - 1
--------- ------- ------ ---------
13,873 7,188 - 21,061
--------- ------- ------ ---------
Interest expense:
Interest on deposits 5,357 3,299 - 8,656
Interest on federal funds purchased -0- 1 - 1
Interest on borrowed funds 113 -0- - 113
--------- ------- ------ ---------
5,470 3,300 - 8,770
--------- ------- ------ ---------
Net interest income 8,403 3,888 - 12,291
Provision for loan losses 300 280 - 580
--------- ------- ------ ---------
Net interest income after provision
for loan losses 8,103 3,608 - 11,711
Noninterest income:
Trust department income 9 80 - 89
Service fees 1,432 280 - 1,712
Security gains (losses) 3 1 - 4
Gain on sale of loans 335 -0- - 335
Other 85 330 - 415
--------- ------- ------ ---------
1,864 691 - 2,555
--------- ------- ------ ---------
Noninterest expense:
Salaries and wages 2,616 1,236 - 3,852
Pension and other employee benefits 689 368 - 1,057
Occupancy expense, net 347 172 - 519
Equipment expense 442 283 - 725
Other operating expense 1,434 843 - 2,277
--------- ------- ------ ---------
5,528 2,902 - 8,430
--------- ------- ------ ---------
Income before income tax expense 4,439 1,397 - 5,836
Income tax expense 1,314 479 - 1,793
--------- ------- ------ ---------
Net income $ 3,125 $ 918 $ - $ 4,043
========= ======= ====== =========
Earnings per common share (basic) $ 1.49(c) $ 6.04(c) $ - $ 1.31(c)
========= ======= ====== =========
Weighted average number of common
shares outstanding 2,093,310 152,000 - 3,084,608
========= ======= ====== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE> 76
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
(a) The accompanying unaudited pro forma condensed combined balance sheet
was prepared assuming that the merger had been consummated as of
March 31, 1999. The accompanying unaudited pro forma condensed
combined income statements were prepared assuming that the merger had
been consummated as of the first day of the respective periods
presented. All such statements were prepared giving effect to the
merger under the pooling-of-interests accounting method.
Union and Citizens expect to achieve annual cost savings through
consolidation of operations, elimination of redundant functions and
technology, reduction in corporate overhead and similar measures. No
adjustment has been included in the unaudited pro forma condensed
combined financial statements for any such anticipated costs savings,
nor do the pro forma financial statements reflect any incremental
earnings the combined company may achieve. The managements of Union
and Citizens can give no firm assurance that the anticipated costs
savings or revenue enhancements will in fact be achieved in the
expected amounts or at or within the times anticipated.
(b) The unaudited pro forma condensed combined balance sheet at March 31,
1999 reflects the issuance in the merger of 991,298 shares of Union
common stock in exchange for 152,000 shares of outstanding Citizens
common stock at the conversion ratio (6.5217) and includes
adjustments to common stock and surplus to reflect the higher par
value of Union's common stock ($2.00 par value) compared to the par
value of Citizens common stock ($1.00 par value).
(c) Pro forma basic earnings per share have been calculated based on the
applicable weighted average number of shares of Union common stock
for the respective periods, plus the additional 991,298 shares of
Union common stock assumed to be issued in the merger in exchange for
the outstanding Citizens common stock at the conversion ratio of
6.5217. Because neither Union nor Citizens has any material stock
options, warrants, rights or convertible securities outstanding which
could result in future stock issuances, no presentation of diluted
earnings per share is given.
(d) The unaudited pro forma condensed combined balance sheet at March 31,
1999 reflects anticipated remaining merger and integration costs not
yet reflected in the financial statements through that date, which
are presently estimated at approximately $272,000. Total merger and
integration expenses (including amounts reflected in the financial
statements through March 31, 1999) are expected to be approximately
$400,000, most of which are expected to be nondeductible for tax
purposes. These expenses consist of primarily investment banking,
legal, accounting and proxy statement printing costs, as well as
costs to combine operations, such as employee severance, data
processing and contract termination costs and incidental merger-
related expenses. Anticipated merger and integration cost estimates
are not included in the unaudited pro forma condensed combined
statements of income for any of the periods presented.
(e) Common shareholders equity does not reflect any reduction for payment
of cash in lieu of fractional shares in the merger, or for payment in
cash for shares of dissenting shareholders who elect to exercise
their statutory appraisal rights. The managements of Union and
Citizens expect that any such cash payments will be immaterial in
amount.
<PAGE> 77
INCREASE IN UNION'S AUTHORIZED COMMON STOCK
At the Union special meeting, Union's shareholders will be asked to approve
an amendment to Union's Amended and Restated Articles of Association to
increase the authorized common stock from 2,400,000 to 5,000,000 shares of
$2.00 par value common stock. At a meeting on February 16, 1999, Union's
Board of Directors voted, in conjunction with its vote to approve the
Citizens merger, to recommend the proposed increase to Union's
shareholders. The proposed increase is necessary to complete the merger,
as Union does not have sufficient authorized but unissued shares available
to issue to Citizens' shareholders at the merger conversion ratio.
Therefore, unless Union's shareholders approve the proposed increase in the
common stock, the merger will not be completed, even if the merger is
approved by the Citizens shareholders and all other conditions to the
merger have been satisfied or waived. Conversely, if the proposed increase
in Union's common stock is approved, it will become effective, even if the
merger is terminated or abandoned for any reason.
Union's Board of Directors believes that the proposed increase in the
common stock is advisable and in the best interests of Union and its
shareholders, in order to permit the merger to be completed and to provide
additional shares for such other corporate purposes as the Union Board may
determine from time to time to be necessary or desirable. Those additional
uses for the authorized shares could include, for example, raising
additional capital, making future acquisitions of banks, branches or
banking related businesses or assets, attracting or retaining valuable
employees through stock options and other stock-based compensation
arrangements, and issuing stock in connection with stock dividends, stock
splits and dividend reinvestment and stock purchase plans. Except for the
shares to be issued in the Citizens merger, and shares reserved for
issuance under Union's 1998 Incentive Stock Option plan (or a similar
earlier plan), at this time Union has no commitments, agreements or
undertakings obligating it to issue any shares to anyone.
Union's Board of Directors considered seeking shareholder authorization
only for the number of shares required to complete the Citizens merger, but
determined that the additional authorized shares would provide the company
with desirable corporate and strategic flexibility by ensuring the prompt
availability of shares for issuance should the opportunity or need arise in
the future.
On the record date for the meeting, Union had 2,038,140 shares of common
stock issued and outstanding. It also had 57,200 shares reserved for
issuance upon exercise of stock options that have been or may be granted
pursuant to Union's incentive stock option plan, leaving approximately
304,660 shares (before the proposed increase and including treasury shares)
available for future issuance. If the proposed increase is approved and
the Citizens merger is completed, Union will issue in the merger to the
former Citizens shareholders approximately 991,298 additional shares of
Union common stock in exchange for Citizens common stock, leaving a total
of approximately 1,679,402 shares available for future issuance by Union
from time to time.
<PAGE> 78
Under Vermont law, the Board of Directors generally may issue authorized
but unissued shares of common stock without shareholder approval. Union's
Board of Directors does not currently have any specific plans or intentions
to issue any additional shares of Union common stock, other than to
Citizens shareholders in the merger or under employee stock options
consistent with past practice. The Board does not intend at this time to
seek shareholder approval before any future issuance of additional shares
of common stock, unless shareholder action is required in a specific case
by applicable law, the rules of any exchange or market on which Union's
securities may then be listed, or Union's Amended and Restated Articles of
Association or By-laws then in effect. Corporate opportunities may arise
that require prompt action, and Union believes that the delay and expense
of obtaining shareholder approval of an increase in authorized shares could
be detrimental to the interests of Union and its shareholders.
Although the Union Board has no present intention of doing so, shares of
authorized and unissued common stock could be issued in one or more
transactions that would make takeover of Union more difficult. For
example, additional shares could be issued to dilute the stock ownership of
a person seeking to obtain control of Union or could be privately placed
with purchasers who would support Union's Board in opposing a hostile
takeover attempt. The availability of shares for issuance under these
circumstances could have the effect of deterring an offer for Union at a
substantial premium over the prevailing trading price of Union's common
stock. Union's Amended and Restated Articles of Association and By-laws
currently contain provisions that may have such an effect, including
provisions requiring a 67% vote of shareholders to approve certain mergers,
consolidations and other business combinations. See "COMPARISON OF
SHAREHOLDER RIGHTS."
The additional authorized shares of Union common stock will have all of the
rights and privileges that the presently outstanding shares of Union common
stock possess. All outstanding shares would continue to have one vote per
share on all matters to be voted on by the shareholders, including the
election of directors. Union does not have any other authorized class of
capital stock.
If a quorum is present at the Union special meeting, the proposed increase
in the common stock will be approved if more votes are cast "FOR" the
proposal than "AGAINST."
Union's shareholders do not have dissenters' rights of appraisal in
connection with the proposed amendment.
The full text of the proposed amendment to Union's Articles is as follows:
To amend Section 7 of the Amended and Restated Articles of
Association of Union Bankshares, Inc. to read in full:
<PAGE> 79
7. Capital Stock. The aggregate number of shares the Corporation
shall have the authority to issue shall be five million
(5,000,000) having a par value of two dollars ($2.00) per
share.
Union's Board of Directors recommends that you vote "FOR" the proposal to
amend Union's Amended and Restated Articles of Association to increase the
authorized common stock.
<PAGE> 80
INFORMATION ABOUT UNION
Business and Properties
General. Union Bank was organized and chartered as a state bank in 1891
under the name "Union Savings Bank," and later added the words "and Trust
Company" to its title. In April 1982, Union Bank reorganized into a one-
bank holding company structure, with the formation of Union Bankshares,
Inc. and its acquisition of all of Union Bank's outstanding shares. Union
is a separate legal entity from Union Bank, and is the Bank's corporate
parent. Union Bank is Union's only subsidiary.
Union is headquartered in Morrisville, Vermont, and, through Union Bank,
provides customary commercial banking and limited fiduciary services from
its eight banking offices in Vermont's Lamoille and Caledonia counties.
Union also offers telebanking services and maintains 15 automated teller
machines (ATMs) at its banking offices and other locations in its market
area, which provide customers with account inquiry, transfer, withdrawal
and deposit capabilities on a 24-hour basis. Union's business has
traditionally consisted of attracting savings, time, demand, NOW, and money
market deposit accounts and using those deposited funds, together with
borrowings and other funds, to originate or purchase residential and
commercial real estate mortgages, and commercial, construction and
municipal term loans and line of credit facilities. In addition to loans
and deposits, Union offers a variety of banking services, including
travelers checks, safe deposit boxes, credit card accounts, consumer loans,
merchant card processing, wire transfer and limited fiduciary services.
Union's income is derived principally from interest on loans and earnings
on other investments, and its primary expenses arise from interest paid on
deposits and borrowings and general overhead expenses.
Union Bank's deposits are insured by the Bank Insurance Fund of the FDIC up
to legal limits (generally $100,000 per depositor). As a Vermont-chartered
commercial bank, Union Bank is subject to regulation, examination, and
supervision by the Vermont Banking Commissioner and the FDIC and 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, including the levels
of capital it must maintain, its ability to pay dividends, the nature and
amount of loans that it may originate, the rate of interest that it may
charge on loans, its investment policies, and other activities. See
"REGULATION AND SUPERVISION." Union does not engage in any nonbanking
activities.
At March 31, 1999, Union had total consolidated assets of approximately
$191.5 million, including net loans receivable of $128.6 million, deposits
of $162.5 million and shareholders' equity of $21.4 million. Based on the
most recent information published by the Vermont Banking Commissioner, in
terms of total assets at December 31, 1998, Union Bank ranked as the 10th
largest institution of the 26 commercial banks and savings institutions
then headquartered in Vermont.
<PAGE> 81
Market Area and Competition. Union's primary service area is located in
north central Vermont and includes all of the towns in Lamoille County and
the town of Hardwick in Caledonia County. At June 30, 1998, the date of
the most recent FDIC published deposit data, total deposits of commercial
banks and savings associations in Lamoille County, Union's primary market,
were approximately $231 million and Union held approximately 56.3% (or $130
million) of those deposits. By contrast, based on June 30, 1998 FDIC data,
Union had only a 2.9% market share (or $12.2 million) of the $424.3 million
of commercial bank and savings association deposits in Caledonia County,
Citizens' primary market area.
Union faces substantial competition in its 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 and consumer
finance companies. Union anticipates continued strong competition from
such financial institutions in the foreseeable future. Within Union's
market areas are branches of several commercial banks that are
substantially larger than Union. Union competes for checking, savings and
other deposits by offering depositors competitive rates, personal service
and local area expertise, convenient locations 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" rates, 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 Union's image as a premiere Vermont community bank.
Properties. Union owns five of its eight banking facilities. The other
three facilities are leased as follows:
* Hyde Park - three-year renewable lease expiring September 31,
1999;
* Morrisville Plaza - five-year renewable lease expiring December
31, 2001; and
* Stowe Mountain Road - five-year renewable lease expiring November
30, 2002.
<PAGE> 82
All of Union's banking offices have drive-up facilities connected to the
bank building and six are equipped with ATMs. Union also maintains nine
ATMs at various non-branch locations throughout its service area.
Legal Proceedings. There are no known pending legal proceedings to which
Union is a party, or to which any of its properties is subject, other than
ordinary litigation arising in the normal course of business and which
would not have a material adverse effect on Union.
Lending Activities. Union conducts its lending activities principally in
northern Vermont and focuses on originating single family residential
loans, commercial real estate loans, including loans to resorts and motels,
municipal loans, home equity loans, commercial loans, and a variety of
consumer loans. In addition, Union originates loans for residential and
commercial real estate construction. Most loans originated by Union are
secured by real estate. Loan policies and administration are designed to
provide assurance that loans will only be granted to credit-worthy
borrowers, although some credit losses are expected to occur because of
subjective factors and factors beyond the control of Union. Although Union
has a diversified loan portfolio and economic conditions are stable, most
of its lending activities are concentrated within its primary geographic
market area. As a result, Union and its borrowers may be especially
vulnerable to the consequences of changes in the local economy. In
response, a substantial portion of Union's loans are secured by real estate
and some are also SBA guaranteed.
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 $96.1 million residential mortgage portfolio,
approximately $41.9 million of which is serviced for unaffiliated third
parties. Additionally, Union originates commercial loans under various SBA
programs which provide an agency guarantee for a portion of the loan
amount. Union will typically 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.
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. As of March 31, 1999, Union's loan
portfolio totaled $130.7 million, or 68.3%, of assets, of which $54.2
million, or 41.4% of gross loans, consisted of residential mortgages, and
$46.3 million, or 35.4%, of total loans consisted of commercial real estate
loans. As of such date, Union's loan portfolio also included $6.3 million
of real estate construction loans, $7.4 million of commercial loans, $7.8
million of municipal loans, and $5.7 million of consumer loans
representing, in order, 4.8%, 5.7%, 6.0%, and 4.3% of total loans
outstanding on March 31, 1999.
The following table shows information on the composition of Union's loan
portfolio, including loans held for sale, as of March 31, 1999, and
December 31, 1998 and 1997.
<PAGE> 83
<TABLE>
<CAPTION>
March 31, December 31,
--------- -------------------
Loan Type 1999 1998 1997
- --------- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Real Estate
Residential $ 54,159 $ 53,913 $ 52,685
Commercial 46,324 47,477 44,852
Construction 6,317 6,790 3,316
Other Commercial 7,420 8,822 9,106
Consumer installment 5,650 5,813 5,594
Home equity loans - Open ended 2,891 3,201 3,572
Municipal and other 7,981 7,705 15,334
-------- -------- --------
Total loans 130,742 133,721 134,459
Less: Unearned income (273) (282) (319)
Allowance for loan losses (1,841) (1,805) (1,794)
-------- -------- --------
Loans, net $128,628 $131,634 $132,346
======== ======== ========
</TABLE>
The following table shows the maturity distribution of Union's commercial
real estate, line of credit, and commercial loans at March 31, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------- ---------------------
Percent of Percent of
Commercial Loan Maturities Amount(1) Total Amount(1) Total
- -------------------------- --------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $12,088 20.32% $11,528 19.10%
One to five years 15,989 26.88% 16,466 27.28%
Over five years 31,402 52.80% 32,372 53.62%
------- ------ ------- ------
Total $59,479 100.00% $60,366 100.00%
======= ====== ======= ======
</TABLE>
Union's commercial real estate, line of credit and commercial loans due
after one year at March 31, 1999 and December 31, 1998, consisted of the
following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Commercial Loan Balances Amount(1) Amount(1)
- ------------------------ ---------- ---------
(dollars in thousands)
<S> <C> <C>
Fixed interest rate $10,772 $11,220
Adjustable interest rate 36,619 37,618
------- -------
Total $47,391 $48,838
======= =======
<FN>
- -------------------
<F1> These amounts include approximately $1,338 and -0 - of commercial
construction loans and $4,397 and $4,067 of loans collateralized by
residential real estate, which are included in the "Real Estate -
Residential" classification, at March 31, 1999 and December 31,1998,
respectively
</FN>
</TABLE>
<PAGE> 84
Residential Mortgage Loan Originations and Servicing. As stated above, one
of Union's significant lending activities is the origination and, for
certain loans, the subsequent sale with servicing rights retained, of loans
secured by first mortgages on real estate improved with single-family
dwellings. Union's residential real estate mortgages carry fixed or
adjustable rates and are generally repayable over 15 or 30 years.
Residential loans typically remain outstanding for shorter periods than
their contractual maturities because borrowers prepay the loans in full
upon sale of the mortgaged property or upon refinancing of the original
loan.
Union's adjustable-rate residential mortgage loans generally have interest
rates that adjust annually at a margin over the weekly average yield on U.
S. Treasury securities adjusted to a constant maturity of one year
published by the Federal Reserve. The maximum adjustment above or below
the initial interest on Union's adjustable-rate mortgage loans is generally
1% or 2% annually, and 5% or 6% over the life of the loan.
Union generally does not originate loans with loan-to-value ratios that
exceed 80% at origination. When terms are favorable. Union will originate
single-family mortgage loans with loan-to-value ratios between 80% and 95%.
In most of these cases, Union will, as a matter of policy, require the
borrower to obtain private mortgage insurance that insures that portion of
the loan exceeding the 80% loan-to-value ratio, thereby reducing the risk
to no more than 80% of appraised value.
In determining whether to originate a residential mortgage loan, Union
reviews information concerning the income, financial condition, employment,
and credit history of the applicant in order to assess the applicant's
ability to repay the loan. In addition, Union examines the adequacy of
proposed collateral, as evidenced by an independent third party appraisal.
Borrowers are required to obtain casualty insurance and, if applicable,
flood insurance in amounts at least equal to the outstanding loan balance
or the maximum amount allowed by law. Union also requires that title
insurance be obtained, insuring the priority of its mortgage lien.
All loans are reviewed by Union's credit underwriting staff to ensure that
its guidelines are met or that waivers are obtained in limited situations
where offsetting factors exist. A review of selected loan files is
conducted by the Bank's internal loan review and internal audit function to
determine the adequacy of the legal documentation.
Union has adopted written, non-discriminatory underwriting standards for
use in the underwriting and review of every loan considered for
origination. These underwriting standards are reviewed and approved
annually by Union's Board of Directors. Union's underwriting standards for
residential mortgage loans generally conform to standards established by
the FHLMC.
Commercial Real Estate Lending. Union originates multi-family and
commercial real estate loans and, through this lending activity, seeks to
develop long-term relationships with select businesses, real estate
borrowers, and professionals. Union's commercial real estate portfolio
includes loans secured by apartment buildings, office buildings,
warehouses, retail stores,
<PAGE> 85
restaurants, hotels, and other properties, which are located in Union's
primary market area. Commercial real estate loans generally are originated
in amounts up to 80% of the appraised value of the property securing the
loan. In determining whether to originate multi-family or commercial real
estate loans, Union also considers such factors as the financial condition
of the borrower and the debt service coverage of the property. A
substantial majority of Union's commercial real estate loans carry
adjustable interest rates and are for terms of over five years.
Appraisals on properties securing commercial real estate loans originated
by Union are performed by an independent appraiser at the time the loan is
made. In addition, Union's underwriting procedures generally require
verification of the borrower's credit history, income and financial
statements, banking relationships, references, and income projections for
the property, as well as a personal guarantee.
While Union's commercial real estate lending activities enable it to earn
interest at rates higher than those generally available from one-to-four
family residential lending, such loans are generally larger and involve a
greater degree of risk. Because payments on loans secured by commercial
real estate properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to
adverse conditions in the real estate market or the economy to a greater
extent than residential loans. If the cash flow from a project is reduced
(for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired. In addition, adjustable-rate
commercial real estate loans are subject to increased risk of delinquency
or default as interest rates increase. Union attempts to minimize these
risks through prudent underwriting standards and SBA guarantees.
Real Estate Construction Lending. Union makes real estate construction
loans to individuals for the construction of single family residences, as
well as to builders and real estate developers for the construction of one-
to-four family residences, commercial and multi-family real estate. Such
residential construction loans are generally underwritten using the same
guidelines as for permanent residential loans. Union's construction loans
typically have terms of up to eight months, at which time they convert to
permanent term financing. During the construction phase, the borrower
ordinarily pays interest only. Generally, the maximum loan-to-value ratio
of owner-occupied, single-family construction loans is 80%.
Commercial Business Lending. In its underwriting of commercial business
loans, Union evaluates the value of the collateral securing the loan and
assesses the borrower's creditworthiness and ability to repay. While
commercial business loans generally are made for shorter terms and at
higher yields than loans secured by real estate, such loans generally
involve a higher level of risk because the risk of borrower default is
greater and the collateral may be more difficult to liquidate and more
likely to decline in value.
Loan origination, commitment fees and certain direct loan origination costs
are deferred by Union for financial reporting purposes and are amortized as
an adjustment of the related loan's yield using methods that approximate
the interest method.
<PAGE> 86
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.
Non-Performing Loans. Loan interest income is accrued daily on outstanding
balances. 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 borrower's 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.
Union had loans on nonaccrual status totaling $278,000 at March 31, 1999,
and $117,000 and $796,000 at December 31, 1998 and 1997, respectively.
Interest income not recognized on such loans amounted to approximately
$59,000 for the three months ended March 31, 1999, and $43,000 and $84,000
for the years ended December 31, 1998 and 1997, respectively.
At March 31, 1999, Union had internally classified certain loans totaling
$1.28 million. In management's view, such loans represent a higher degree
of risk and could become nonperforming loans in the future. While still on
a performing status, in accordance with Union's credit policy, loans are
internally classified when a review indicates any of the following
conditions making the likelihood of collection highly 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.
Other Real Estate Owned. Real estate acquired by foreclosure consists of
properties acquired either through foreclosure proceedings or acceptance of
a deed in lieu of foreclosure, and for which Union has taken physical
possession. Union classifies loans as foreclosed if Union receives
physical possession of the debtor's assets, regardless of whether or not
foreclosure proceedings take place.
Foreclosures and real estate formally acquired in settlement of loans are
initially recorded at the lower of amortized cost or fair value, less
estimated costs to sell. Gains and losses upon sale are reflected in
operations as realized. Holding and maintenance costs related to
properties are
<PAGE> 87
recorded as expenses in the period incurred. Union expenses, when
recognized, any deficiency resulting from valuation adjustments to real
estate owned after it is acquired in foreclosure or otherwise.
At March 31, 1999, Union had acquired by foreclosure or through
repossession real estate worth $499,000, consisting of commercial property
and residential homes.
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. 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 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. 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 three months ended March 31, 1999, and for the years ended December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Years Ended December 31,
------------------ ------------------------
March 31, 1999 1998 1997
-------------- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Balance at the beginning of period $1,805 $1,794 $1,850
Charge-offs:
Real Estate -0- 42 -0-
Commercial -0- 63 121
Consumer and other 14 55 115
------ ------ ------
Total charge-offs 14 160 236
------ ------ ------
Recoveries:
Real Estate 1 -0- 4
Commercial 4 33 15
Consumer and other 8 38 36
------ ------ ------
Total recoveries 13 71 55
------ ------ ------
Net charge-offs (1) (89) (181)
Provision for loan losses 37 100 125
------ ------ ------
Balance at end of period $1,841 $1,805 $1,794
====== ====== ------
</TABLE>
<PAGE> 88
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.
<TABLE>
<CAPTION>
Three Months Ended Years Ended December 31,
------------------ -----------------------------------
March 31, 1999 1998 1997
-------------- ---- ----
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential $ 137 41.5% $ 121 40.3% $ 157 39.2%
Commercial 646 35.4% 669 35.5% 767 33.3%
Construction 13 4.8% 14 5.1% 7 2.5%
Other Loans
Commercial 72 5.7% 88 6.6% 91 6.8%
Consumer installment 128 4.3% 131 4.3% 126 4.2%
Home equity loans 6 2.2% 6 2.4% 7 2.6%
Municipal, Other and Unallocated 839 6.1% 776 5.8% 639 11.4%
------ ----- ------ ------ ------ -----
Total $1,841 100.0% $1,805 100.0% $1,794 100.0%
====== ===== ====== ===== ====== =====
Ratio of Net Charge Offs to Average Loans 0.00% 0.06% 0.14%
Ratio of Allowance for Loan Losses to Loans 1.41% 1.35% 1.34%
</TABLE>
Investment Activities. Union's investment policy is structured to meet the
following goals:
* complement Union's asset and liability management policy;
* provide the liquidity necessary to meet anticipated deposit
outflows and normal working capital needs;
* expand the loan portfolio within guidelines approved by Union's
Board of Directors; and
* mitigate the adverse effects of changes in interest rates and
shifts in the mix of Union's liabilities.
As of March 31, 1999, Union's investment securities portfolio amounted to
$38.2 million, or 20.0% of its total assets.
Debt securities that Union intends to hold to maturity are classified as
held to maturity and carried on Union's balance sheet at cost, adjusted for
amortization of premium and accretion of discounts using methods
approximating the interest method. Debt and equity 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 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
<PAGE> 89
on available-for-sale securities are reported as a net amount in other
comprehensive income, net of applicable income taxes. The specific
identification method is used to determine realized gains and losses on
sales of securities. If a decline in the fair value below the adjusted
cost basis on an investment or mortgage-backed security is judged to be
other than temporary, the cost basis of the investment is written down to
fair value as the new cost basis and the amount of the write down is
included as a charge against securities gains, net.
At March 31, 1999, the reported value of investment securities available-
for-sale was $38.2 million. As of such date, Union had no securities
classified as held-to-maturity or trading securities. The reported value
of securities available-for-sale at March 31, 1999, reflects a positive
valuation adjustment of $314,000. The offset of this adjustment, net of
income tax effect, was a $207,000 increase in Union's other comprehensive
income component of shareholders' equity and an increase in deferred tax
liabilities of $107,000.
The following table shows the reported value of Union's investment
securities, all of which were categorized as available-for-sale, as of
March 31, 1999 and December 31, 1998 and 1997.
<TABLE>
<CAPTION>
March 31, December 31,
--------- -----------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Securities available-for-sale:
U.S. Government and agency and
corporation securities $18,753 $18,845 $14,995
Mortgage-backed securities 5,003 5,182 5,400
State and political subdivisions 3,572 3,655 800
Corporate debt securities 10,118 9,791 5,316
Marketable equity securities 792 938 1,501
------- ------- -------
Total investment securities $38,238 $38,411 $28,012
======= ======= =======
</TABLE>
The following tables show, as of March 31, 1999 and December 31, 1998, the
amortized cost of Union's debt obligations maturing within the stated
period and their related weighted average interest rates.
<PAGE> 90
<TABLE>
<CAPTION>
At March 31, 1999
Maturities
--------------------------------------------- Weighted
Within One to Five to Over Total Average
One Year Five Years Ten Years Ten Years Cost Yield
-------- ---------- --------- --------- ----- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government and agency
and corporation securities $8,831 $ 7,746 $2,112 $ -0- $18,689 5.68%
Mortgage-backed securities -0- 3,036 329 1,594 4,959 6.53%
State and political subdivisions 84 237 1,645 1,642 3,608 6.64%
Corporate debt securities -0- 5,464 2,499 2,147 10,110 6.31%
Marketable equity securities -0- -0- -0- 558 558 10.92%
------ ------- ------ ------ -------
Total investment securities $8,915 $16,483 $6,585 $5,941 $37,924
====== ======= ====== ====== =======
Fair Value $8,971 $16,745 $6,399 $6,123 $38,238
====== ======= ====== ====== =======
Weighted Average Yield 6.05% 5.82% 6.32% 6.96% 6.14%
====== ======= ====== ====== =======
<CAPTION>
At December 31, 1998
Maturities
--------------------------------------------- Weighted
Within One to Five to Over Total Average
One Year Five Years Ten Years Ten Years Cost Yield
-------- ---------- --------- --------- ----- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government and agency
and corporation securities $8,337 $ 7,256 $3,117 $ -0- $18,710 5.82%
Mortgage-backed securities -0- 3,141 331 1,658 5,130 6.50%
State and political subdivisions 79 251 1,659 1,666 3,655 6.68%
Corporate debt securities 501 5,470 2,013 1,691 9,675 6.29%
Marketable equity securities -0- -0- -0- 558 558 8.98%
------ ------- ------ ------ -------
Total investment securities $8,917 $16,118 $7,120 $5,573 $37,728 6.16%
====== ======= ====== ====== =======
Fair Value $8,990 $16,355 $7,172 $5,894 $38,411
====== ======= ====== ====== =======
Weighted Average Yield 6.09% 5.93% 6.36% 6.66% 6.16%
====== ======= ====== ====== =======
</TABLE>
Federal Home Loan Bank Stock. Union Bank is a voluntary member of the
Federal Home Loan Bank and is thereby entitled to various benefits,
including certain borrowing capabilities on advantageous terms that assist
Union in matching the maturities of its assets and liabilities and in
supporting its loan growth. As a member of the FHLB, Union is required to
invest in the FHLB's $100 par value stock. The stock is nonmarketable, and
when redeemed, Union would receive from the FHLB an amount equal to the par
value of the stock.
Sources of Funds. Deposits generated from within Union's local market area
are the primary source of funds for lending and investment operations.
Union offers a full variety of deposit accounts ranging from passbook
accounts to certificates of deposit with maturities of up to five years.
Union also offers transaction accounts, which include commercial checking
accounts, negotiable order of withdrawal ("NOW") accounts, and money
market deposit accounts. The
<PAGE> 91
rates paid on deposits are established periodically by management based on
Union's need for funds and on the rates being offered by Union's
competitors. Union's goal in pricing its deposit products is to remain
competitive without offering the highest rates in the market area. Union
does not rely on brokered deposits as a source of funding.
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 March 31, 1999 and December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
Three Months Ended -------------------------------------------------------------
March 31, 1999 1998 1997
----------------------------- ----------------------------- -----------------------------
(dollars in thousands)
Percent Percent Percent
Average of Total Average Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-certificate deposits:
Demand deposits $ 23,299 14.61% $ 21,289 13.91% $ 19,274 13.12%
Now accounts 22,225 13.93% 2.12% 20,680 13.51% 2.38% 18,219 12.39% 2.06%
Money Markets 35,770 22.43% 4.31% 29,084 19.01% 4.44% 25,719 17.50% 4.45%
Savings and other 24,575 15.41% 2.50% 24,428 15.96% 2.72% 24,865 16.91% 2.75%
-------- ------ -------- ------ -------- ------
Total non-certificate deposits 105,869 66.38% 95,481 62.39% 88,077 59.92%
-------- ------ -------- ------ -------- ------
Certificates of deposit:
Less than $100,000 43,966 27.57% 5.10% 43,958 28.73% 5.34% 44,304 30.13% 5.42%
$100,000 and over 9,662 6.05% 5.18% 13,590 8.88% 5.70% 14,621 9.95% 5.55%
-------- ------ -------- ------ -------- ------
Total certificates of deposit 53,628 33.62% 57,548 37.61% 58,925 40.08%
-------- ------ -------- ------ -------- ------
Total deposits $159,497 100.00% 3.37% $153,029 100.00% 3.64% $147,002 100.00% 3.68%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The following table sets forth information regarding the amounts of Union's
certificates of deposit in amounts of $100,000 or more at March 31,1999,
and December 31, 1998 that mature during the periods indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Within 3 months $ 8,693 $1,169
3 to 6 months 1,030 5,715
6 to 12 months 1,476 1,435
Over 12 months 693 1,307
------- ------
$11,892 $9,626
======= ======
</TABLE>
<PAGE> 92
Borrowings. Union may obtain advances from the FHLB upon pledging as
collateral the common stock of the FHLB that it owns and certain of its
investment securities and residential mortgage loans, provided certain
standards related to creditworthiness are met. FHLB borrowings have been
utilized for loan portfolio growth, asset/liability management, liquidity
and/or operational needs. At March 31, 1999, Union's available lines of
credit totaled $17.9 million.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis provides information regarding
Union's financial position as of March 31, 1999 and 1998, and as of
December 31, 1998 and 1997, and its results of operations for the three
months ended March 31, 1999 and 1998, and for the years ended December 31,
1998, 1997, and 1996. This discussion should be read in conjunction with
the information in this document under "SELECTED FINANCIAL DATA --- Union,"
Union's consolidated financial statements and related notes beginning on
page F-2, and with other financial data appearing elsewhere in this joint
proxy statement/prospectus. In the opinion of Union's management, the
unaudited interim data reflect all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present Union's consolidated
financial position and results of operations to be expected for a full
fiscal year. Management is not aware of the occurrence of any events after
March 31, 1999, that would materially affect the information presented
below, except that in connection with its routine asset/liability and
liquidity management activities in May, 1999, Union repaid approximately
$2.5 million in FHLB borrowings and paid a prepayment fee of $2,120.
Nevertheless, readers are cautioned to refer to "RISK FACTORS" for
information relating to factors that could affect future operating results
and to the qualifications under "A Warning About Forward-Looking
Statements" that apply to any forward-looking statements in the following
discussion.
Results of Operations. Net Interest Income. The largest component of
Union's operating income is net interest income, which is the difference
between the interest and dividend income received from interest-earning
assets and the interest expense paid on its interest-bearing liabilities.
For purposes of this discussion, the average yield rate on interest income
earned on tax-exempt loans and securities is adjusted to a fully-taxable
equivalent basis to facilitate comparison with interest earned that is
subject to taxation under applicable laws. Net interest income is
determined by an institution's net interest spread (the difference between
the yield on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative average balances of interest-
earning assets and interest-bearing liabilities, and the degree of variance
in the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Changes in nonperforming assets
together with amounts of interest lost and recovered on those assets also
impact comparisons of net interest income.
Yields Earned and Rates Paid. The following tables show, for the periods
indicated, the total amount of income recorded from interest-earning
assets, and the related average yields, the
<PAGE> 93
interest expense associated with interest-bearing liabilities, expressed in
dollars and average rates, and the relative net interest spread and net
interest margin. All yield and rate information is calculated on an
annualized basis. Yield and rate information for a period is average
information for the period, and is calculated by dividing the 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 tables have been
calculated on a pre-tax basis.
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 3,766 $ 42 4.51% $ 4,807 $ 64 5.33%
Interest bearing deposits 2,015 28 5.65% 734 8 4.36%
Investments (1) (2) 38,958 574 6.20% 29,271 457 6.36%
Loans, net (1), (3) 130,227 2,963 9.24% 132,011 3,069 9.56%
-------- ------ -------- ------
Total interest-earning
assets (1) 174,966 3,607 8.42% 166,823 3,598 8.85%
Cash and due from banks 6,266 5,442
Premises and equipment 2,599 2,520
Other assets 4,393 4,482
-------- --------
Total assets $188,224 $179,267
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 22,225 118 2.12% $ 18,597 106 2.28%
Savings and money market
accounts 60,345 531 3.52% 52,182 472 3.62%
Certificates of deposit 53,628 680 5.07% 62,222 839 5.39%
Borrowed funds 4,516 67 6.22% 2,299 35 6.09%
-------- ------ -------- ------
Total interest-bearing
liabilities 140,714 1,396 3.97% 135,300 1,452 4.29%
Non-interest bearing deposits 23,299 19,868
Other liabilities 2,993 4,651
-------- --------
Total liabilities 167,006 159,819
Shareholders' equity 21,218 19,448
-------- --------
Total liabilities and
shareholders' equity $188,224 $179,267
======== ========
Net interest income (1) $2,211 $2,146
====== ======
Net interest spread (1) 4.45% 4.56%
==== ====
Net interest margin (1) 5.21% 5.37%
==== ====
<FN>
- -------------------
<F1> Average yield reported on a tax-equivalent basis.
<F2> The average balance of investments is calculated using the amortized
cost basis.
<F3> Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 5,130 $ 268 5.22% $ 3,914 $ 195 4.98% $ 5,428 $ 284 5.23%
Interest bearing
deposits 1,459 81 5.55% 202 1 0.49% 24 1 4.17%
Investments (1) (2) 33,171 2,058 6.31% 28,368 1,761 6.30% 24,151 1,443 6.09%
Loans, net (1), (3) 130,607 12,326 9.76% 128,414 12,159 9.68% 123,955 12,145 10.02%
-------- ------- -------- ------- -------- -------
Total interest-
Earning assets (1) 170,367 14,733 8.91% 160,898 14,116 8.96% 153,558 13,873 9.23%
Cash and due from banks 5,743 5,452 5,406
Premises and equipment 2,615 2,395 2,387
Other assets 4,036 3,864 3,660
-------- -------- --------
Total assets $182,761 $172,609 $165,011
======== ======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 20,680 $ 493 2.38% $ 18,219 $ 376 2.06% $ 17,545 $ 405 2.31%
Savings and money
market accounts 53,511 1,957 3.66% 50,584 1,790 3.54% 46,001 1,590 3.46%
Certificates of deposit 57,548 3,106 5.40% 58,925 3,136 5.32% 60,153 3,362 5.59%
Borrowed funds 3,725 224 6.01% 2,169 129 5.95% 1,836 113 6.16%
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities 135,464 5,780 4.27% 129,897 5,431 4.18% 125,535 5,470 4.36%
Non-interest bearing
deposits 21,290 19,274 17,643
Other liabilities 5,921 5,179 4,598
-------- -------- --------
Total liabilities 162,675 154,350 147,776
Shareholders' equity 20,086 18,259 17,235
-------- -------- --------
Total liabilities
and shareholders'
equity $182,761 $172,609 $165,011
======== ======== ========
Net interest income (1) $ 8,953 $ 8,685 $ 8,403
======= ======= =======
Net interest spread (1) 4.64% 4.78% 4.87%
==== ==== =====
Net interest margin (1) 5.48% 5.58% 5.67%
==== ==== =====
<FN>
- -------------------
<F1> Average yield reported on a tax-equivalent basis.
<F2> The average balance of investments is calculated using the amortized
cost basis.
<F3> Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
<PAGE> 95
Union's net interest income increased by $65,000, or 3.0%, to $2.21 million
for the three months ended March 31, 1999, from $2.15 million for the three
months ended March 31, 1998. This increase was primarily due to the lower
cost of interest-bearing liabilities as a result of lower interest rates
paid on deposits and an increase in investment assets. The net interest
spread decreased by 11 basis points to 4.45% for the three months ended
March 31, 1999, from 4.56% for the three months ended March 31, 1998. The
net interest margin for the 1999 period decreased by 16 basis points to
5.21% from 5.37% for the 1998 period.
Union's net interest income increased by $268,000, or 3.1% to $8.95 million
for the year ended December 31, 1998, from $8.68 million for the year ended
December 31, 1997. The net interest spread decreased by 14 basis points to
4.64% for the year ended December 31, 1998, from 4.78% for the year ended
December 31, 1997, although this decline was offset by an increase in the
volume of earning assets. The net interest margin for 1998 decreased by 10
basis points to 5.48% from 5.58% for 1997, primarily due to the increase in
the cost of interest-bearing liabilities, decrease in the loan to deposit
ratio, and the reduction in the prime rate over the last four months of
1998.
Net interest income increased by $282,000, or 3.4%, to $8.68 million for
the year ended December 31, 1997, from $8.40 million for the year ended
December 31, 1996, primarily due to an increase in Union's average earning
assets of $7.3 million, or 4.8%, to $160.9 million for the year ended
December 31, 1997, from $153.6 million for the year ended December 31,
1996. The net interest spread decreased by 9 basis points to 4.78% for the
year ended December 31, 1997, from 4.87% for the year ended December 31,
1996, primarily due to the decrease in interest rates on loans in 1997
which caused the yield on earning assets to decline greater in relation to
rates paid on Union's funding sources.
Rate/Volume Analysis. The following tables describe 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 prior 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.
<PAGE> 96
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Compared
to Three Months Ended March 31, 1998
------------------------------------------
Increase/(Decrease) Due to Change In
Volume Rate Net
------ ---- ---
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (14) $ (8) $ (22)
Interest bearing deposits 14 6 20
Investments 142 (24) 118
Loans, net (30) (77) (107)
----- ----- -----
Total interest-earning assets 112 (103) 9
----- ----- -----
Interest-bearing liabilities:
NOW accounts $ 21 $ (9) $ 12
Savings and money market accounts 74 (15) 59
Certificates of deposit (116) (43) (159)
Borrowed funds 31 1 32
----- ----- -----
Total interest-bearing liabilities 10 (66) (56)
----- ----- -----
Net change in net interest income $ 102 $ (37) $ 65
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Compared Year Ended December 31, 1997 Compared
to Year Ended December 31, 1997 to Year Ended December 31, 1996
------------------------------------- -------------------------------------
Increase/(Decrease) Due to Change In Increase/(Decrease) Due to Change In
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 61 $ 12 $ 73 $ (79) $ (10) $ (89)
Interest bearing deposits 6 74 80 7 (7) 0
Investments 293 5 298 258 60 318
Loans, net 66 100 166 449 (435) 14
----- ---- ----- ----- ----- -----
Total interest-earning
assets 426 191 617 635 (392) 243
----- ---- ----- ----- ----- -----
Interest-bearing liabilities:
NOW accounts $ 51 $ 66 $ 117 $ 16 $ (45) $ (29)
Savings and money
market accounts 104 63 167 158 42 200
Certificates of deposit (73) 43 (30) (69) (157) (226)
Borrowed funds 93 2 95 21 (5) 16
----- ---- ----- ----- ----- -----
Total interest-bearing
liabilities 175 174 349 126 (165) (39)
----- ---- ----- ----- ----- -----
Net change in net
interest income $ 251 $ 17 $ 268 $ 509 $(227) $ 282
===== ==== ===== ===== ===== =====
</TABLE>
Comparison of Financial Condition at March 31, 1999 and December 31, 1998.
Union's total assets increased by $0.3 million or 0.2% to $191.5 million at
March 31, 1999 from $191.2 million at December 31, 1998. Total net loans
decreased by $3 million or 2.2% to $130.5 million or 68.1% of total assets
at March 31, 1999 as compared to $133.5 million or 69.8% of total assets at
December 31, 1998, primarily due to a decrease of $1.2 million in
commercial real estate loans. Cash and cash equivalents, including Federal
funds sold, increased approximately $3.2 million or 27.1% to $14.8 million
at March 31, 1999 from $11.6 million at December 31, 1998, which was
primarily attributable to loan repayments.
<PAGE> 97
Total deposits approximated $162.5 million at March 31, 1999 and December
31, 1998. An approximate $4.9 million or 9.9% decrease in demand and NOW
accounts for the three months ended March 31, 1999 was offset with a $3.1
million or 5.2% increase in savings and money market deposits and a $1.9
million or 3.5% increase in time deposits. Total FHLB advances remained at
$4.5 million at March 31, 1999 and December 31, 1998.
Total equity increased by $100,000 or 0.5% to $21.4 million at March 31,
1999 from $21.3 million at December 31, 1998 as a result of a decrease of
$243,000 in the net unrealized holding gain on securities available-for-
sale and dividend payments of $448,000 which were offset with net income
of $754,000 and the exercise of employee stock options for $37,000.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998. Interest and Dividend Income. Union's interest and dividend income
increased by $9,000, or .25%, to $3.61 million for the three months ended
March 31, 1999, from $3.60 million for the three months ended March 31,
1998. Average earning assets increased by $8.2 million, or 4.9%, to $175.0
million for the three months ended March 31, 1999, from $166.8 million for
the three months ended March 31, 1998. Average loans decreased by $1.8
million, or 1.35%, to $130.2 million for the three months ended March 31,
1999, from $132.0 million for the three months ended March 31, 1998,
primarily due to a decrease in loans for municipal school construction.
Decreases in loan interest rates and the volume of commercial real estate
and commercial business loans primarily accounted for the decrease in loan
interest income of $106,000. The average balance of investment securities
(including mortgage-backed securities) increased by $9.7 million, or 33.1%,
to $39.0 million for the three months ended March 31, 1999, from $29.3
million for the three months ended March 31, 1998. The average level of
federal funds sold and interest bearing deposits increased by $240,000, or
4.3%, to $5.8 million for the three months ended March 31, 1999, from $5.5
million for the three months ended March 31, 1998. This increase in the
average balances of investment securities, federal funds sold, and interest
bearing deposits resulted in an increase in interest income on these
interest-earning assets of $115,000, and reflects increased investment
activity due largely to increased deposits combined with lower loan demand.
Interest Expense. Union's interest expense decreased by $56,000, or 3.9%,
to $1.40 million for the three months ended March 31, 1999, from $1.45
million for the three months ended March 31, 1998. Average interest-
bearing liabilities increased by $5.4 million, or 4.0% to $140.7 million
for the three months ended March 31, 1999, from $135.3 million for the
three months ended March 31, 1998. Average time deposits decreased $8.6
million, or 13.8%, to $53.6 million for the three months ended March 31,
1999, from $62.2 million for the three months ended March 31, 1998, while
the average balances for NOW, money markets, and savings accounts increased
by $11.8 million to $82.6 million for the three months ended March 31,
1999, from $70.8 million for the three months ended March 31, 1998. Lower
interest rates prevailed for all deposit types for the current year.
<PAGE> 98
Provision for Loan Losses. Union's provision for loan losses was $37,500
for each of the three month periods ended March 31, 1999 and 1998. Net
charge offs approximated $1,000 for the three months ended March 31, 1999
as compared to approximately $1,000 of net recoveries for the three months
ended March 31, 1998. Management evaluates the provision and the level of
the allowance on a regular basis based on various factors including
previous loss experience, current economic conditions and their effect on
borrowers and the market area in general, and the performance of individual
credits in relation to contract terms. Loan losses are charged to earnings
when management believes that the collectability of the loan balance is
unlikely. For a detailed discussion of Union's asset quality and allowance
for loan losses, see " -- Business and Properties - Asset Quality".
Noninterest Income. Union's noninterest income decreased $35,000, or 7.1%,
to $455 million for the three months ended March 31, 1999, from $490
million for the three months ended March 31, 1998. The results for the
first quarter 1999 period reflected a net gain of $15,000 from the sale of
loans and securities compared to a net gain of $54,000 from these sales
during the first quarter of 1998. Other noninterest income and service
fees (sources of which include ATM fees, and safe deposit fees) increased
by $3,000, or .7%, to $434,000 for the three months ended March 31, 1999,
from $431,000 for the three months ended March 31, 1998. Trust income was
relatively unchanged between the fist quarter of 1999, compared to 1998, at
$6,000 and $5,000, respectively.
Noninterest Expense. Union's noninterest expense increased $58,000, or
3.8%, to $1.59 million for the three months ended March 31, 1999, from
$1.54 million for the three months ended March 31, 1998. Salaries and
employee benefits increased $7,000, or .8% to $866,000 for the quarter
ended March 31, 1999, from $859,000 for the three months ended March 31,
1998, reflecting normal salary and benefit increases. Office occupancy and
equipment expense increased $45,000, or 19.7%, to $273,000 for the three
months ended March 31, 1999, from $228,000 for the three months ended March
31, 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.
During the three months ended March 31, 1999, Union incurred approximately
$37,600 of expenses related to the merger, including legal and advisory
fees.
Income Tax Expense. Union's income tax expense decreased by $24,000, or
7.9%, to $281,000 for the three months ended March 31, 1999, from $305,000
for the three months ended March 31, 1998. For more information about the
principal components of Union's income tax expense during the periods
discussed herein, see the notes to Union's consolidated financial
statements beginning on page F-1 of this joint proxy statement/prospectus.
Net Income. Union's net income decreased by $3,000, or .4%, to $754,000
for the three months ended March 31, 1999, from $757,000 for the three
months ended March 31, 1998. Earnings per share were $.37 for each period.
<PAGE> 99
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Interest and Dividend Income. Union's interest and dividend income
increased by $617,000, or 4.4%, to $14.7 million for the year ended
December 31, 1998, from $14.1 million for the year ended December 31, 1997.
Average earning assets increased by $8.0 million, or 5.0%, to $168.9
million for the year ended December 31, 1998, from $160.9 million for the
year ended December 31, 1997. Average loans increased by $.7 million, or
.5%, to $129.1 million for the year ended December 31, 1998, from $128.4
million for the year ended December 31, 1997. The change was attributable
to increases in the combined level of consumer, residential, commercial
real estate, and construction loans, after repayment of approximately $7
million in municipal loans for school construction. The average balance of
investment securities (including mortgage-backed securities) increased by
$4.8 million, or 16.9%, to $33.2 million for the year ended December 31,
1998, from $28.4 million for the year ended December 31, 1997. The
average level of federal funds sold and interest bearing deposits for the
year ended December 31, 1998, increased by $2.5 million, or 60.1%, to $6.6
million, from $4.1 million for the year ended December 31, 1997. The
increase in the average level of federal funds sold and interest bearing
deposits reflects the increased investment of available funds resulting
from increased deposits and maturities of investments occurring during the
year.
Interest Expense. Union's interest expense increased by $349,000, or 6.4%,
to $5.8 million for the year ended December 31, 1998 from $5.4 million for
the year ended December 31, 1997. Average interest-bearing liabilities
increased by $5.6 million to $135.5 million for the year ended December 31,
1998, from $129.9 million for the year ended December 31, 1997. Average
time deposits decreased $1.4 million, or 2.3%, to $57.5 million for the
year ended December 31, 1998, from $58.9 million for the year ended
December 31, 1997, while the average balances for NOW, money markets, and
savings accounts increased by $5.4 million, or 7.8%, to $74.2 million for
the year ended December 31, 1998, from $68.8 million for the year ended
December 31, 1997. Although subject to pricing modifications, the average
yield on interest-earning assets and the rates paid on interest-bearing
liabilities remained relatively constant between the periods with the
changes in interest income primarily affected by the changes in volume.
Provision for Loan Losses. The provision for loan losses decreased by
$25,000, or 20%, to $100,000 for the year ended December 31, 1998, from
$125,000 for the year ended December 31, 1997. Net charge offs decreased
by $92,000, or 50.8%, to $89,000 for the year ended December 31, 1998, from
$181,000 for the year ended December 31, 1997.
Noninterest Income. Noninterest income increased $438,000, or 25.3%, to
$2.1 million for the year ended December 31, 1998, from $1.7 million for
the year ended December 31, 1997. The results for 1998 reflected net gains
of $147,000 from the sale of securities during 1998 compared to a net loss
of $23,000 from securities sales during 1997. Additionally, gains on sales
of loans increased approximately $144,000 to $302,000 during 1998 as
compared to $158,000 during 1997. Other noninterest income (sources of
which include credit card merchant and fee income, ATM fees, safe deposit
fees, and service fees) increased by $124,000, or 7.8%, to $1.7 million
<PAGE> 100
for the year ended December 31, 1998, from $1.6 million for the year ended
December 31, 1997. Trust income was relatively unchanged.
Noninterest Expense. Noninterest expense increased $570,000, or 10.4%, to
$6.1 million for the year ended December 31, 1998, from $5.5 million for
the year ended December 31, 1997. Salaries and employee benefits increased
$135,000, or 4.1%, to $3.4 million for the year ended December 31, 1998,
from $3.3 million for the year ended December 31, 1997, reflecting a slight
increase in normal salary and benefit costs. Office occupancy and
equipment expense increased $206,000, or 27.0%, to $970,000 for the year
ended December 31, 1998, from $764,000 for the year ended December 31,
1997. This increase was due primarily to increases in depreciation on
equipment resulting from computer and equipment purchases during the year.
Costs of service contracts also increased in part as a result of these
purchases. Other operating expenses increased by $229,000, or 15.5%, to
$1.7 million for the year ended December 31, 1998, from $1.5 million for
the year ended December 31, 1997, as a result of increases in supply costs,
advertising, and Vermont franchise taxes.
Income Tax Expense. Income tax expense increased by $57,000, or 3.9%, to
$1.51 million for the year ended December 31, 1998, from $1.45 million for
the year ended December 31, 1997. This increase primarily reflected the
difference in the amount of Union's taxable income. Union's statutory
income tax rate was 34% in 1998 and 1997.
Net Income. Union's net income increased by $104,000, or 3.1%, to $3.45
million, or $1.70 per share, for the year ended December 31, 1998, from
$3.35 million, or $1.64 per share, for the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Interest and Dividend Income. Interest and dividend income increased by
$243,000, or 1.8%, to $14.1 million for the year ended December 31, 1997,
from $13.9 million for the year ended December 31, 1996. Average earning
assets increased by $7.3 million, or 4.8%, to $160.9 million for the year
ended December 31, 1997, from $153.6 million for the year ended December
31, 1996. Average loans increased by $4.5 million, or 3.6%, to $128.4
million for the year ended December 31, 1997, from $123.9 million for the
year ended December 31, 1996. The average balance of investment securities
(including mortgage-backed securities) increased by $4.2 million, or 17.4%,
to $28.4 million for the year ended December 31, 1997, from $24.2 million
for the year ended December 31, 1996. The average level of federal funds
sold and interest bearing deposits for the year ended December 31, 1997,
decreased by $1.3 million, or 24.5%, to $4.1 million, from $5.4 million for
the year ended December 31, 1996.
Interest Expense. Union's interest expense decreased by $39,000, or .7%,
to $5.43 million for the year ended December 31, 1997, from $5.47 million
for the year ended December 31, 1996. Average interest-bearing liabilities
increased by $4.4 million, or 3.5%, to $129.9 million for the year ended
December 31, 1997, from $125.5 million for the year ended December 31,
1996. Average time deposits decreased $1.2 million, or 2.0%, to $58.9
million for the year ended
<PAGE> 101
December 31, 1997, from $60.1 million for the year ended December 31, 1996,
while the average balances for NOW, money markets, and savings accounts
increased by $5.3 million, or 8.3%, to $68.8 million for the year ended
December 31, 1997, from $63.5 million for the year ended December 31, 1996.
Provision for Loan Losses. The provision for loan losses decreased
$175,000 to $125,000 for the year ended December 31, 1997 compared to
$300,000 for the year ended December 31, 1996. Net charge offs decreased
by $22,000, or 10.8%, to $181,000 for the year ended December 31, 1997,
from $203,000 for the year ended December 31, 1996.
Noninterest Income. Noninterest income decreased $134,000, or 7.2%, to
$1.7 million for the year ended December 31, 1997, from $1.8 million for
the year ended December 31, 1996. The results for 1997 reflected a net
loss of $23,000 from securities sales compared to a net gain of $3,000
during 1996. Gains realized on the sale of loans decreased $177,000 to
$158,000 during 1997 compared to $335,000 in 1996. Other noninterest
income (sources of which include ATM fees, safe deposit fees, and service
fees) increased by $69,000, or 4.5%, to $1.6 million for the year ended
December 31, 1997, from $1.5 million for the year ended December 31, 1996.
Noninterest Expense. Noninterest expense decreased $34,000, or .6%, to
$5.49 million for the year ended December 31, 1997, from $5.52 million for
the year ended December 31, 1996. Salaries and employee benefits decreased
$49,000, or 1.5%, to $3.26 million for the year ended December 31, 1997,
from $3.31 million for the year ended December 31, 1996. Office occupancy
and equipment expense decreased $25,000, or 3.2%, to $764,000 for the year
ended December 31, 1997 from $789,000 for the year ended December 31, 1996.
Other operating expenses increased by $40,000, or 2.8%, to $1.47 million
for the year ended December 31, 1997, from $1.43 million for the year ended
December 31, 1996.
Income Tax Expense. Income tax expense increased by $136,000, or 10.4%,
to $1.45 million for the year ended December 31, 1997, from $1.31 million
for the year ended December 31, 1996. This increase primarily reflected
the difference in the amount of taxable income. Union's statutory income
tax rate was 34% in 1997 and 1996.
Net Income. Union's net income increased by $221,000, or 7.1%, to $3.34
million, or $1.64 per share, for the year ended December 31, 1997, from
$3.13 million, or $1.49 per share, for the year ended December 31, 1996.
This increase reflected an increase in net interest income due to favorable
interest rate spreads, offset by a decrease in noninterest income.
Other Financial Considerations
Changes in Financial Condition. Union had total assets of $191.5 million
at March 31, 1999, and $191.2 million and $180.7 million at December 31,
1998 and 1997, respectively. Average earning assets were $175.0 million
for the three months ended March 31, 1999, including average loans of
$130.2 million and average investment securities of $39 million. Average
<PAGE> 102
earning assets were $168.9 million and $160.9 million for the years ended
December 31, 1998 and 1997, respectively, including average loans of $129.1
million and $128.4 million and average investment securities of $33.2
million and $28.4 million, respectively.
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 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 immediate substantial increases or decreases in
market rates of interest.
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;
<PAGE> 103
* 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.
<PAGE> 104
The following tables show Union's rate sensitivity analysis as of March 31,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999
Cumulative repriced within
----------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Total Total
-------- ------- ------ ------ ------ -----
(dollars in thousands, by repricing date)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Federal Funds Sold $ 6,470 $ -0- $ -0- $ -0- $ -0- $ 6,470
Interest bearing deposits 491 495 866 99 -0- 1,951
Investments available for sale (1) 1,531 7,381 10,196 6,208 12,130 37,446
FHLB Stock -0- -0- -0- -0- 642 642
Loans (fixed and
adjustable rate) (2) 50,501 19,457 6,274 10,253 43,984 130,469
------- ------- ------- ------- ------- --------
Total interest sensitive assets $58,993 $27,333 $17,336 $16,560 $56,756 $176,978
------- ------- ------- ------- ------- --------
Interest sensitive liabilities:
Certificates of deposit $19,680 $23,731 $11,291 $ 655 $ -0- $ 55,357
Money markets 23,390 -0- -0- -0- 14,002 37,392
Regular savings 1,652 -0- -0- -0- 23,359 25,011
Now accounts 10,935 -0- -0- -0- 12,112 23,047
Borrowed funds 35 107 310 1,353 2,698 4,503
------- ------- ------- ------- ------- --------
Total interest sensitive liabilities $55,692 $23,838 $11,601 $ 2,008 $52,171 $145,310
------- ------- ------- ------- ------- --------
Net interest rate sensitivity gap 3,301 3,495 5,735 14,552 4,585 31,668
Cumulative net interest rate
sensitivity gap 3,301 6,796 12,531 27,083 31,668
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 1.72% 3.55% 6.54% 14.14% 16.54%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets 1.87% 3.84% 7.08% 15.30% 17.89%
Cumulative net interest earning
assets as a percentage of
cumulative interest-bearing
liabilities 2.27% 4.68% 8.62% 18.64% 21.79%
<FN>
- -------------------
<F1> Investments available for sale exclude marketable equity securities
with a fair value of $792,000 which may be sold by Union at any time.
<F2> Balances shown net of unearned income of $273,000.
</FN>
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
December 31, 1998
Cumulative repriced within
----------------------------------------------------
3 Months 4 to 12 1 to 3 3 to 5 Over 5
or Less Months Years Years Total Total
-------- ------- ------ ------ ------ -----
(dollars in thousands, by repricing date)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Federal Funds Sold $ 4,876 $ -0- $ -0- $ -0- $ -0- $ 4,876
Interest bearing deposits 495 887 392 99 -0- 1,873
Investments available for sale (1) 2,005 6,922 7,655 8,516 12,368 37,466
FHLB Stock -0- -0- -0- -0- 626 626
Loans (fixed and
adjustable rate) (2) 48,416 24,751 6,768 8,683 44,821 133,439
------- ------- ------- ------- ------- --------
Total interest sensitive assets $55,792 $32,560 $14,815 $17,298 $57,815 $178,280
------- ------- ------- ------- ------- --------
Interest sensitive liabilities:
Certificates of deposit $11,279 $26,933 $14,624 $ 651 $ -0- $ 53,487
Money markets 19,390 -0- -0- -0- 15,780 35,170
Regular savings 2,457 -0- -0- -0- 21,709 24,166
Now accounts 12,507 -0- -0- -0- 12,504 25,011
Borrowed funds 60 130 310 1,353 2,734 4,587
------- ------- ------- ------- ------- --------
Total interest sensitive liabilities $45,693 $27,063 $14,934 $ 2,004 $52,727 $142,421
------- ------- ------- ------- ------- --------
Net interest rate sensitivity gap 10,099 5,497 (119) 15,294 5,088 35,859
Cumulative net interest rate
sensitivity gap 10,099 15,596 15,477 30,771 35,859
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 5.27% 8.14% 8.08% 16.07% 18.73%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets 5.66% 8.75% 8.68% 17.26% 20.11%
Cumulative net interest earning
assets as a percentage of
cumulative interest-bearing
liabilities 7.09% 10.95% 10.87% 21.61% 25.18%
<FN>
- -------------------
<F1> Investments available for sale exclude marketable equity securities
with a fair value of $938,000 which may be sold by Union at any time.
<F2> Balances shown net of unearned income of $282,000.
</FN>
</TABLE>
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, loan and deposit pricing,
changes in funding mix, and asset and liability repricing and maturity
characteristics. Based on the results of these
<PAGE> 106
simulations, Union is able to quantify its interest rate risk and develop
and implement appropriate strategies.
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 a member of the FHLB, Union has access to
preapproved lines of credit up to 7.16% of total assets.
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 marketable assets and credit available to fund
liquidity requirements and compares the adequacy of that aggregate amount
against the aggregate amount of Union's sensitive or volatile liabilities,
such as core deposits and time deposits in excess of $100,000, term
deposits with short maturities, and credit commitments outstanding. The
committee's primary objective is to manage 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.
Union's operating activities provided cash flows of $764,000 and $903,000
during the three months ended March 31, 1999 and 1998, respectively, and
cash flows of $2.4, $4.1, and $1.0 million during the years ended December
31, 1998, 1997, and 1996, respectively. During these periods, cash
resources were provided primarily by net income.
Union's cash flows from investing activities provided $2.8 million and $0.9
million during the three months ended March 31, 1999 and 1998,
respectively, and $10.8, $10.8, and $6.0 million during the years ended
December 31, 1998, 1997, and 1996, respectively. Purchases of investment
securities available-for-sale totaled $3.4 and $3.0 million during the
three months ended March 31, 1999 and 1998, respectively, and $20.9, $13.5,
and $16.3 million during the years ended December 31, 1998, 1997, and 1996,
respectively. Proceeds from sales and maturities of securities available-
for-sale provided $10.8, $13.7, and $11.5 million during the years ended
December 31, 1998, 1997, and 1996, offsetting the purchases during that
period. This investment activity and net loans originated were the
principal uses of funds during these periods.
Union's financing activities utilized $0.5 and $4.2 million during the
three months ended March 31, 1999, and March 31, 1998, respectively, and
provided cash flows of $6.9, $9.1, and $4.6
<PAGE> 107
million for the years ended December 31, 1998, 1997, and 1996,
respectively. Cash flows from financing activities primarily related to
changes in deposits, net borrowings, and payment of dividends. During the
year ended December 31, 1996, significant cash was used in financing
Union's stock repurchase plan at a cost of approximately $748,000.
Union management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 78.4% of Union's certificates of deposit 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. Such steps could result in an
increase in Union's cost of funds and adversely impact the net interest
margin.
Regulatory Capital Requirements. A bank's capital serves to support growth
and provide protection against loss to depositors and creditors. Equity
capital represents the shareholders' investment in Union. Management
strives to maintain an optimal level of capital on which an attractive
return to the shareholders will be realized over both the short-term and
long-term, while serving depositors' and creditors' needs. Federally
insured banks, such as Union, must also maintain capital at levels
specified by applicable minimum capital ratios. For more information on
these requirements, see "REGULATION AND SUPERVISION."
As of March 31, 1999, the most recent notification from the FDIC
categorized Union Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, Union
Bank must maintain minimum total risk-based and Tier I risk-based capital
and minimum Tier I leverage ratios. There are no conditions or events
since the date of the most recent notification that management believes
might result in an adverse change to Union Bank's regulatory capital
category. The following table shows Union's actual consolidated capital
amounts and ratios against the amounts and ratios required by applicable
capital adequacy guidelines and the amounts and ratios necessary to be
categorized as well-capitalized:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to
Risk Weighted Assets) $22,765 19.08% $9,517 8.0% $11,896 10.0%
Tier I Capital (to
Risk Weighted Assets) $21,168 17.74% $4,759 4.0% $ 7,138 6.0%
Tier I Capital (to
Average Assets) $21,168 11.25% $7,536 4.0% $ 9,420 5.0%
</TABLE>
<PAGE> 108
Impact of Inflation and Changing Prices. Union's consolidated financial
statements, included in this document beginning on page F-2, 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.
Year 2000
The Problem. The problem relates to computer systems and applications that
currently use two-digit date fields to designate a year. As the century
date change occurs, date-sensitive systems could recognize the year 2000 as
1900 and potentially cause systems to process critical financial and
operational information incorrectly. This would drastically affect
calculations, timetables and even the ability to perform many tasks. Like
other financial institutions, Union relies heavily on computers.
Management and the directors believe it is our responsibility to do
everything in our control to make sure our systems perform properly in the
Year 2000 and beyond.
The Plan. Union has been working on the Year 2000 issues since 1997.
Union organized an internal Year 2000 project team, which consists of
several members of senior management and member from the Board of
Directors. The committee, which has developed a Year 2000 plan for Union,
meets on a weekly basis and reports to the Board of Directors on critical
steps taken in the Y2K process. The plan requires assessment, testing and
remediation for all of our computer programs and equipment driven by
computer chips and establishes a timetable for accomplishing each of the
significant benchmarks. The plan also includes communication, assessment
and testing with third party vendors that are critical to Union's operation
and service. In addition, the plan includes assessment of Union's major
customers and the credit and operational risks associated with those
findings. And finally, the plan contains contingency plans in the event
any important aspect of the century date change does not transition
smoothly.
Execution of the Plan as of March 31, 1999. As of March 31, 1999, testing
of the hardware components and software applications for all mission and
non-mission critical items was 90% complete. As of that date, software
upgrades and minor hardware replacements were substantially complete.
Testing of Union's core application software, which is called Silverlake
and is supported by Jack Henry & Associates, was completed in November of
1998. A test lab facility was created and used to test a variety of
different software and hardware items. All of our mission critical vendors
have supplied Year 2000 ready products.
<PAGE> 109
Looking Ahead through 1999. The goals for 1999 include ongoing review and
maintenance of all mission critical systems; testing and correction of
secondary systems that are non-mission critical; customer awareness;
commercial borrower assessment and contingency training.
Costs. In 1998, we designated a bank officer to manage the Year 2000
project. In addition, the six other Year 2000 committee members spent a
great deal of time overseeing Union's plan. The effect of this time was
not additional expense, but rather a diversion from other productive
endeavors. Direct Year 2000 capital expenses in 1998 were $13,522 and
extra operating expenses were $12,541. Estimates for 1999 include $10,000
of capital expense and $75,000 of operating expense, of which $26,218 had
been incurred as of March 31, 1999. During the first quarter of 1999, we
did not incur any direct Year 2000 capital expense. Given our state of
planning and test results to date, we expect our 1999 capital and operating
expense estimates to be reasonably accurate. We do not expect Year 2000
capital and operating expenses to have a material effect on Union's
financial condition.
Risks. Despite our best efforts and test results, something could go
wrong. This is especially true in an industry such as ours that is so
interconnected and dependent upon information technology and data
transfers. A Year 2000 failure could disrupt Union's banking operations.
The severity would depend on the nature and duration of the problem. If it
concerned a core application or mission critical system, such failure could
have an adverse effect on our operations and financial condition.
Contingencies. Union has studied what could go wrong and has developed
plans to maintain operations given any number of malfunctions. However,
although contingency planning can help to mitigate the risks of major Year
2000 systems malfunctions, it cannot eliminate such risks entirely.
Merger Related Issues. In planning for completion of the proposed merger
with Citizens during the fourth quarter of 1999, we have deemed it
advisable to defer the data processing conversion of Citizens and similar
information technology changeovers until the first quarter of 2000. That
timetable will permit us to respond to any Year 2000 problems that may
occur at year end 1999 without the added demands on staff and other
resources that the data processing conversion may entail.
Summary. Year 2000 readiness is a very high priority for Union's
management and Board of Directors. In developing and executing its Year
2000 plan, Union is following the guidelines that were established by the
FDIC and Federal Financial Institutions Examination Council. Our results
to date are reasonably successful. However, we cannot make any certain
representations that our systems and, especially, those of third parties,
will function properly.
<PAGE> 110
Directors and Management
Directors and Executive Officers. The following table shows the names,
ages, positions with Union, and business experience of Union's current
directors and executive officers:
<TABLE>
<CAPTION>
Name and Position with Union Age Business Experience
- ---------------------------- --- -------------------
<S> <C> <C>
W. Arlen Smith, Chairman of the 67 Mr. Smith has served as Chairman of the
the Board and Past President Board of Directors of Union and Union Bank
since 1991. Mr. Smith previously served as
President of Union Bank from 1979 and as
President of Union from 1982, until his
retirement in 1991. Before becoming
President, Mr. Smith served as Vice President
of Union Bank from 1973 to 1979. He has
served as a director of Union Bank since
1969 and as a director of Union since 1982.
Kenneth D. Gibbons, President, 52 Mr. Gibbons has served as President and
Chief Executive Officer and Chief Executive Officer of Union and Union
Director Bank since 1991. Before becoming
President, Mr. Gibbons served as Vice
President of Union Bank from 1984 to 1991
and as a Vice President of Union from 1989
to 1991. Mr. Gibbons has served as a
director of Union and Union Bank since 1989.
Cynthia D. Borck, Vice 49 Ms. Borck has served as Vice President of
President and Director Union since 1994 and as Senior Vice
President of Union Bank since 1991. Prior to
that time she served as a mortgage lender for
Union Bank beginning in 1987. Ms. Borck
has served as a director of Union Bank since
1994 and Union since 1995.
Oscar E. Churchill, Director 92 Mr. Churchill has served as a director of
Union Bank since 1958 and as a director of
Union since 1982. Prior to retirement, Mr.
Churchill owned a construction company and
later a hardware store.
<PAGE> 111
<CAPTION>
Name and Position with Union Age Business Experience
- ---------------------------- --- -------------------
<S> <C> <C>
Peter M. Haslam, Director 71 Mr. Haslam has served as a director
and Secretary of Union Bank since 1975 and as a director
of Union since 1982. Mr. Haslam has also
served as the Corporate Secretary of Union
and Union Bank since 1989. Prior to his
retirement, Mr. Haslam owned Stowe
Insurance Agency.
William F. Kinney, Director 70 Mr. Kinney has served as a director of Union
Bank since 1967 and as a director of Union
since 1982. Prior to retirement, Mr. Kinney
owned various businesses.
Richard C. Marron, Director 61 Mr. Marron has served as a director of Union
Bank and Union since 1998. Mr. Marron
owns the Town & Country Motor Lodge and
serves as State Representative for Lamoille
District 2-2.
Robert P. Rollins, Director 60 Mr. Rollins has served as a director of
and Assistant Secretary Union Bank and Union since 1983. Mr.
Rollins is an insurance agent, formerly
owning the Barrows, Mercia and Rollins
Insurance Agency.
Richard C. Sargent, Director 61 Mr. Sargent has served as a director of Union
Bank since 1977 and as a director of Union
since 1982. Mr. Sargent is an attorney with
his own law firm in Morrisville.
Walter M. Sargent, Director 90 Mr. Sargent has served as a director of Union
Bank since 1950 and as a director of Union
since 1982. Now retired, Mr. Sargent is a
Past President of Union (1976-1980) and had
been employed by the bank for 47 years.
Marsha A. Mongeon, Treasurer 43 Ms. Mongeon is Treasurer of Union and has
also served as Chief Financial Officer and
Treasurer of Union Bank since 1989. Ms.
Mongeon has also served as a Senior Vice
President of Union Bank since 1994, and
prior to that time served as a Vice President.
</TABLE>
<PAGE> 112
As discussed under "THE MERGER -- Management and Operations After the
Merger," Citizens President, Chief Executive Officer and Director, Jerry S.
Rowe, and Citizens Directors William T. Costa, Jr. and Franklin G. Hovey,
II will be appointed to Union's Board when the merger is completed. In
addition, Mr. Rowe will be appointed as a Vice President of Union. For
information about Messrs. Rowe, Costa and Hovey, see "INFORMATION ABOUT
CITIZENS -- Directors and Management."
Directors' Fees. Directors of Union receive an annual retainer of $5,472,
but do not receive any per meeting or committee meeting fees. Each
Director of Union, except Mr. Gibbons and Ms. Borck, also receive fees for
their services as directors of Union Bank. Union Bank directors who are
not bank employees receive an annual retainer of $4,222 and a per meeting
fee of $417, but do not receive any additional fees for attendance at
committee meetings. Mr. Gibbons and Ms. Borck are not separately
compensated for their service as directors of Union Bank.
Certain Directors of Union participate in the Union Bankshares, Inc.
Deferred Compensation Plan, described below under the subcaption "Deferred
Compensation Plan."
Executive Compensation and Benefit Plans. The following table shows annual
compensation for services rendered in all capacities to Union and Union
Bank during 1998, 1997, and 1996, paid to Mr. Gibbons, the only executive
officer of Union whose total salary and bonus in 1998 exceeded $100,000:
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation ----------------------
Name and --------------------------- Securities Underlying All Other
Principal Position Year Salary Bonus Options/SARs (1) Compensation (2)
- ------------------ ---- ------ ----- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
Kenneth D. Gibbons, 1998 $130,500 $28,475 2,000 shs. $10,021
President, Chief Executive 1997 123,500 26,938 2,000 shs. 9,495
Officer and Director 1996 118,500 30,094 4,000 shs. 4,774
<FN>
- -------------------
<F1> The numbers shown in the table represent the shares underlying
incentive stock options granted to Mr. Gibbons under Union's 1998
Incentive Stock Option Plan (or a predecessor plan) during each of
the years shown. All options shown in the table are subject to a
one-year holding period from the date of grant before they become
exercisable, and expire five years from the date of grant. All
options were issued at an exercise price equal to the fair market
value of Union's stock on the date of grant, as determined by the
Board of Directors. There is no active public trading market in
Union's common stock.
<F2> Includes Union director fees (1998 - $5,262; 1997 - $5,012; and 1996
- $4,774); and matching employer contributions under Union's 401(k)
plan (1998 - $4,759; and 1997 - $4,483). Mr. Gibbons also has the
use of a bank-owned automobile, which is not reflected in the table.
</TABLE>
Union does not have any employment or change in control agreement with Mr.
Gibbons or any other senior executive or employee.
Deferred Compensation Plan. Union has in effect a nonqualified deferred
compensation plan for directors and executive officers under which
participants are able to defer receipt of directors fees, salary or bonus.
Participation in the Plan is limited to current participants, which include
<PAGE> 113
four of Union's directors and three of its executive officers, including
Mr. Gibbons. Deferred compensation benefits are calculated based on the
amount deferred, earnings on deferrals and the length of the deferral
period. Payments are generally made in 15 annual installments beginning
after age 55, on a date specified by the participant. Payment in a lump
sum is possible in some circumstances. Union has purchased insurance to
fund a portion of the benefit payments under the plan. Amounts deferred
and benefit accruals under the plan represent a general unsecured
obligation of Union, and no assets of Union have been segregated to meet
Union's obligations under the plan.
The Board of Directors is currently reviewing the design, benefit structure
and funding mechanism for this Plan, and may modify the terms of the Plan
as a result of such review.
Discretionary Bonus Payments. Union's Board has ordinarily paid to Mr.
Gibbons each year, after the first two quarters of operations, a
discretionary cash bonus of approximately 1% of Union Bank's net income for
such period. In addition, the Board has ordinarily paid a discretionary
annual cash bonus to all employees each year (including Mr. Gibbons) equal
to a percentage of base compensation. The applicable percentage for 1998
staff bonuses was 9%. These discretionary payments have been a matter of
practice and are not embodied in any formal written plan. The Board may,
in its discretion and at any time, discontinue either or both of these
bonus payment practices or modify them in any way, including, without
limitation, changing the manner in which the bonus is calculated or time or
manner of payment, and changing the persons or categories of persons to
whom the bonuses are paid.
Incentive Stock Option Plan. Union's 1998 Incentive Stock Option Plan,
adopted by the Board and approved by the shareholders, is designed to link
senior management compensation more closely to corporate performance and to
increases in shareholder value, and to assist Union in attracting,
retaining and motivating executive management. The plan is administered by
a committee of the Board consisting of all non-employee Directors.
Eligibility for awards is limited to those senior officers and other key
employees who are in a position to contribute significantly to Union's
profitability and who are designated by the committee. The committee has
in the past designated two employees to receive awards, Mr. Gibbons and Ms.
Borck.
Awards under the plan consist of options to purchase shares of Union's
common stock at a fixed price, at least equal to 100% of the fair market
value of the shares on the day the option is granted, and for a fixed
period of time established by the Board at the time of the grant, but no
longer than ten years from the date of option grant. The optionholder may
pay for the option shares with either cash or other shares of Union's
common stock (valued at their fair market value, as determined by the
committee), including shares withheld upon exercise of the option.
The options contain various provisions and limitations intended to qualify
them as incentive stock options under federal income tax laws. Generally,
the optionholder will not recognize gain at the time the option is
exercised, but only upon later sale of the shares. The total number of
shares of Union common stock that may be awarded under the plan is 50,000,
subject to standard
<PAGE> 114
adjustments in the case of stock dividends, stock splits, recapitalization
and similar changes in Union's capitalization. Of that number, incentive
options have been issued, to date, with respect to 2,500 shares, including
options issued to Mr. Gibbons during 1998 with respect to 2,000 shares, as
described in the table below.
The following table shows information about incentive stock options granted
under the plan during 1998 to Mr. Gibbons, the only executive officer named
in the summary compensation table.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options/SARs Appreciation for
Underlying Granted to Per Share Option Term (3)
Options/SARs Employees in Exercise or Expiration --------------------
Name Granted (#) Fiscal Year Base Price (1) Date (2) 5% 10%
---- ------------ ------------ -------------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Kenneth D. Gibbons 2,000 80% $22.00 8/05/03 $12,160 $26,860
<FN>
- -------------------
<F1> Represents the fair market value of Union's common stock on the date
of grant (August 6, 1998), as determined by the committee that
administers the Plan.
<F2> All options listed in the table were granted on August 6, 1998 and
are subject to early termination following the optionholder's
termination of employment during the option period.
<F3> Represents the hypothetical value that may be realized by the
optionholder (hypothetical market price less the exercise price)
assuming (a) a beginning per share market value of $22.00 for Union's
common stock, (b) the market price increases annually at the stated
rates and (c) the option is held to its full term (5 years) before
exercise.
</FN>
</TABLE>
In assessing the grant date values in the above table, readers should keep
in mind that no matter what theoretical value is placed on a stock option
on the date of grant, its ultimate value will be dependent on the market
value of Union's stock at a future date and that value will in large part
depend, in turn, on the efforts of Union's management team.
The following table shows certain information about the 1998 year-end
values of outstanding incentive stock options held by Mr. Gibbons, as well
as information on his exercise of options during 1998:
<PAGE> 115
Aggregated Option/SAR Exercises in Last Fiscal Year,
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number Unexercised In-the-Money
of Shares Options/SARs Options/SARs
Underlying at FY-End (2) at FY-End(2)
Options/SARs Exercisable/ Exercisable/
Name Exercised Value Realized (1) Unexercisable Unexercisable
---- ------------ ------------------ ------------- --------------------
<S> <C> <C> <C> <C>
Kenneth D. Gibbons 4,000 $56,000 10,000/2,000 $118,000/$ 2,000
<FN>
- -------------------
<F1> Represents the difference between the aggregate option exercise price
(at $9.00 per share) and the market value of the stock on the date of
exercise (at $23.00 per share), as determined by the Board committee
which administers the Plan.
<F2> Year-end values are based on the assumed market value of Union's
common stock on December 31, 1998 ($23.00 per share), less the
applicable option exercise prices. There is no active public trading
market in Union's common stock.
</FN>
</TABLE>
Other Employee Benefit Plans. Except as described above, Union does not
maintain any special employee benefit plans or arrangements for Union's
senior management. Executive officers participate in Union's medical,
life, accidental death, disability, and salary continuation insurance
plans, and in Union's 401(k) and pension plans, all of which are available
to Union's other officers and employees generally.
Union's pension plan is a non-contributory defined benefit plan
administered by the Board's Retirement Committee, consisting of Messrs.
Churchill, Haslam, and Kinney, who have been designated as plan trustees.
Union's independent actuary consults the Board Committee members on matters
of plan administration and funding.. All employees join the plan upon
reaching age twenty-one and completing at least 1,000 hours of service in a
consecutive twelve-month period. An employee generally becomes 100% vested
in the pension plan after 7 years. Benefits begin on retirement after age
65, although early retirement may be taken after age 55, with an
actuarially reduced benefit.
The following table shows estimated annual pension benefits payable to a
Union employee under the pension plan upon retirement at age 65 in 1999
under the most advantageous plan provisions available for various levels of
compensation and years of service. Benefit calculations are subject to the
limitations under the Internal Revenue Code on the amount of the
compensation that may be considered in such calculations ($160,000 for
1999) and on the amount of the annual benefit payable under the plan
($130,000 for 1999). The amounts shown in this table are calculated on the
basis of a straight-life annuity and upon certain other assumptions
regarding social security benefits and compensation trends. Amounts shown
would be subject to offset by the primary amount of Social Security
benefits received by the participant.
<PAGE> 116
<TABLE>
<CAPTION>
Assumed Average Years of Service
3-year Annual -----------------------------------------
Compensation 5 10 15 20
- --------------- - -- -- --
<S> <C> <C> <C> <C>
$ 15,000 $ 1,500 $ 3,000 $ 4,500 $ 6,000
$ 25,000 $ 2,500 $ 5,000 $ 7,500 $10,000
$ 35,000 $ 3,566 $ 7,133 $10,700 $14,267
$ 45,000 $ 4,891 $ 9,783 $14,675 $19,567
$ 55,000 $ 6,216 $12,433 $18,650 $24,867
$ 65,000 $ 7,541 $15,083 $22,625 $30,167
$ 75,000 $ 8,866 $17,733 $26,600 $35,467
$ 85,000 $10,191 $20,383 $30,575 $40,767
$ 95,000 $11,516 $23,033 $34,550 $46,067
$105,000 $12,841 $25,683 $38,525 $51,367
$125,000 $15,491 $30,983 $46,475 $61,967
$150,000 $18,804 $37,608 $56,413 $75,217
$175,000 $20,129 $40,258 $60,388 $80,517
</TABLE>
As of December 31, 1998, Mr. Gibbons had 15 years of credited service under
Union's Retirement Plan.
Certain Relationships and Related Transactions. In the ordinary course of
its business, Union Bank grants loans to directors, officers, their
immediate families and companies or organizations with which they are
affiliated. These loans are made on substantially the same terms, including
interest rate and collateral, as those prevailing at the same time for
comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility or present other unfavorable features.
Federal banking laws and regulations limit the aggregate amount of
indebtedness that a bank may extend to its insiders and their affiliates.
Under these laws and regulations, banks may extend credit to executive
officers, directors, principal shareholders, or any related interest of
such persons, if the extension of credit to such persons is in an amount
that, when aggregated with the amount of all outstanding extensions of
credit to such individuals, does not exceed the banks' unimpaired capital
and unimpaired surplus. As of March 31, 1999, and December 31, 1998, the
aggregate amount of extensions of credit made by Union Bank to Union
directors and executive officers, and their affiliates, totaled $726,000
and $760,000, respectively, or 3.4% and 3.6% of Union Bank's capital, which
was well below the legal limit.
During the three month period ended March 31, 1999, and the three years
ended December 31, 1998, there were no directors or officers of Union whose
direct or indirect liability to Union exceeded 10% of Union's shareholders'
equity. During that period, Union was not, and is not now, a party to any
transaction or proposed transaction in which any director, director
nominee, executive officer, or principal shareholder, or any of their
immediate family members, has had a direct or indirect material interest,
other than transactions in the ordinary course of Union Bank's business.
Director Richard Sargent is an attorney in Morrisville, Vermont, who
performs legal services for Union and Union Bank from time to time.
<PAGE> 117
Share Ownership of Management and Principal Holders
The following table shows the number and percentage of outstanding shares
of Union common stock owned beneficially as of June 30, 1999 by:
* each director of Union;
* each executive officer of Union;
* all of Union's directors and executive officers as a group; and
* each person (including any "group," as that term is used in
Section 13 (d) (3) of the Exchange Act), known to the management
of Union to own beneficially more than 5% of Union's outstanding
common stock. Except as otherwise noted below, to the knowledge
of Union's management, all persons listed have sole voting and
investment power over their shares.
Except as otherwise indicated in the footnotes to the table, the named
individuals possess sole voting and investment power over the shares
listed.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Shareholder or Group Owned of Class
- -------------------- ------------ --------
<S> <C> <C>
Directors and Certain Officers:
Cynthia D. Borck 1,720 (1) .084
Oscar E. Churchill 24,000 1.178
Kenneth D. Gibbons 29,730 (2) 1.456
Peter M. Haslam 55,490 (3) 2.723
William F. Kinney 30,620 (3) 1.502
Richard C. Marron 1,010 (3) .049
Marsha A. Mongeon -0- -0-
Robert P. Rollins 1,000 .049
Richard C. Sargent 137,884 (4) 6.765
Walter M. Sargent 299,845 (5) 14.712
W. Arlen Smith 141,332 (6) 6.934
All Directors and Executive
Officers as a Group (11) 722,631 35.455
Other 5% or more Shareholders:
Copley Fund 108,000 (7) 5.299
<FN>
- -------------------
<F1> Ms. Borck has shared voting and investment power over 520 of the
shares listed. Includes 1,200 shares Ms. Borck has the right to
acquire under presently exercisable incentive stock options.
<F2> Includes 6,000 shares Mr. Gibbons has the right to acquire upon
exercise of incentive stock options.
<F3> The named individual has shared voting and investment power over all
but 10 of the shares listed.
<PAGE> 118
<F4> Mr. Richard Sargent has shared voting power over 137,874 of the
shares listed. The total includes 108,000 shares held by the Copley
Fund, a charitable trust of which Mr. Sargent serves as co-trustee.
Mr. Sargent does not have any beneficial interest in the trust and
disclaims beneficial ownership of all 108,000 shares held by the
trust.
<F5> Includes 293,545 shares held by the Walter M. Sargent Revocable
Trust, of which Mr. Sargent is the settlor and trustee, and 6,300
shares held by the Stella B. Sargent Revocable Trust.
<F6> Mr. Smith has shared voting and investment power over 23,030 of the
shares listed.
<F7> All 108,000 shares are also included in the total shown for Mr.
Richard Sargent, who is a co-trustee of the Copley Fund. Mr. Sargent
disclaims beneficial ownership of such shares. See footnote (4).
</FN>
</TABLE>
INFORMATION ABOUT CITIZENS
Business and Properties
General. Citizens was chartered under Vermont law in 1887 as a state bank
and is headquartered in St. Johnsbury, Vermont. In addition to its main
office, Citizens operates two branch offices in St. Johnsbury and one in
Lyndonville. Citizens provides customary commercial banking and personal
trust services. Citizens offers checking accounts, NOW accounts, money
market accounts, certificates of deposit, savings accounts and individual
retirement accounts. Citizens' primary use of funds, including funds on
deposit, is lending to local businesses and individuals for real estate
mortgages, consumer, commercial and municipal loans. In addition to loans
and deposits, Citizens offers a variety of banking services at its
branches, including personal trust services, safe deposit boxes, wire
transfer services, telephone banking, travelers checks and night
depositories. Citizens has five ATMs for convenient 24 hour banking,
including two at nonbranch locations. Citizens' income is primarily
generated on its spread between interest income and interest expense, less
overhead expenses.
Citizens' deposits are insured by the Bank Insurance Fund of the FDIC up to
legal limits (generally $100,000 per depositor). As a Vermont-chartered
commercial bank, Citizens is subject to regulation, examination, and
supervision by the Vermont Banking Department and the FDIC. The
regulations of these authorities govern certain aspects of Citizens'
operations, including the levels of capital it must maintain, its ability
to pay dividends, the nature and amount of loans that it may originate, the
rate of interest that it may charge on loans, its investment policies, and
other activities. See "REGULATION AND SUPERVISION." Citizens does not
engage in any nonbanking activities.
At March 31, 1999 Citizens had total assets of approximately $98.1 million,
including net loans receivable of $69.4 million, deposits of $85.7 million
and shareholders' equity of $10.6 million. Based on the most recent
information published by the Vermont Banking Commissioner, in terms of
total assets at December 31, 1998, Citizens ranked as the 19th largest
institution of the 26 commercial banks and savings institutions then
headquartered in Vermont.
Market Area and Competition. Citizens' banking offices are located in
Vermont's Caledonia County, in the northeastern part of the state. St.
Johnsbury is the southern gateway to the
<PAGE> 119
"Northeast Kingdom," a popular outdoor recreation region. St. Johnsbury is
at the crossroads of Interstates 91 and 93 and US Routes 2 and 5. The
economy of this region is stable, although it lags the growth of more
populous areas of the state. At June 30, 1998, the date of the most recent
FDIC published deposit data, total deposits of commercial banks and savings
associations in Caledonia County were approximately $424.3 million, and
Citizens held approximately 19.5% (or $82.6 million) of those deposits.
Citizens operates in a highly competitive market for financial services.
Six banking institutions maintain banking offices in St. Johnsbury and
three of these competitors are local, community banks. All six are part of
organizations larger than Citizens and, therefore, have higher lending
limits, greater resources and offer more extensive services than does
Citizens. In addition, like other commercial banks, Citizens competes for
some or all segments of traditional banking business with nonbank financial
service providers, such as credit unions and local, regional and national
investment firms, insurance companies, mutual funds, mortgage companies
and retailers.
Citizens competes within this market environment by offering fair interest
rates, reasonable service fees and personal service. Our banking offices
are strategically located; our hours of operation are convenient and our
stable staff projects a customer friendly image.
Properties. Citizens operates four banking offices, three of which are
owned. The owned properties are the main office at 364 Railroad Street and
the branch offices at 325 Portland Street in St. Johnsbury, and 183 Depot
Street in Lyndonville. Citizens leases its branch office at the Green
Mountain Mall in St. Johnsbury Center, under a five year renewable lease
expiring on June 30, 2000. In addition to ATMs at three of its banking
offices, Citizens has two nonbranch ATM locations in East Burke and
Danville, Vermont, which are under short term rental agreements.
Legal Proceedings. There are no known pending legal proceedings to which
Citizens is a party, or to which any of the properties are subject, other
than ordinary litigation arising in the normal course of business, none of
which would have a material adverse effect on Citizens.
Lending Activities. Citizens' primary lending territory is Caledonia
County, Vermont. Due to our relatively small asset size and geographic
market, Citizens aims to diversify its loan portfolio as much as possible
by equal emphasis on commercial, consumer and residential loans. The
commercial portfolio consists principally of real estate mortgages for
local business and short term borrowing for inventory and accounts
receivable. The consumer portfolio is mainly installment loans for
personal property such as vehicles, boats, campers, snowmachines and the
like. The residential portfolio includes one- to four-family, owner-
occupied properties. Citizens services a modest portfolio of sold home
loans amounting to approximately $6.0 million.
Citizens' loan policies and administration are designed to maintain quality
underwriting and compliant documentation. Despite our best efforts, some
credit losses are inevitable because of
<PAGE> 120
subjective factors and unforeseen factors beyond Citizens' control. To
mitigate the credit problems, Citizens emphasizes secured lending for any
credit beyond normal risk classification.
Loan Portfolio. Citizens aims to have a balanced loan portfolio in three
areas: (1) commercial and commercial real estate, (2) residential real
estate and (3) consumer loans. As of December 31, 1998 these three
categories accounted for approximately 35.3%, 37.6% and 27.1%,
respectively, of Citizens' loan portfolio.
The following table presents the outstanding balance of loans in various
categories as of March 31, 1999 and December 31, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, December 31,
--------- -----------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Commercial and commercial
real estate $25,449 $24,375 $23,082
Residential Real Estate 27,218 25,929 22,875
Consumer 15,447 16,732 20,106
Municipal 1,628 1,178 753
Other loans 750 799 896
------- ------- -------
Total loans 70,492 69,013 67,712
Allowance for loan losses (1,044) (1,040) (1,017)
Net deferred loan fees (7) 17 66
------- ------- -------
Net loans $69,441 $67,990 $66,761
======= ======= =======
</TABLE>
The following tables show the maturity distribution and interest rate
sensitivity of selected loan categories at the dates indicated:
<TABLE>
<CAPTION>
March 31, 1999
Maturities
-----------------------------------------------
Within One One to Five Over Five
Year Years Years Total
---------- ----------- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and commercial
real estate $ 7,606 $12,713 $ 4,784 $25,103
Residential real estate 2,231 6,783 18,175 27,189
Municipal 1,116 512 0 1,628
Consumer 6,324 8,853 218 15,395
Other 625 91 33 749
------- ------- ------- -------
Total (1) $17,902 $28,952 $23,210 $70,064
======= ======= ======= =======
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
December 31, 1998
Maturities
-----------------------------------------------
Within One One to Five Over Five
Year Years Years Total
---------- ----------- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and commercial
real estate $ 7,167 $12,560 $ 4,316 $24,043
Residential real estate 2,086 6,342 17,443 25,871
Municipal 566 612 0 1,178
Consumer 6,616 9,842 242 16,700
Other 695 97 6 798
------- ------- ------- -------
Total(1) $17,130 $29,453 $22,007 $68,590
======= ======= ======= =======
<FN>
- -------------------
<F1> Does not include non-accrual loans in the amount of $ 427,704 for
March 31, 1999 and $ 423,229 for December 31, 1998.
</FN>
</TABLE>
Citizens actively manages its loan portfolio to minimize risks. The Board
reviews the problem accounts monthly and the adequacy of the loan loss
reserve quarterly. Whenever management determines that the full collection
of an account is doubtful, interest accrual is discontinued. The following
table presents a summary of non-accrual, past due and restructured loans
and foreclosed real estate as of March 31, 1999 and as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ---------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Loans on non-accrual $428 $423 $612
Loans past due 90 days or more and
still accruing 541 583 784
Troubled debt restructuring, included
in above non-accrual loans 92 94 103
Foreclosed real estate 20 0 110
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is a reserve
created to absorb losses inherent in the loan portfolio. The allowance is
increased by charges to current earnings and recovery of prior losses. The
allowance is decreased by loan losses after all reasonable collection
efforts are exhausted. The balance of the reserve is evaluated quarterly
based upon the current quality of the loan portfolio, the local economy and
other related trends. Citizens management and Board considers the current
balance of the allowance to be adequate.
Citizens' allowance for loan losses was $ 1,044,290 at March 31, 1999.
This represented 1.5% of the total loans outstanding. The following table
shows changes to Citizens' allowance for loan losses for the first quarter
of 1999, and for the years ended 1998 and 1997:
<PAGE> 122
<TABLE>
<CAPTION>
At or for the year
ended December 31,
At or for the three months --------------------
ended March 31, 1999 1998 1997
-------------------------- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses,
beginning of period $1,040 $1,017 $ 993
Charge offs:
Real estate-mortgage loans 16 7 31
Real estate commercial/
industrial loans 3 4 29
Loans to Individuals 48 316 252
------ ------ ------
67 327 312
------ ------ ------
Recoveries:
Real estate-mortgage loans 0 0 0
Real estate commercial/
industrial loans 0 0 0
Loans to Individuals 9 50 36
------ ------ ------
9 9 36
------ ------ ------
Net charge offs 58 277 276
------ ------ ------
Provision for loan losses 62 300 300
------ ------ ------
Allowance for loan losses, end
of period $1,044 $1,040 $1,017
====== ====== ======
Ratio of net charge offs to
average loans 0.08% 0.40% 0.42%
Ratio of allowance for loan
losses to period-end loans 1.48% 1.51% 1.50%
</TABLE>
The following table shows the amount of Citizens' allowance for loan losses
on Citizens' loan portfolio by category of loan and the percentage of loans
in each category to total loans in the respective portfolios at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Amount Percent (1) Amount Percent(1) Amount Percent(1)
------ ----------- ------ ---------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate $ 144 38.6% $ 137 37.5% $ 120 33.8%
Commercial and
commercial real estate 331 36.1% 324 35.7% 320 34.1%
Consumer 305 23.0% 329 25.1% 384 31.0%
Municipal 8 2.3% 6 1.7% 4 1.1%
Unallocated 256 N/A 244 N/A 189 N/A
------ ----- ------ ----- ------ -----
Total $1,044 100.0% $1,040 100.0% $1,017 100.0%
====== ===== ====== ===== ====== =====
<FN>
- -------------------
<F1> Percentage of loans in each category.
</FN>
</TABLE>
<PAGE> 123
The allocations in the table are merely for purposes of illustration. No
portion of the allowance is restricted to any loan or group of loans, and
the entire allowance is available to absorb realized losses.
Investment Securities. Citizens' investment portfolio is conservatively
managed as a source of income, an asset/liability management tool and a
resource for potential liquidity requirements. Citizens invests in short
to intermediate term U.S. Treasury and agency securities, investment grade
corporate bonds, municipal bonds, Federal Funds and other short term
investments.
The following table shows the amortized cost and market value of Citizens'
investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
March 31, 1999 1998 1997
------------------- ------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available -for-sale:
Debt securities issued
by the U.S. Treasury and
other U.S. Gov't corporations
and agencies $10,708 $10,735 $10,709 $10,834 $10,457 $10,496
Debt securities issued by
states of the U.S. and
political subdivisions of
the states - - - - 85 87
Mortgage-backed securities 391 393 435 437 727 731
Other securities 9,842 9,831 8,811 8,903 6,511 6,574
------- ------- ------- ------- ------- -------
Total Securities available-for-sale $20,941 $20,959 $19,955 $20,174 $17,780 $17,888
------- ------- ------- ------- ------- -------
Federal Home Loan Bank and Vermont
Bank Service Corp. stock 280 280 280 280 263 263
------- ------- ------- ------- ------- -------
Total Securities $21,221 $21,239 $20,235 $20,454 $18,043 $18,151
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 124
The following table shows, as of March 31, 1999, the amortized costs of
Citizens' investment securities maturing within stated periods and their
related weighted average yields.
<TABLE>
<CAPTION>
Under 1 1-5 5-10 Over 10
Year Yield Years Yield Years Yield Years Yield Total Yield
------- ----- ----- ----- ----- ----- ------- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $1,501 6.34% $ 5,506 6.58% $3,201 6.40% $500 6.65% $10,708 6.50%
Mortgage-backed securities - - - 391 6.14% 391 6.14%
Other Securities 759 6.39% 8,048 6.24% 1,035 6.21% - 9,842 6.25%
------ ------- ------ ---- -------
Total portfolio (1) $2,260 6.36% $13,554 6.38% $4,236 6.35% $891 6.43% $20,941 6.37%
====== ======= ====== ==== =======
<FN>
- -------------------
<F1> Does not include Federal Home Loan Bank stock and Vermont Bank
Service Corp stock with carrying amounts at March 31, 1999 of
$277,800 and $2,500, respectively.
</FN>
</TABLE>
Sources of Funds. Citizens' primary source of funds for its lending and
investment activities is deposits obtained from individuals and small and
medium-sized businesses in our market area. Management monitors closely
the cost of these funds, which is affected by money and capital markets,
local competition, Citizens' liquidity, loan demand and the availability
and attractiveness of other investment alternatives.
The following table shows the average deposits and average interest rate
paid on deposits as of March 31, 1999, and as of December 31, 1998 and
1997.
<TABLE>
<CAPTION>
Years Ended December 31,
Three Months Ended ------------------------------------
March 31,1999 1998 1997
------------------ ---------------- ----------------
Average Yield Average Yield Average Yield
Balance Rate Balance Rate Balance Rate
------- ----- ------- ----- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 8,128 0% $ 7,562 0% $ 7,082 0%
NOW and money
market accounts 19,242 2.41% 18,831 2.87% 17,155 3.08%
Savings 13,587 3.02% 13,487 3.06% 13,127 3.05%
Time, $100,000 and over 9,724 5.93% 8,702 5.91% 7,557 5.91%
Other Time Deposits 35,560 5.25% 35,363 5.47% 35,889 5.50%
------- ------- -------
Total $86,241 3.85% $83,945 4.05% $80,810 4.15%
======= ======= =======
</TABLE>
<PAGE> 125
The following table shows, as of March 31, 1999 and December 31, 1998, the
maturities of time deposits in amounts of $100,000 or more:
<TABLE>
<CAPTION>
Maturity March 31,1999 December 31, 1998
- -------- ------------- -----------------
(dollars in thousands)
<C> <C> <C>
3 months or less $1,214 $ 627
Over 3 months through 6 months 1,128 1,136
Over 6 months through 12 months 2,433 3,266
Over 12 months 4,954 4,787
------ ------
$9,729 $9,816
====== ======
</TABLE>
The following tables show Citizens' rate sensitivity analysis as of March
31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999
0-3 3 months 6 months 1 year to Over 5
months to 6 months to 1 year 5 years years Total
------ ----------- --------- --------- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) $13,036 $ 3,911 $ 9,538 $27,528 $15,877 $69,890
FHLB/VBSC stock - - - - 280 $ 280
Available-for-sale
securities (2) 1,000 501 1,011 13,302 5,127 $20,941
------- ------- -------- ------- ------- -------
Total interest-
earning assets $14,036 $ 4,412 $ 10,549 $40,830 $21,284 $91,111
======= ======= ======== ======= ======= =======
Interest bearing liabilities:
Time CD's over $100,000 $ 1,214 $ 1,128 $ 2,433 $ 4,954 $ - $ 9,729
Other time deposits 9,457 6,715 8,781 10,092 320 $35,365
Money market accounts 9,468 - - - - $ 9,468
Regular savings - - 3,646 - 10,377 $14,023
NOW accounts 98 - - - 9,728 $ 9,826
FHLB advances - - - 578 912 $ 1,490
------- ------- -------- ------- ------- -------
Total interest-
bearing liabilities $20,237 $ 7,843 $ 14,860 $15,624 $21,337 $79,901
======= ======= ======== ======= ======= =======
Period sensitivity gap $(6,201) $(3,431) $ (4,311) $25,206 $ (53) $11,210
======= ======= ======== ======= ======= =======
Cumulative sensitivity gap $(6,201) $(9,632) $(13,943) $11,263 $11,210
======= ======= ======== ======= =======
Period sensitivity gap
as a percentage of
interest earning assets (6.8%) (3.8%) (4.7%) 27.7% (0.1%)
Cumulative sensitivity
gap as a percentage of
interest earning assets (6.8%) (10.6%) (15.3%) 12.4% 12.3%
<FN>
- -------------------
<F1> Loans do not include non-accrual loans.
<F2> Amortized cost.
</FN>
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
December 31, 1998
0-3 3 months 6 months 1 year to Over 5
months to 6 months to 1 year 5 years years Total
------ ----------- --------- --------- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) $13,327 $ 4,597 $ 8,253 $28,016 $14,171 $68,364
FHLB/VBSC stock - - - - 280 $ 280
Available-for-sale
securities (2) 250 1,000 502 13,797 4,404 $19,953
------- ------- -------- ------- ------- -------
Total interest-
earning assets $13,577 $ 5,597 $ 8,755 $41,813 $18,855 $88,597
======= ======= ======== ======= ======= =======
Interest bearing liabilities:
Time CD's over $100,000 $ 627 $ 1,136 $ 3,266 $ 4,787 $ - $ 9,816
Other time deposits 8,177 8,492 8,915 9,753 159 $35,496
Money market accounts 8,953 - - - - $ 8,953
Regular savings - - 3,520 - 10,018 $13,538
NOW accounts 103 - - - 10,229 $10,332
FHLB advances - - - 610 936 $ 1,546
------- ------- -------- ------- ------- -------
Total interest-
bearing liabilities $17,860 $ 9,628 $ 15,701 $15,150 $21,342 $79,681
======= ======= ======== ======= ======= =======
Period sensitivity gap $(4,283) $(4,031) $ (6,946) $26,663 $(2,487) $ 8,916
======= ======= ======== ======= ======= =======
Cumulative sensitivity
gap $(4,283) $(8,314) $(15,260) $11,403 $ 8,916
======= ======= ======== ======= =======
Period sensitivity gap
as a percentage of
of interest earning assets (4.8%) (4.5%) (7.8%) 30.1% (2.8%)
Cumulative sensitivity
gap as a percentage
of interest earning assets (4.8%) (9.4%) (17.2%) 12.9% 10.1%
<FN>
- -------------------
<F1> Loans do not include non-accrual loans.
<F2> Amortized cost.
</FN>
</TABLE>
Borrowings. Citizens borrowed $1.69 million from the FHLB in the first
quarter of 1998 to fund loan portfolio growth. This advance was secured by
a portion of qualified assets, consisting of first mortgage residential
real estate loans, securities issued, insured or guaranteed by the U.S.
government or agencies and all funds placed in deposit accounts at the
Federal Home Loan Bank of Boston. As of March 31, 1999, $1.49 million was
outstanding on this borrowing, at a weighted average cost of 6.017%.
<PAGE> 127
Management's Discussion and Analysis of Financial Condition
and Results of Operation
The following discussion and analysis provides information regarding
Citizens' financial position as of March 31, 1999 and 1998, and as of
December 31, 1998 and 1997, and its results of operations for the three
months ended March 31, 1999 and 1998, and for the years ended December 31,
1998, 1997 and 1996. This discussion should be read in conjunction with
the information under "SELECTED FINANCIAL DATA -- Citizens" and with
Citizens' financial statements and related notes beginning on page F-44,
and with other financial data appearing elsewhere in this joint proxy
statement/prospectus. In the opinion of Citizens' management, the
unaudited interim data reflect all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present Citizens' consolidated
financial position and results of operations to be expected for a full
fiscal year. Management is not aware of the occurrence of any events after
March 31, 1999 that would materially affect the information presented
below. Nevertheless, readers are cautioned to refer to "RISK FACTORS" for
information relating to factors that could affect future operating results
and to the qualifications under "A Warning About Forward-Looking
Statements" that apply to any forward-looking statements in the following
discussion.
Results of Operations. Net Interest Income. The largest component of
Citizens' operating income is net interest income, which is the difference
between the interest and dividend income received from interest-earning
assets and the interest expense paid on its interest-bearing liabilities.
For purposes of this discussion, the average yield rate on interest income
earned on tax-exempt loans and securities is adjusted to a fully-taxable
equivalent basis to facilitate comparison with interest earned that is
subject to taxation under applicable laws. Net interest income is
determined by an institution's net interest spread (the difference between
the yield on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative average balances of interest-
earning assets and interest-bearing liabilities, and the degree of variance
in the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Changes in nonperforming assets
together with amounts of interest lost and recovered on those assets also
impact comparisons of net income.
Yields Earned and Rates Paid. The following tables show, for the periods
indicated, the total amount of income recorded from interest-earning
assets, and the related average yields, the interest expenses associated
with interest-bearing liabilities, expressed in dollars and average rates,
and the relative net interest spread and net interest margin. All yield
and rate information is calculated on an annualized basis. Yield and rate
information for a period is average information for the period, and is
calculated by dividing the 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 tables have been calculated on a pre-tax basis.
<PAGE> 128
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 2,841 $ 33 4.65% $ 816 $ 11 5.39%
Interest bearing deposits 30 0 3.45% 45 1 4.14%
Investments (1) (2) 20,929 328 6.27% 17,981 288 6.41%
Loans, net (1), (3) 68,937 1,556 8.89% 66,979 1,608 9.60%
------- ------ ---- ------- ------
Total interest-earning
assets (1) 92,737 1,917 8.18% 85,821 1,908 8.79%
Cash and due from banks 3,017 2,494
Premises and equipment 1,930 1,927
Other assets 1,000 1,212
------- -------
Total assets $98,684 $91,454
======= =======
Average Liabilities and
Shareholders' Equity:
NOW accounts $10,033 33 1.32% $ 9,345 46 1.97%
Savings and money market
accounts 22,795 185 3.25% 20,966 179 3.42%
Certificates of deposit 45,283 611 5.40% 43,872 604 5.51%
Borrowed funds 1,510 23 6.09% 79 1 5.51%
------- ------- ------- -------
Total interest-bearing
liabilities 79,621 852 4.28% 74,262 830 4.47%
Non-interest bearing deposits 8,128 6,995
Other liabilities 352 373
------- -------
Total liabilities 88,101 81,630
Shareholders' equity 10,583 9,824
------- -------
Total liabilities and
shareholders' equity $98,684 $91,454
======= =======
Net interest income (1) $1,065 $1,078
====== ======
Net interest spread (1) 3.90% 4.32%
==== ====
Net interest margin (1) 4.54% 4.96%
==== ====
<FN>
- -------------------
<F1> Average yield reported on a tax-equivalent basis.
<F2> The average balance of investments is calculated using the amortized
cost basis.
<F3> Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 3,660 $ 193 5.27% $ 2,254 $ 119 5.28% $ 2,316 $ 122 5.27%
Interest bearing
deposits 31 2 6.45% 94 4 4.26% 96 4 4.17%
Investments (1) (2) 18,655 1,188 6.37% 17,205 1,103 6.41% 16,597 1,032 6.22%
Loans, net (1), (3) 67,468 6,510 9.50% 65,171 6,324 9.55% 62,115 6,030 9.56%
------- ------ ------- ------ ------- ------
Total interest-
earning assets (1) 89,814 7,893 8.69% 84,724 7,550 8.80% 81,124 7,188 8.76%
Cash and due from banks 2,800 2,653 2,909
Premises and equipment 1,981 1,935 2,050
Other assets 1,111 1,121 983
------- ------- -------
Total assets $95,706 $90,433 $87,076
======= ======= =======
Average Liabilities and
Shareholders' Equity:
NOW accounts $10,263 $ 198 1.93% $ 8,956 $ 194 2.17% $ 8,808 $ 195 2.21%
Savings and money
market accounts 22,055 755 3.42% 21,326 735 3.45% 21,295 732 3.44%
Certificates of deposit 44,065 2,450 5.56% 43,446 2,421 5.57% 41,294 2,373 5.75%
Borrowed funds 1,277 70 5.48% 29 1 5.90% 4 1 5.98%
------- ------ ------- ------ ------- ------
Total interest-
bearing liabilities 77,660 3,473 4.47% 73,757 3,351 4.54% 71,401 3,301 4.62%
Non-interest bearing
deposits 7,551 7,088 6,877
Other liabilities 222 165 90
------- ------- -------
Total liabilities 85,433 81,010 78,368
Shareholders' equity 10,273 9,423 8,708
------- ------- -------
Total liabilities
and shareholders'
equity $95,706 $90,433 $87,076
======= ======= =======
Net interest income (1) $4,420 $4,199 $3,887
====== ====== ======
Net interest spread (1) 4.21% 4.27% 4.13%
==== ==== ====
Net interest margin (1) 4.86% 4.90% 4.73%
==== ==== ====
<FN>
- -------------------
<F1> Average yield reported on a tax-equivalent basis.
<F2> The average balance of investments is calculated using the amortized
cost basis.
<F3> Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
<PAGE> 130
Rate/Volume Variance Analysis. The following table shows certain
information about changes in Citizens' interest income and interest expense
for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable
to : (1) changes in volume (changes in volume multiplied by old rate) and
(2) changes in rates (changes in rate multiplied by old volume). Changes
in rate-volume (changes in rate multiplied by the changes in volume) are
allocated proportionately between changes in rate and changes in volume.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Compared
to Three Months Ended March 31, 1998
Increase/(Decrease) Due to Change In
------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 27 $ (5) $ 22
Interest bearing deposits (1) (0) (1)
Investments 47 (7) 40
Loans, net 38 (90) (52)
---- ----- ----
Total interest-earning assets $112 $(103) $ 9
---- ----- ----
Interest-bearing liabilities:
NOW accounts $ 3 $ (16) $(13)
Savings and money market accounts 16 (10) 6
Certificates of deposit 19 (12) 7
Borrowed funds 20 2 22
---- ----- ----
Total interest-bearing liabilities $ 58 $ (36) $ 22
---- ----- ----
Net change in net interest income $ 54 $ (67) $(13)
==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Compared Year Ended December 31, 1997 Compared
to Year Ended December 31, 1997 to Year Ended December 31, 1996
Increase/(Decrease) Due to Change In Increase/(Decrease) Due to Change In
------------------------------------- -------------------------------------
(dollars in thousands)
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 74 $ (0) $ 74 $ (3) $ 0 $ (3)
Interest bearing deposits (3) 1 (2) (0) 0 (0)
Investments 93 (8) 85 39 32 71
Loans, net 221 (35) 186 294 0 294
---- ---- ---- ---- ---- ----
Total interest-earning assets 386 (43) 343 330 32 362
---- ---- ---- ---- ---- ----
Interest-bearing liabilities:
NOW accounts $ 28 $(24) $ 4 $ 3 $ (4) $ (1)
Savings and money market accounts 25 (5) 20 1 2 3
Certificates of deposit 34 (5) 29 124 (76) (48)
Borrowed funds 73 (4) 69 1 (1) 0
---- ---- ---- ---- ---- ----
Total interest-bearing
liabilities 161 (39) 122 129 (79) 50
---- ---- ---- ---- ---- ----
Net change in net
interest income $225 $ (4) $221 $201 $111 $312
==== ==== ==== ==== ==== ====
</TABLE>
<PAGE> 131
Comparison of Financial Condition at March 31, 1999 and December 31, 1998.
Citizens' total assets decreased by $0.9 million or 0.9% to $98.1 million
at March 31, 1999 from $99.0 million at December 31, 1998. The net decrease
in total assets is primarily attributable to a $1.5 million increase in net
loans and increase in securities of $788,000, offset by a $3.2 million
decrease in cash and cash equivalents primarily due to the purchase of
securities in anticipation of interest rate decreases and pending
maturities. Total net loans increased by $1.5 million or 2.1% to $69.4
million or 70.7% of total assets at March 31, 1999 as compared to $68.0
million or 68.7% of total assets at December 31, 1998, due to an increase
of $1.3 million in residential real estate loans. Securities held by
Citizens increased by $788,000 or 3.9% to $21.2 million at March 31, 1999
from $20.5 million at December 31, 1998.
Total deposits decreased by $667,000 or 0.8% to $85.7 million at March 31,
1999 from $86.4 million at December 31, 1998. This decrease was the result
of a decrease of $1.4 million in non-interest bearing demand and NOW
accounts. Total FHLB advances remained at $1.5 million at March 31, 1999
and December 31, 1998.
Total equity increased by $87,000 or 0.8% to $10.6 million at March 31,
1999 from $10.5 million at December 31, 1998 as a result of a decrease of
$132,000 in the net unrealized holding gain on securities available-for-
sale and net income of $219,000. With total equity of 10.8% of total
assets, the Bank exceeded all regulatory capital ratios at March 31, 1999.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998. Net Income. Citizens net income decreased by $2,484 or 1.1%, to
$218,938 or $1.44 per share, for the three months ended March 31, 1999,
from $221,422, or $1.46 per share, for the three months ended March 31,
1998.
Interest and Dividend Income. Total interest and dividend income
increased by $9,000 or .5% to $1.92 million for the three months ended
March 31, 1999 from $1.91 million for the three months ended March 31,
1998. Average interest earning assets increased by $6.9 million or 8% to
$93.8 million for the three months ended March 31, 1999 from $86.9 million
for the three months ended March 31, 1998. There were increases in the
average balances for federal funds sold of $2.0 million or 2.48%; for
securities of $2.9 million or 16.4%; and for loans of $2.0 million or 2.9%.
However, due to a lower interest rate environment, the overall interest
rate yield on interest earning assets reduced to 8.2% for the three months
ended March 31, 1999 from 8.8% for the three months ended March 31, 1998.
Interest Expense. Interest expense increased by $22,000, or 2.7%, to
$852,000 for the three months ended March 31, 1999 from $830,000 for the
three months ended March 31, 1998. Interest expense increased primarily
as a result of an increase of $23,000 in interest expense in other borrowed
money. Other borrowings consist of FHLB loan advances. Increased
borrowings were the result of matching FHLB borrowings with fixed rate
mortgages. Interest expense on deposits remained at $829,000 for the three
months ended March 31, 1999 and March 31, 1998. Total average interest-
bearing deposits increased by $3.9 million to $78.1
<PAGE> 132
million for the three months ended March 31, 1999 from $74.2 million for
the three months ended March 31, 1998, an increase of 5%; however, total
interest expense did not change due to lower interest rates paid on all
categories of deposits, except for regular savings accounts.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses, which is a charge to operations.
The provision reflects management's assessment of losses inherent in the
loan portfolio and is based on a review of the risk characteristics as well
as the growth of the loan portfolio. Management of Citizens considers many
factors in determining the level of the provision for loan losses. Major
factors include collateral value on a loan by loan basis, trends in loan
delinquencies, risk classification identified in the bank's regular review
of individual loans, and economic conditions. The provision for loan
losses decreased by $13,000 or 17.3% for the three months ended March 31,
1999 as compared to the three months ended March 31, 1998. The decrease in
the provision is due to a shift into real estate loans and phase-out of
indirect automobile dealer lending activity. Net charge-offs decreased
$20,000 or 25.6%, to $58,000 for the three months ended March 31, 1999,
from $78,000 for the three months ended March 31, 1998.
Noninterest Income. Noninterest income increased by $23,000 or 15.6% to
$170,000 for the three months ended March 31, 1999 from $147,000 for the
three months ended March 31, 1998. The increase was primarily the result of
a $17,000 or 19.1% increase in service charges on deposit accounts.
Noninterest Expense. Citizens' noninterest expense increased by $12,000 or
1.5% to $833,000 for the three months ended March 31, 1999 from $821,000
for the three months ended March 31, 1998. The increase resulted primarily
from a general increase in operating expenses. Salaries and employee
benefits, the largest component of noninterest expense, was $433,000 for
the three months ended March 31, 1999 as compared to $480,000 for the three
months ended March 31, 1998, a decrease of $47,000 or 9.8%. This decrease
was primarily associated with a change from a bi-weekly to a bi-monthly
payroll, effective December 31, 1998. This change reduced the payroll
expense in the first quarter of 1999 by approximately $53,000, but will not
affect year-to-date 1999 payroll expense as compared to year-to-date 1998.
During the period, other noninterest expense increased by $44,000 or 18.6%
from $236,000 to $280,000, due mainly to expenses of $35,000 associated
with the merger. Occupancy and equipment expense increased by $15,000 or
14.3% to $120,000 for the three months ended March 31, 1999 as compared to
$105,000 for the three months ended March 31, 1998, with the increase
primarily related to depreciation increases due to equipment purchases
during 1998, including a Vertex Teller System and two ATM machines.
Income Taxes. The net provision for income taxes amounted to $120,000 for
the three months ended March 31, 1999 as compared to $107,000 for the three
months ended March 31, 1998, resulting in effective tax rates of 35.4% and
32.6%, respectively. The effective tax rate reflects in 1999 the non-
deductibility of the merger expenses described above.
<PAGE> 133
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Interest and Dividend Income. Interest and dividend income increased by
$343,000 or 4.5% to $7.9 million for the year ended December 31, 1998, from
$7.6 million for the year ended December 31, 1997. Average earning assets
increased by $5.1 million, or 6.0%, to $90.1 million for the year ended
December 31, 1998, from $85.8 million for the year ended December 31, 1997.
Average loans increased by $2.3 million, or 3.5%, to $68.5 million for the
year ended December 31, 1998, from $66.2 million for the year ended
December 31, 1997. Increases in the level of residential and commercial
real estate and commercial business loans accounted for this increase,
which growth is consistent with Citizens' focus away from retail
installment lending to real estate lending. The average balance of
investment securities (including mortgage-backed securities) increased by
$1.5 million to $18.7 million for the year ended December 31, 1998, from
$17.2 million for the year ended December 31, 1997. The average level of
federal funds sold for the year ended December 31, 1998, increased by $1.4
million, or 62.4%, to $3.6 million for the year ended December 31, 1998,
from $2.2 million for the year ended December 31, 1997. The increase in
the average level of federal funds sold was due to normal investment
security maturities and calls on investment securities due to depressed
interest rates.
Interest Expense. Interest expense increased by $122,000 or 3.6%, to $3.5
million for the year ended December 31, 1998 from $3.4 million for the year
ended December 31, 1997. Average interest-bearing liabilities increased by
$3.9 million to $77.7 million for the year ended December 31, 1997, from
$73.8 million for the year ended December 31, 1997. Average time deposits
increased $619,000, or 1.4%, to $44.1 million for the year ended December
31, 1996, from $43.4 million for the year ended December 31, 1997, while
the average balances for NOW, money market and savings accounts increased
by $2.0 million, or 6.6%, to $32.3 million for the year ended December 31,
1998, from $30.3 million for the year ended December 31, 1997.
Provision for Loan Losses. Citizens' provision for loan losses remained at
$300,000 for the years ended December 31, 1998 and December 31, 1997. Net
charge offs increased by $15,000, or 4.8%, to $327,000 for the year ended
December 31, 1998 from $276,000 for the year ended December 31, 1997.
Noninterest Income. Noninterest income increased $61,000, or 9.0%, to
$743,000 for the year ended December 31, 1998, from $682,000 for the year
ended December 31, 1997. The results for 1998 reflected net gains of
$3,000 from the sale of securities during 1998 compared to a net gain of
$5,000 from securities sales during 1997. Other noninterest income
increased by $63,000, or 9.3%, to $740,000 for the year ended December 31,
1998 from $677,000 for the year ended December 31, 1997. Increases in
Trust Department income of $27,000 or 31.4% and increased non-sufficient
funds (NSF) service fees of $50,000 or 14.0% were the main reasons for this
increase.
Noninterest Expense. Noninterest expense increased $140,000 or 4.5% to
$3.2 million for the year ended December 31, 1998, from $3.1 million for
the year ended December 31, 1997. Salaries and employee benefits increased
$57,000, or 3.4%, to $1.8 million for the year ended
<PAGE> 134
December 31, 1998, from $1.7 million for the year ended December 31, 1997,
reflecting a slight increase in normal salary and benefit increases. Other
operating expense increased $85,000, or 9.4%, to $990,000 for the year
ended December 31, 1998, from $905,000 for the year ended December 31,
1997. This increase was mainly attributable to a $35,000 OREO writedown
and a $35,000 increase in state franchise taxes.
Income Tax Expense. Income tax expense increased by $50,000, or 10.0%, to
$548,000 for the year ended December 31, 1998, from $498,000 for the year
ended December 31, 1997. This increase primarily reflected the difference
in the amount of Citizens' taxable income. Citizens' effective income tax
rate was 33% in 1998 and 33% in 1997.
Net Income. Net income increased by $92,000, or 9.1%, to $1.1 million, or
$7.25 per share, for the year ended December 31, 1998, from $1.0 million,
or $6.64 per share, for the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Interest and Dividend Income. Citizens' interest and dividend income
increased by $362,000 or 5.0% to $7.5 million for the year ended December
31, 1997, from $7.2 million for the year ended December 31, 1996. Average
earning assets increased by $3.7 million or 4.5%, to $85.8 million for the
year ended December 31, 1997, from $82.1 million for the year ended
December 31, 1996. Average loans increased by $3.1 million, or 4.9%, to
$66.2 million for the year ended December 31, 1997, from $63.1 million for
the year ended December 31, 1996. The average balance of investment
securities (including mortgage-backed securities) increased by $608,000 to
$17.2 million for the year ended December 31, 1997, from $16.6 million for
the year ended December 31, 1996. The average level of federal funds sold
remained unchanged at $2.3 million for the years ended December 31, 1997
and 1996.
Interest Expense. Interest expense increased by $50,000 or 1.5%, to $3.4
million for the year ended December 31, 1997 from $3.3 million for the year
ended December 31, 1996. Average interest-bearing liabilities increased by
$2.4 million, or 3.2%, to $73.8 million for the year ended December 31,
1997, from $71.4 million for the year ended December 31, 1996. Average
time deposits increased $2.1 million, or 5.1%, to $43.4 million for the
year ended December 31, 1997, from $41.3 million for the year ended
December 31, 1996, while the average balances for NOW, money market and
savings accounts decreased by $179,000, or .67%, to $30.3 million for the
year ended December 31, 1997, from $30.1 million for the year ended
December 31, 1996.
Provision for Loan Losses. Citizens' provision for loan losses was
$300,000 for the year ended December 31, 1997 and $280,000 for December 31,
1996 an increase of $20,000, or 7.1%. Net charge offs increased by
$18,000, or 7.0%, to $276,000 for the year ended December 31, 1997 from
$258,000 for the year ended December 31, 1996.
Noninterest Income. Noninterest income decreased $9,000, or 1.3%, to
$682,000 for the year ended December 31, 1997, from $691,000 for the year
ended December 31, 1996. The decrease
<PAGE> 135
was due, in part, to a one-time gain on pension termination in 1996 of
$167,000 offset by a $77,000 increase in service fees.
Noninterest Expense. Noninterest expense increased by $172,000 or 5.9% to
$3.1 million for the year ended December 31, 1997, from $2.9 million for
the year ended December 31, 1996. Salaries and employee benefits increased
$117,000, or 7.3%, to $1.7 million for the year ended December 31, 1997,
from $1.6 million for the year ended December 31, 1996. Office occupancy
and equipment expense decreased $8,000, or 1.8%, to $447,000 for the year
ended December 31, 1997, from $455,000 for the year ended December 31,
1996.
Income Tax Expense. Income tax expense increased by $19,000, or 4.0%, to
$498,000 for the year ended December 31, 1997, from $479,000 for the year
ended December 31, 1996. Citizens' effective tax rates for 1997 and 1996
were 33% and 34%, respectively.
Net Income. Net income increased by $91,000, or 9.9%, to $1.0 million, or
$6.64 per share, for the year ended December 31, 1997, from $918,000, or
$6.04 per share, for the year ended December 31, 1996.
Other Financial Considerations
Allowance for Loan Losses and Non-Performing Assets. At March 31, 1999,
Citizens' allowance for loan losses amounted to $1.0 million, or 1.5% of
total loans, equal to $1.0 million or 1.5% of total loans at December 31,
1998 and at March 31, 1998. During the first quarter of 1999, Citizens
made provisions to the allowance of $62,000 as compared to $75,000 the
first quarter of March 1998. Provisions are based on the evaluation by
management and the board of directors of current and anticipated economic
conditions, changes in character and size of the loan portfolio and other
indicators. Management and the Board consider the current balance of the
allowance to be adequate to absorb losses inherent in the loan portfolio.
As of March 31, 1999, non-performing loans (non-accrual loans and loans
past due 90 days or more) totaled $969,000 or 1.4% of total loans, compared
to $1.0 million, or 1.5% at December 31, 1998. The decrease consisted of a
$5,000 or 1.2% increase in nonaccrual loans and a $42,000 or 7.2% decrease
in loans past due 90 days or more from December 31, 1998.
The ratio of non-performing assets (non-performing loans and OREO) to total
assets for
March 31, 1999 was 1.0% as compared to 1.0% for December 31, 1998.
Net charge-offs totaled $58,000, or .1% of total loans as of March 31, 1999
as compared to $78,000 or .1% of total loans as of March 31, 1998.
At December 31, 1998, Citizens' allowance for loan losses amounted to
$1.017 million, which was $24,000 more than the $993 thousand balance at
December 31, 1997. During 1998, Citizens
<PAGE> 136
made provisions of $300,000 for loan losses which remained unchanged in
1997. This compares with provisions of $280,000 in 1996.
As of December 31, 1998, nonaccrual loans totaled $423,000 or .6% of total
loans as compared to $612,000 or .9% at December 31, 1997. This represents
a decrease of $189,000 or 30.9%. Total non-performing loans decreased
$390,000, or 27.9%, over the same period.
Liquidity and Capital Resources. Citizens' primary sources of funds are
deposits, proceeds from the principal and interest payments on loans, debt
and equity securities, and to a lesser extent, borrowings and proceeds from
the sale of fixed rate mortgage loans to the secondary market. While
maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows, mortgage prepayments,
mortgage loan sales, and borrowings are greatly influenced by general
interest rates, economic conditions and competition.
Citizens is required to maintain adequate levels of liquid assets. This
guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. Citizens has historically maintained a level of liquid assets
in excess of regulatory requirements.
Liquidity management is both a daily and long-term function of management.
As part of this liquidity management process, Citizens has established a
pre-approved $3 million line of credit facility with the Federal Home Loan
Bank, upon which it may draw if it requires funds beyond those it is able
to generate internally. At March 31, 1999, Citizens had FHLB borrowings of
$1.5 million.
Citizens anticipates that it will have sufficient funds available to meet
its current loan origination commitments. Certificates of deposit of
$100,000 or more which are scheduled to mature in one year or less totaled
$4.8 million at March 31, 1999. Based on historical experience, management
believes that a significant portion of such deposits will remain with the
Bank.
Regulatory Capital Requirements. A bank's capital serves to support growth
and provide protection against loss to depositors and creditors. Equity
capital represents the shareholders' investment. Management strives to
maintain an optimal level of capital on which an attractive return to the
shareholders will be realized over both the short-term and long-term, while
serving depositors' and creditors' needs. Federally insured banks, such as
Citizens, must also maintain capital at levels specified by applicable
minimum capital ratios. For more information on these requirements, see
"REGULATION AND SUPERVISION."
As of March 31, 1999, the most recent notification from the FDIC
categorized Citizens as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, Citizens
must maintain minimum total risk-based and Tier I risk-based capital and
minimum Tier I leverage ratios. There are no conditions or events since
that notification that management believes have changed Citizens category.
The following table shows Citizens'
<PAGE> 137
actual capital amounts and ratios against the amounts and ratios required
by the capital adequacy guidelines and the amounts and ratios necessary to
be categorized as well-capitalized:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to
Risk Weighted Assets) $11,449 16.15% $5,671 8.0% $7,089 10.0%
Tier I Capital (to
Risk Weighted Assets) $10,561 14.90% $2,835 4.0% $4,253 6.0%
Tier I Capital (to
Average Assets) $10,561 10.70% $2,835 4.0% $4,253 5.0%
</TABLE>
Year 2000
The Problem. The rollover of the date on the Year 2000 may be a problem
for many computer programs or computer chips. Many computer programs and
chips store calendar dates as two-digit rather than four-digit numbers.
Unless these two-digit systems are corrected or replaced before the Year
2000, they probably will not recognize the proper year. This would
drastically affect calculations, timetables and even the ability to perform
many tasks. Like other financial institutions, Citizens relies heavily on
computers. It is our responsibility to do everything in our control to
make sure our systems perform properly in the Year 2000 and beyond.
The Plan. Citizens has been working on the Year 2000 issue since 1996. A
senior management committee is directly taking charge to make sure our
systems will operate smoothly. This committee meets monthly with the Board
of Directors for input and reporting on critical steps. The FDIC is
closely monitoring our progress. The plan requires assessment, testing and
remediation for all of our computer programs and equipment driven by
computer chips. Our Year 2000 plan includes communication, assessment and
testing with third party vendors that are critical to our bank's operation
and service. The plan involves Year 2000 readiness assessment of our major
customers and evaluation of the credit and operational risks associated
with those findings. And finally, our plan contains contingency plans in
case any important aspect of the century date change does not transition
smoothly.
Execution of the Plan as of December 31, 1998. Our goal was to identify
and thoroughly test all mission critical systems by December 31, 1998.
This was done successfully and includes systems such as proof of deposit,
loan origination and deposit opening. Core applications were completed by
proxy testing. An IBM AS400 mainframe computer identical to the production
machine has been leased to conduct interface testing. All of our mission
critical vendors have supplied Year 2000 ready products. Mission critical
systems that we knew were noncompliant
<PAGE> 138
with the Year 2000 were the teller platform and the main office telephone
system. Both of those systems were replaced in 1998.
Looking Ahead through 1999. The goals for 1999, which we are now
implementing, include ongoing review and maintenance of all mission
critical systems; testing and correction of secondary systems such as
personal computers, fax machines, copiers, alarms, etc.; customer
awareness; commercial borrower assessment and contingency training.
Costs. In 1998 we dedicated 1 1/2 operational staff to the Year 2000
project. In addition, the Senior Management Committee spent a great deal
of time overseeing our Year 2000 plan. The effect of this time was not
additional expense, but rather a diversion from other productive endeavors.
Direct Year 2000 capital expenses in 1998 were $211,885 and extra operating
expenses were $18,660. Estimates for 1999 included an additional
operational staff position, $72,667 of capital expense and $40,137 of
operating expense. During the first quarter of 1999, we incurred $29,892
in direct Year 2000 capital expenses and $14,567 in extra operating
expenses. Given our state of planning and test results to date, we do not
expect our estimates to balloon into a material expense.
Risks. Despite our best efforts and test results, something could go
wrong. This is especially true for an industry such as ours that is so
interconnected and dependent upon information technology and data
transfers. A Year 2000 failure could disrupt our operations, and the
severity would depend on the nature and duration of the problem, which
cannot be predicted. If a failure concerned a core application or mission
critical system, it could have an adverse effect on our operations and
financial condition.
Contingencies. We are also studying what could go wrong and developing
plans to maintain operations given any number of malfunctions and have
developed a flow chart with a variety of possible scenarios. The chart
identifies the procedures we intend to take in order to circumvent the
problem should it arise. In 1999, the staff will be trained in each
variation of the contingency plan.
Merger Related Issues. We have consulted with management of Union about
the plans for conversion of Citizens to Union's data processing and other
information technology systems after the merger is completed later this
year. Due to various factors, including the Year 2000 date changeover,
that conversion will be deferred until the first quarter of 2000. We
believe this timetable will permit us to respond as and if necessary to any
Year 2000 problems before undertaking the systems conversion.
Summary. Citizens' management and the Board view the Year 2000 as a
significant priority. We are following the guidelines established by the
FDIC and Federal Financial Institutions Examination Council. Our results
to date are reasonably successful. However, we cannot make any certain
representations that our systems and, especially, those of third parties
whose failure may affect us, will function properly.
<PAGE> 139
Directors and Management
Directors and Executive Officers. The following table shows the names,
ages, terms, positions with Citizens, and business experience of Citizens'
current directors and executive officers:
<TABLE>
<CAPTION>
Name and Position with Citizens Age Business Experience
- ------------------------------- --- -------------------
<S> <C> <C>
Genevieve L. Hovey, 87 Mrs. Hovey has served as a director
Chairman of the Board and Chairman since 1972. She is a retired
dental hygienist.
J.R. Alexis Clouatre, 69 Mr. Clouatre has served as a director since
Director 1974. He is owner of Alex Clouatre Realty and
former owner of East End Market.
William T. Costa, Jr. 67 Mr. Costa has served as a director since
Director 1972. He is President of Costa Realty, Inc.
(Gold Crown Bowling Lanes and other commercial
properties); President of Recreation, Inc.
(Star Theater) and Partner and Trustee of
Green Mountain Mall.
<CAPTION>
Name and Position with Citizens Age Business Experience
- ------------------------------- --- -------------------
<S> <C> <C>
Dwight A. Davis 66 Mr. Davis has served as a director since
Director 1995. He is headmaster of Lyndon Institute.
Franklin G. Hovey, II 50 Mr. Hovey has served as a director since
Director 1981. He is the President of Hovey Enterprises,
Inc. (real estate)
Dennis J. Lamothe 48 Mr. Lamothe is the Chief Financial
Chief Financial Officer Officer and Treasurer of Citizens. He has
and Treasurer served nineteen years with the bank and one year
in this capacity.
Jerry S. Rowe 49 Mr. Rowe has served as President and
President, Chief Executive CEO of Citizens since 1988, as a director
Officer and Director since 1993 and as Executive Vice President
from 1987 to 1988.
Joseph M. Sherman 72 Mr. Sherman has served as a director
<PAGE> 140
Director since 1972. He served as President of
Citizens from 1972 until his retirement in
1988. Mr. Sherman is currently a State
Representative for St. Johnsbury.
Reginald J. Wakeham 51 Mr. Wakeham is Vice President and
Senior Loan Officer/ Senior Loan Officer of Citizens. He has
Vice President held this position since 1988.
</TABLE>
As discussed under "THE MERGER -- Management and Operations After the
Merger," Union's President, Chief Executive Officer and Director, Kenneth
D. Gibbons, and Union's Vice President and Director, Cynthia Borck, will be
appointed to Citizens' Board when the merger is completed. For information
about Mr. Gibbons and Ms. Borck, see "INFORMATION ABOUT UNION -- Directors
and Management" and " -- Share Ownership of Management and Principal
Holders."
Directors' Fees. Mrs. Hovey receives an annual retainer of $25,000 as
Chairman of the Board. Directors (including Mrs. Hovey) who are not
employees of Citizens receive a fee of $400.00 per meeting attended.
Directors do not receive additional fees for attendance at Board committee
meetings.
Executive Compensation and Benefit Plans. The following table shows
compensation paid for services rendered in all capacities to Citizens
during 1998, 1997 and 1996, paid to Mr. Rowe, the only executive officer of
Citizens whose total annual salary and bonus in 1998 exceeded $100,000:
<TABLE>
<CAPTION>
Annual Compensation
Name and ----------------------------- All Other
Principal Position Year Salary Bonus Compensation (1)
- ------------------ ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Jerry S. Rowe, 1998 $115,000 $5,750 $10,867
President, Chief 1997 99,631 5,000 9,123
Executive Officer and Director 1996 95,928 4,750 2,754
<FN>
- -------------------
<F1> Represents matching employer contributions under Citizens 401(k) plan
(1998 - $3,622; 1997 - $3,010; and 1996 - $6,113); and discretionary
profit sharing plan contributions (1998 - $7,245; 1997 - $1,837; and
1996 - $917). Mr. Rowe also has the use of a bank-owned automobile,
which is not reflected in the table.
</FN>
</TABLE>
Other Employee Benefits. Citizens does not maintain any special employee
benefit plans or arrangements for senior management, but executive officers
participate in Citizens' medical, life, accidental death, disability, and
salary continuation insurance plans, and in Citizens' 401(k) plan, all of
which are available to Citizens' other officers and employees generally.
Employment Agreements. Citizens and Mr. Rowe are parties to a three year
renewable employment agreement, which provides for a minimum annual salary
of $125,000, and annual salary reviews and increases at the Board's
discretion. The agreement also provides certain
<PAGE> 141
ancillary benefits, including participation in Citizens' benefit plans and
programs and discretionary annual bonus payments. The agreement does not
provide for any special benefits or payments as a result of the merger or
otherwise upon a change in control of Citizens.
Except for the employment agreement with Mr. Rowe, Citizens does not have
any employment or change in control agreements with senior executives or
other employees.
Certain Relationships and Related Transactions. In the ordinary course of
its business, Citizens grants loans to directors, officers, their immediate
families and companies or organizations with which they are affiliated.
These loans are made on substantially the same terms, including interest
rate and collateral, as those prevailing at the same time for comparable
transactions with unrelated persons and do not involve more than the normal
risk of collectibility or present other unfavorable features. Federal
banking laws and regulations limit the aggregate amount of indebtedness
that a bank may extend to its insiders and their affiliates. Under these
laws and regulations, banks may extend credit to executive officers,
directors, principal shareholders, or any related interest of such persons,
if the extension of credit to such persons is in an amount that, when
aggregated with the amount of all outstanding extensions of credit to such
individuals, does not exceed the banks' unimpaired capital and unimpaired
surplus. As of March 31, 1999 and December 31, 1998 the aggregate amount
of extensions of credit made by Citizens to directors and officers of
Citizens and their affiliates, totaled $120,773 and $103,069 respectively,
or 1.14% and .98% of Citizens' capital, which is well below the legal
limit.
Citizens leases its Green Mountain Mall branch facility from a real estate
corporation of which Director William T. Costa, Jr. is a principal. The
lease provides for minimum annual rentals of $24,412 expiring on June 30,
2000. Citizens has the option to renew the lease for five years.
Share Ownership of Management and Principal Holders
The following table shows the number and percentage of outstanding shares
of Citizens common stock, and the equivalent number and percentage of the
combined company's common stock following the merger, owned beneficially as
of June 30, 1999 by:
* each director of Citizens;
* each executive officer of Citizens;
* all of Citizens' directors and executive officers as a group; and
* each person (including any "group," as that term is used in
Section 13(d)(3) of the Exchange Act), known to management of
Citizens to own beneficially more than 5% of Citizens' outstanding
common stock. Except as otherwise noted below, to the knowledge
of Citizens' management, all persons listed have sole voting and
investment power over their shares.
Except as otherwise indicated in the footnotes to the table, the named
individuals have sole voting and investment power over the shares listed.
<PAGE> 142
<TABLE>
<CAPTION>
Pro Forma Equivalent Shares of
Citizens Common Stock Union Common Stock Assuming
Beneficially Owned Consummation of the Merger
--------------------------------- -------------------------------------
Name of Beneficial Owner # of shares Percent of Class # of shares Percent of Class (1)
- ------------------------ ----------- ---------------- ----------- --------------------
<S> <C> <C> <C> <C>
J. R. Alexis Clouatre 1,959 (2) 1.289% 12,776 .428%
William T. Costa, Jr. 490 (3) .322% 3,195 .105%
Dwight A. Davis 34 .022% 221 .007%
Franklin G. Hovey, II 756 .497% 4,930 .163%
Genevieve L. Hovey 78,728 (4) 51.795% 513,440 16.948%
Dennis Lamothe 19 (5) .012% 123 .004%
Jerry S. Rowe 275 (6) .181% 1,793 .059%
Joseph M. Sherman 2,844 (5) 1.871% 18,547 .612%
Reginald J. Wakeham 50 (5) .033% 326 .011%
All Directors and Executive
Officers as a Group (9) 85,136 56.011% 555,227 18.328%
<FN>
- -------------------
<F1> The pro forma percentages are based upon 3,029,438 shares of Union
common stock outstanding following completion of the merger.
<F2> Includes 1,949 shares over which Mr. Clouatre has shared voting and
investment power.
<F3> Includes 480 shares over which Mr. Costa has shared voting and
investment power.
<F4> Includes 35,497 shares held by the Franklin G. Hovey Trust of which
Mrs. Hovey is a co-trustee and beneficiary and 43,131 shares held by
The Genevieve L. Hovey Trust of which Mrs. Hovey is the settlor and a
trustee.
<F5> The named individual has shared voting and investment power over all
but 10 of the shares listed.
<F6> Includes 265 shares over which Mr. Rowe has shared voting and
investment power.
</FN>
</TABLE>
DESCRIPTION OF UNION'S COMMON STOCK
Authorized Capital Stock
Union has only one authorized class of capital stock, $2.00 par value
common stock. At present Union has 2,400,000 shares of common stock
authorized, of which ________ were issued and outstanding on the record
date for the Union special meeting and 57,200 shares of which were reserved
for future issuance under the terms of Union's 1998 Incentive Stock Option
Plan, or its predecessor plan, Union's 1988 Incentive Stock Option Plan.
As described above under "INCREASE IN UNION'S AUTHORIZED COMMON STOCK,"
Union shareholders will be voting at the Union special meeting upon a
proposed amendment to Union's Amended and Restated Articles of Association
to increase the number of authorized shares of common stock to 5,000,000.
The merger cannot be completed unless the proposed amendment is approved.
However, if approved, the amendment will become effective, even if the
merger is terminated or abandoned for any reason.
Union's common stock is not presently traded or quoted on any exchange or
in the over-the-counter market, nor is there otherwise any public trading
market in its stock. Union intends to apply to list its common stock on
AMEX as soon as practicable after the merger is completed,
<PAGE> 143
but cannot predict whether its application will be accepted. See "STOCK
PRICE AND DIVIDEND INFORMATION."
Voting Rights
Each outstanding share of Union common stock entitles the holder to one
vote on all matters submitted to vote of shareholders, including election
of directors. Unless a larger vote is required by law or by Union's
Amended and Restated Articles of Association, a matter is deemed to be
approved if more votes are cast in favor of the matter than against.
Abstentions and broker non-votes are disregarded for purposes of
determining whether the requisite vote has been achieved.
Directors of Union are elected by a plurality of the shares of common stock
voted in the election at a meeting at which a quorum is present. Union's
shareholders do not have the right to cumulate their votes for directors.
Dividends
Holders of Union's common stock are entitled to such dividends as Union's
Board may declare from time to time out of funds legally available for
payment of dividends. Because Union has no substantial independent sources
of income at the holding company level, payment of dividends by Union to
its shareholders depends upon the receipt by it of dividends from its
subsidiary, Union Bank, and following completion of the merger, will also
depend on receipt of dividends from Citizens. Regulatory restrictions on
the payment of dividends by Vermont-chartered, FDIC-insured banks (such as
Citizens and Union Bank) could in some circumstances indirectly limit the
amount of dividends Union is able to pay. See "REGULATION AND SUPERVISION
- -- Dividend Limitations."
Liquidation
In the event of liquidation, dissolution or winding up of Union, the
holders of Union's common stock would be entitled to share rateably in all
assets remaining after payment of all Union's debts and other liabilities.
Non-Assessable Shares
The outstanding shares of Union's common stock are, and the shares of Union
common stock to be issued in the merger will be, fully paid and
nonassessable.
No Conversion, Redemption or Preemptive Rights
Holders of Union common stock do not have conversion, sinking fund or
redemption rights, nor do they have any preemptive rights to subscribe for
additional shares of Union's common stock
<PAGE> 144
or any other securities. Citizens' shareholders do have preemptive rights,
which they would not have if they become Union shareholders. See
"COMPARISON OF SHAREHOLDER RIGHTS" below.
No Preferential Rights
All shares of Union's common stock have equal dividend, distribution,
liquidation and other rights and have no preference or special rights over
any other shares of Union's common stock.
Antitakeover Provisions
Unions' Amended and Restated Articles of Association contain certain
provisions that may have the effect of delaying, deferring or preventing a
change in control of Union. See "COMPARISON OF SHAREHOLDER RIGHTS" below.
<PAGE> 145
COMPARISON OF SHAREHOLDER RIGHTS
The rights of holders of Union's common stock are governed by applicable
provisions of Vermont business corporation law and Union's Amended and
Restated Articles of Association and By-laws. The rights of holders of
Citizen's common stock are governed by applicable provisions of Vermont
banking laws, Vermont business corporation laws and Citizens' Amended and
Restated Articles of Association and By-laws. When the merger is
completed, Citizens shareholders (other than those exercising dissenters'
rights of appraisal) will become shareholders of Union. The following
chart summarizes the material differences between the rights of holders of
Citizens common stock and the rights of Union common stock after the
merger.
<TABLE>
<CAPTION>
Citizens Union
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Governance: The rights of Citizens shareholders The rights of Union shareholders are
are governed by Vermont banking governed by Vermont business
laws, Vermont business corporation corporation laws and Union's Amended
laws and Citizens' Amended and and Restated Articles of Association
Restated Articles of Association and and By-laws.
By-laws.
When the merger is completed, Union's
Amended and Restated Articles of
Association and By-laws will be
unchanged, except for the increase
in Union's authorized common stock,
described above under "INCREASE IN
UNION'S AUTHORIZED COMMON STOCK,"
beginning on page ___.
- -------------------------------------------------------------------------------------------------------------
Authorized Capital
Stock: The authorized capital stock of The authorized capital stock of Union
Citizens consists of 304,000 shares presently consists of 2,400,000 shares of
of $1.00 par value common stock. $2.00 par value common stock. Union
Citizens has no other authorized has no other authorized classes of capital
classes of capital stock. stock.
If the proposed amendment to Union's
Amended and Restated Articles of
Association described under the caption
"INCREASE IN UNION'S AUTHORIZED COMMON
STOCK" is adopted, Union's authorized
common stock would increase to 5,000,000
shares of $2.00 par value common stock.
The increase is necessary to complete
the merger.
- -------------------------------------------------------------------------------------------------------------
<PAGE> 146
<CAPTION>
Citizens Union
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number and Term of
Directors: Citizens' Amended and Restated Union's By-laws provide for a Board of
Articles of Association provide for at least three directors, with the exact
a Board of between five and nine number determined by resolution of the
directors. The Citizens Board directors or vote of the shareholders.
currently consists of seven Union's Board presently consists of ten
directors. As described under directors. As described under "THE
"THE MERGER -- Management MERGER -- Management and Operations
and Operations After the Merger," After the Merger," Union's Board will
the Citizens Board will be be increased to thirteen when the
increased to nine when the merger merger is completed, and Messrs. Rowe,
is completed and Mr. Gibbons and Hovey and Costa of Citizens will be
Ms. Borck of Union will be appointed to fill the three vacancies.
appointed to fill the two vacancies.
All directors of Union are elected
All directors of Citizens are elected annually to a one-year term.
annually to a one-year term.
- -------------------------------------------------------------------------------------------------------------
Removal of Directors: Neither Vermont banking laws nor Under Vermont business corporation
Citizens' Amended and Restated laws, directors may be removed with or
Articles of Association or By-laws without cause unless the corporate
address the issue of removal of charter provides that removal may only
directors by shareholder vote. be for cause. Union's Amended and
Therefore, removal of Citizens' Restated Articles of Association do not
directors would follow the contain any such provision. Therefore,
requirements of Vermont business Union's shareholders may remove
corporation law and would directors with or without cause. A
therefore be the same procedures as removal vote may only be taken at a
for removal of Union's directors. properly noticed meeting called for that
Because Citizens is a Vermont purpose.
bank, the Vermont Banking
Commissioner also has the
authority to remove directors in
some circumstances, even if the
shareholders do not favor removal.
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Citizens Union
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Director Vacancies: Vermont banking laws provide that Under Vermont business corporation
the directors may fill Board laws and Union's By-laws, vacancies on
vacancies until the next annual Union's Board, including vacancies
meeting of shareholders. There are resulting from an increase in the number
no provisions in Citizens' Amended of directors, may be filled by either the
and Restated Articles of shareholders or the directors. If the
Association or By-laws relating to number of directors then remaining in
the filling of vacancies. office is less than a quorum, the
remaining directors may nevertheless fill
the vacancy by the affirmative vote of a
majority of all of the directors remaining
in office.
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Director
Qualifications: Under Vermont banking laws, a There are no share-ownership or other
Citizens director must own at least qualifications under Vermont business
ten shares of Citizens stock free corporation laws or Union's Amended
and clear of all pledges or liens. and Restated Articles of Association to
An individual appointed or elected serve as a director of Union.
to the Board has twenty days after
election or appointment to meet the
share-ownership qualification
requirement.
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Director Meetings: Under Vermont banking laws, Vermont business corporation laws do
Citizens' Board must hold a regular not require monthly or other periodic
meeting at least once each month to meetings of Union's Board. However, it
receive the report of its treasurer has been the practice of Union's Board to
and to transact any other business. meet at least quarterly.
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Authorization for
Issuance of
Additional
Common Stock: Under Vermont banking laws and Except as may be required by law in a
Citizens' Amended and Restated specific transaction, Union does not
Articles of Association, Citizens' require approval by any regulatory body
issuance of additional shares of its or the shareholders to issue additional
common stock must be approved shares of common stock.
by:
* The Vermont Banking
Commissioner, and
* the holders of at least two-thirds
of the outstanding common stock.
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<PAGE> 148
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Preemptive Rights: Under Citizens' Amended and Shareholders of Union do not have
Restated Articles of Association, preemptive rights to purchase additional
shareholders of Citizens have shares.
preemptive rights to subscribe to
purchase additional shares of
common stock in connection with
any proposed stock issuance by
Citizens.
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Repurchase of Shares: Under Vermont banking laws, Under Vermont business corporation
Citizens may not repurchase or laws, Union may repurchase shares of its
reacquire any of its shares of capital stock, except if it would constitute
capital stock, except as foreclosed an unlawful distribution to the selling
collateral for payment of a shareholder. In general, distributions are
defaulted debt, or in connection permissible unless, after the distribution,
with a merger. the corporation would be unable to pay
its debts as they become due in the usual
course of business or the corporation's
total assets would be less than the sum of
its total liabilities plus the amount
required to satisfy any preferential rights
of shareholders upon dissolution or
liquidation. Union does not have any
such preferential liquidation rights in
favor of any securityholders.
Because Union is a bank holding
company, repurchases of its shares in
excess of certain volume limitations
would be subject to approval by the
Federal Reserve under the federal Bank
Holding Company Act.
<PAGE> 149
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Citizens Union
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Extraordinary
Corporate
Transactions and
Amendments to
Articles of
Association: Under Vermont banking laws and Under Vermont business corporation
Citizens' Amended and Restated laws, extraordinary corporate transactions
Articles of Association, such as mergers, consolidations, sales of
extraordinary corporate all or substantially all of the assets or
transactions such as mergers, liquidations involving Union ordinarily
consolidations, sales of all or require the affirmative vote of at least a
substantially all of the assets and majority of all the votes entitled to be
liquidations require approval by: cast on the matter. However, Union's
* holders of at least two-thirds of Amended and Restated Articles of
the issued and outstanding shares Association require a higher vote in some
of common stock, and cases. See "Antitakeover Provisions for
* the approval of the Vermont Certain Business Combinations" in this
Banking Commissioner. table below.
Vermont banking laws do not have Unlike Vermont banking laws, Vermont
any procedures authorizing the business corporation laws authorize a
acquisition of control of a bank plan of share exchange procedure.
through a plan of share exchange.
A share exchange procedure would The Union Board has the authority under
permit the direct acquisition of a Vermont business corporation laws to
bank as a wholly-owned subsidiary impose other conditions on the
without the need for a merger shareholder approval of extraordinary
between the bank and an interim corporate transactions, in addition to the
bank subsidiary of the acquiror. shareholder vote otherwise required by
law or Union's Amended and Restated
The Citizens Board does not have Articles of Association.
any express statutory authority to
impose other conditions on the
shareholder vote to approve an
extraordinary corporate transaction,
in addition to the two-thirds vote
requirement.
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<PAGE> 150
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Antitakeover
Provisions for
Certain Business
Combinations: Neither Vermont banking laws nor Union's Amended and Restated Articles
Citizens' Amended and Restated of Association provide that certain
Articles of Association or By-laws business combinations with a substantial
provide any special procedures for shareholder or its affiliates require
business combinations involving approval by the affirmative vote of the
shareholders (or their related holders of at least 67% of Union's
interests) which hold a significant outstanding common stock. A substantial
block of company stock. shareholder is one who together with its
Therefore, approval of any such affiliates owns 5% or more of Union's
transaction would require only the outstanding common stock. Union's
percentage vote ordinarily required Board of Directors would have the right
for transactions of that type not to override the 67% vote requirement in
involving a substantial shareholder any particular transaction. If the Board
or its affiliates, which is ordinarily chose to override the 67% vote, the
two-thirds of the outstanding Board could require only the percentage
common stock. vote that would otherwise be required
under Vermont's business corporation
laws, which is ordinarily a majority of the
outstanding common stock.
The effect of these provisions may be to
discourage attempts to acquire control of
Union without direct negotiation with
Union's Board and to enhance the Board's
ability to negotiate the most favorable
terms for all of Union's shareholders, or
to resist a hostile takeover attempt
entirely, as it may deem advisable in the
circumstances.
The 67% vote requirement in Union's
Articles may only be amended by the
affirmative vote of at least 67% of
Union's outstanding common stock.
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<PAGE> 151
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Citizens Union
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Amendment to
Articles of
Association: Vermont banking laws and Under Vermont business corporation
Citizens' Amended and Restated laws, the vote required to approve an
Articles of Association provide that amendment to Union's Articles of
amendments to the Articles must Association will depend upon whether
be approved by: the amendment would create dissenters'
* The Vermont Banking rights of appraisal.
Commissioner, and
* the holders of at least two-thirds Amendments that do not create
of the outstanding shares of dissenters' rights will be approved if
common stock. more votes are cast in favor of the
amendment than against, at a meeting at
Vermont banking laws do not which a quorum is present.
provide any dissenters' rights of
appraisal in connection with Amendments that create dissenters' rights
amendments to Citizens' Amended will be approved if at least a majority of
and Restated Articles of the outstanding shares entitled to vote on
Association. the matter are voted in favor.
Dissenters' rights will exist as to any
charter amendment which:
* alters or abolishes a preferential right
of the shares;
* creates, alters or abolishes a redemption
right, including sinking fund provisions
or provisions for redemption or re-
purchase of shares;
* alters or abolishes preemptive rights of
holders of the shares to acquire additional
shares or other securities;
* excludes or limits voting rights on any
matter;
* excludes or limits the right to cumulate
votes; or
* results in a "squeeze-out" of the
shareholder by reducing the number of
shares owned to a fraction of a share,
which is to be acquired for cash.
No regulatory approval is required in
order for Union to amend its Articles.
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<PAGE> 152
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Dissenters' Rights
of Appraisal: Vermont banking laws provide for Vermont business corporation laws provide
dissenters' rights of appraisal only for dissenters' rights of appraisal in most
in connection with a merger of the circumstances involving mergers,
bank, but not as to other types of consolidations, sales of all or substantially
extraordinary corporate transactions all of the assets, liquidations, and plans of
or any amendment to the Articles share exchange, and sometimes in connection with
of Association. charter amendments. See "Amendments to Articles
of Association," above, in this table. In order
The procedures for exercising to exercise dissenters' rights, a shareholder must:
dissenters' rights are described in * deliver to the corporation before the vote is
this document under "THE taken a written notice of intent to demand
MERGER -- Dissenters' Rights of payment if the proposed action is effectuated, and
Appraisal." * not vote his or her shares in favor of the
proposed action.
Within ten days after the corporate action is
taken, the corporation must notify all
dissenters who have satisfied the above
requirements of their right to perfect their
dissenters' rights and of the procedures for
doing so, which include a further written
demand upon the corporation and deposit of
stock certificates with the corporation.
Dissenting shareholders are entitled to receive
the "fair value" of their shares, plus accrued
interest. Payment by the company must be
accompanied by specified information about
the company and about how the fair value
was calculated and must inform the dissenter
of his right to dispute the corporation's
estimate of fair value. If the corporation and
the dissenter cannot agree on a fair value,
within a specified time period the corporation
may file a petition in the Superior Court,
seeking a court-ordered valuation. The
corporation bears the cost of the proceeding
unless the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith
in demanding payment.
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<PAGE> 153
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Limitation of
Director Liability; Citizens' Amended and Restated Union's Amended and Restated Articles
Articles of Association do not of Association limit the liability of
contain any provisions limiting the Union's directors to the fullest extent
liability of directors, nor do permitted by law. Vermont Business
Vermont banking laws expressly Corporation law prohibits exculpation for
authorize any such limitation. any of the following:
* the amount of any improper financial
benefit received by the director;
* liability resulting from intentional
reckless infliction of harm on the
company or its shareholders;
* a violation of the director's statutory
duty not to authorize or consent to
unlawful distributions; or
* intentional or reckless criminal acts.
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Indemnification of
Directors,
Officers and
Others: Neither Vermont banking laws nor Union's By-laws provide for mandatory
Citizens' Amended and Restated indemnification of its directors and
Articles of Association or By-laws permit indemnification of its officers,
contain any provisions relating to employees or agents against any liability
indemnification of directors, incurred by them in their capacity as
officers and others. such, to the fullest extent permitted by
Vermont law. In general, indemnification
Citizens currently maintains a will be provided if the individual acted in
Directors and Officers liability good faith and in a manner he or she
insurance policy containing reasonably believed to be in or not opposed
standard coverages for financial to Union's best interests. No indemnification
institution directors and officers, will be provided if the individual is found
but has not adopted any liable for gross negligence or willful
indemnification policy statement misconduct for performance of his or her
or procedures. duty to the corporation, except to the
extent a court may otherwise determine.
Union may also advance litigation
expenses to any indemnified individual,
subject to certain procedures.
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<PAGE> 154
REGULATION AND SUPERVISION
As a registered bank holding company, Union is subject to regulation,
supervision and examination by the Federal Reserve Board. Both Citizens
and Union's subsidiary, Union Bank, are organized as Vermont-chartered,
FDIC-insured, non-Federal Reserve member banks, and are subject to
regulation, supervision and examination by the Vermont Banking Department
and the FDIC. The following discussion summarizes certain aspects of
federal and state banking laws and regulations that apply to Union,
Citizens and Union Bank.
Bank Holding Companies
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 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.
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 Reigle-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 Reigle-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
permit an out-of-state bank or bank holding company to acquire existing
branches. Although interstate banking and branching may result in
increased competitive pressures in the markets in which we operate, we
<PAGE> 155
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 purchases 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
and Union Bank are now, and upon completion of the merger, Citizens will
be, subject to these restrictions in their intercompany transactions.
Financial Modernization. Proposals to change the laws and regulations
governing the banking industry are frequently introduced in Congress, in
state legislatures and before the various bank regulatory agencies. A
significant financial modernization bill (H.R. 10) is now pending in
Congress. In addition, a complete revision and modernization of Vermont's
banking laws is now pending in the Vermont Legislature. While it is likely
that Congress and the Vermont Legislature will each eventually enact
legislation modernizing the banking industry, the final terms of any such
legislative proposals or their precise impact on Union, Union Bank or
Citizens cannot be predicted with any certainty.
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, the types of business
conducted and the location of offices. There are no outstanding regulatory
orders resulting from regulatory examinations of Union Bank or Citizens.
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 banks' 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.
<PAGE> 156
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 bank holding company, or render it illiquid, could be found to be such
an unsafe or unsound practice.
Capital Requirements
The Federal Reserve Board, the FDIC and other federal banking regulators
have issued substantially similar risk-based and leverage capital
guidelines for United States banking organizations. Those regulatory
agencies are also authorized to require that a banking organization
maintain capital above the minimum levels, whether because of its financial
condition or actual or anticipated growth. The Federal Reserve Board's
risk-based capital guidelines define a three-tier capital framework and
specify three relevant capital ratios: Tier 1 Capital Ratio, a Total
Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of common and
qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder (Tier 2 and Tier 3 Capital) consists of
subordinated and other qualifying debt, preferred stock that does not
qualify as Tier 1 Capital, and the allowance for 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 stated 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 banks and 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 ratios. 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
<PAGE> 157
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. Neither Union nor Citizens has any material amount
of intangibles in its capital base, nor will any goodwill intangible be
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 within such
categories. 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 Capital 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.
<PAGE> 158
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 our last CRA compliance
examinations by the FDIC, Union Bank received a rating "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 no 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 no 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.
LEGAL OPINION
Union's counsel, Primmer & Piper, P.C., will render its legal opinion on
certain matters relating to the issuance of Union's common stock offered
through this joint proxy statement/prospectus.
EXPERTS
The audited consolidated financial statements of Union as of December 31,
1998 and 1997, and for each of the years in the three-year period ended
December 31, 1998, have been included in this joint proxy
statement/prospectus in reliance upon the report of A.M. Peisch & Company,
independent certified public accountants, contained in such financial
statements, and upon the authority of said firm as experts in accounting
and auditing.
The audited financial statements of Citizens as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included in this joint proxy statement/prospectus, in
reliance upon the report of A.M. Peisch & Company, independent certified
public accountants, contained in such financial statements, and upon the
authority of said firm as experts in accounting and auditing.
<PAGE> 159
Representatives of A.M. Peisch & Company are expected to be present at the
Union and Citizens special meetings. Such representatives will have the
opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
Union has filed a Registration Statement on Form S-4 (File No. 333-______)
to register with the SEC the Union common stock to be issued to Citizens
shareholders in the merger. This joint proxy statement/prospectus is part
of that Registration Statement. As allowed by SEC rules, this joint proxy
statement/prospectus does not contain all of the information that you can
find in the Registration Statement or its exhibits. You may read and copy
(at prescribed rates) the Registration Statement, including its exhibits,
at the SEC's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The Registration Statement is
also available to the public from commercial document retrieval services
and on the SEC's web site at "http://www.sec.gov."
Citizens is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, as administered by the FDIC. Citizens
files reports, proxy statements and other information with the FDIC under
the Exchange Act. You may read and copy (at prescribed rates) these
materials at the FDIC's Registration Disclosure and Securities Operations
Unit, Division of Supervision, Room F-6043, 550 Seventeenth Street, N.W.,
Washington, D.C. 20429. You may also obtain copies (at prescribed rates)
of such material from the public reference section of the FDIC, 550
Seventeenth Street, N.W., Washington, D.C. 20429.
You should rely only on the information contained in this joint proxy
statement/prospectus in deciding how to vote on the merger and on the
proposed increase in Union's common stock. We have not authorized anyone
to provide you with information other than what is contained in this joint
proxy statement/prospectus. This joint proxy statement/prospectus is dated
______, 1999. You should not assume that information contained in this
document is accurate as of any other date, and neither the mailing of this
document to Union or Citizens shareholders nor the issuance of Union common
stock in the merger will create any implication to the contrary.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, neither the Union
Board nor the Citizens Board knows of any matters that will be presented
for consideration at the special meetings other than as described in this
document. If any other matters are properly considered at either meeting
or any adjournments or postponements of such meetings, the proxy cards
furnished with this document will be deemed to confer discretionary
authority on the individuals named as proxies to vote the shares
represented by the proxies on any such other matters. The named proxies
intend to vote or not to vote in accordance with the recommendations of the
managements of Union and Citizens.
<PAGE> 160
INDEX TO FINANCIAL STATEMENTS
Union Bankshares, Inc. and Subsidiary
Unaudited Consolidated Balance Sheets at March 31, 1999 and 1998
Unaudited Consolidated Statements of Income for the F-2
three months ended March 31, 1999 and 1998 F-3
Unaudited Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1999 and 1998 F-4
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 F-6
Notes to Unaudited Consolidated Financial Statements
for the three months ended March 31, 1999 and 1998 F-8
Independent Auditors' Report (A.M. Peisch & Company) F-14
Consolidated Balance Sheets at December 31, 1998 and 1997 F-15
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 F-16
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-17
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 F-19
Notes to Consolidated Financial Statements for the
years ended December 31, 1998, 1997 and 1996 F-21
Citizens Savings Bank and Trust Company
Unaudited Balance Sheets at March 31, 1999 and 1998 F-44
Unaudited Statements of Income for the three months
ended March 31, 1999 and 1998 F-45
Unaudited Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1999 and 1998 F-46
Unaudited Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 F-48
Notes to Unaudited Financial Statements for the
three months ended March 31, 1999 and 1998 F-50
Independent Auditors' Report (A.M. Peisch & Company) F-51
Balance Sheets at December 31, 1999 and 1998 F-52
Statements of Income for the years ended
December 31, 1998, 1997 and 1996 F-53
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-54
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-56
Notes to Financial Statements for the years ended
December 31, 1998, 1997 and 1996 F-58
<PAGE> F-1
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,332,762 $ 6,115,052
Federal funds sold and overnight deposits 6,470,359 4,541,777
------------ ------------
Cash and cash equivalents 14,803,121 10,656,829
Interest bearing deposits 1,951,024 1,288,000
Securities available-for-sale 38,237,847 30,756,170
Federal Home Loan Bank stock 641,800 626,200
Loans held for sale 7,950,274 6,736,852
Loans, net 120,677,526 121,060,052
Accrued interest receivable 1,351,975 1,334,651
Premises and equipment, net 2,532,512 2,518,243
Other real estate owned 498,844 635,478
Other assets 2,844,589 2,315,761
------------ ------------
$191,489,512 $177,928,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 21,703,662 $ 20,845,735
NOW accounts 23,046,928 18,020,851
Savings and money market 62,402,950 52,733,063
Time, $100,000 and over 11,524,118 15,998,637
Other time 43,823,800 44,469,946
------------ ------------
162,501,458 152,068,232
Borrowed funds 4,503,102 2,620,950
Accrued expenses and other liabilities 3,109,864 3,467,645
------------ ------------
170,114,424 158,156,827
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 2,400,000
shares authorized; 2,272,100 shares
issued in 1999; 2,264,000 shares
in 1998 4,544,200 4,528,000
Paid-in capital 878,190 820,415
Retained earnings 17,338,063 15,597,925
Treasury stock at cost (233,960 shares
at March 31, 1999; 232,960 shares at
March 31, 1998) (1,592,451) (1,570,451)
Accumulated other comprehensive income 207,086 395,520
------------ ------------
21,375,088 19,771,409
------------ ------------
$191,489,512 $177,928,236
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-2
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans $2,962,540 $3,069,248
Interest and dividends on investment securities
U.S. Treasury 201,615 188,602
U.S. Government agencies and corporations 150,797 136,306
State and political subdivisions 41,668 13,683
Other 179,748 118,460
Interest on federal funds sold 42,440 63,884
Interest on interest bearing deposits 28,471 7,826
---------- ----------
3,607,279 3,598,009
---------- ----------
Interest expense
Interest on deposits 1,329,081 1,417,303
Interest on other borrowed money 66,720 35,086
---------- ----------
1,395,801 1,452,389
---------- ----------
Net interest income 2,211,478 2,145,620
Provision for loan losses 37,500 37,500
---------- ----------
Net interest income after provision
for loan losses 2,173,978 2,108,120
---------- ----------
Other income
Trust department income 6,128 5,185
Service fees 397,811 374,548
Loss on sale of securities (109) (41,668)
Gain on sale of loans 15,685 54,160
Other 35,591 97,997
---------- ----------
455,106 490,222
---------- ----------
Other expenses
Salaries and wages 702,651 678,114
Pension and other employee benefits 163,224 180,694
Occupancy expense, net 95,317 93,037
Equipment expense 178,128 134,654
Other operating expense 454,929 449,359
---------- ----------
1,594,249 1,535,858
---------- ----------
Income before income taxes 1,034,835 1,062,484
Income tax expense 280,582 305,034
---------- ----------
Net income $ 754,253 $ 757,450
========== ==========
Earnings per common share $0.37 $0.37
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------- Paid-in
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balances, December 31, 1997 2,032,260 $4,528,000 $820,415
Comprehensive income, net of taxes
Net income -0- -0- -0-
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- -0-
Comprehensive income -0- -0- -0-
Cash dividends declared -0- -0- -0-
Treasury stock purchased (1,220) -0- -0-
Exercise of stock option -0- -0- -0-
--------- ---------- --------
Balances, March 31, 1998 2,031,040 $4,528,000 $820,415
========= ========== ========
Balances, December 31, 1998 2,034,140 $4,536,200 $849,190
Comprehensive income, net of taxes
Net income -0- -0- -0-
Net unrealized holding loss on
securities available-for-sale, net of tax -0- -0- -0-
Comprehensive income -0- -0- -0-
Cash dividends declared -0- -0- -0-
Treasury stock purchased -0- -0- -0-
Exercise of stock option 4,000 8,000 29,000
--------- ---------- --------
Balances, March 31, 1999 2,038,140 $4,544,200 $878,190
========= ========== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-4
<TABLE>
<CAPTION>
Accumulated
other Total
Retained Treasury comprehensive stockholders'
earnings stock income equity
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1997 $15,246,927 $(1,548,491) $321,263 $19,368,114
Comprehensive income, net of taxes
Net income 757,450 -0- -0- 757,450
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- 74,257 74,257
-----------
Comprehensive income 831,707
-----------
Cash dividends declared (406,452) -0- -0- (406,452)
Treasury stock purchased -0- (21,960) -0- (21,960)
Exercise of stock option -0- -0- -0- -0-
----------- ----------- --------- -----------
Balances, March 31, 1998 $15,597,925 $(1,570,451) $395,520 $19,771,409
=========== =========== ========= ===========
Balances, December 31, 1998 $17,031,320 $(1,592,451) $450,527 $21,274,786
Comprehensive income, net of taxes
Net income 754,253 -0- -0- 754,253
Net unrealized holding loss on
securities available-for-sale, net of tax -0- -0- (243,441) (243,441)
-----------
Comprehensive income 510,812
-----------
Cash dividends declared (447,510) -0- -0- (447,510)
Treasury stock purchased -0- -0- -0- -0-
Exercise of stock option -0- -0- -0- 37,000
----------- ----------- --------- -----------
Balances, March 31, 1999 $17,338,063 $(1,592,451) $ 207,086 $21,375,088
=========== =========== ========= ===========
</TABLE>
<PAGE> F-5
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 754,253 $ 757,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 141,148 111,070
Provision for loan losses 37,500 37,500
Provision (credit) for deferred income taxes 9,129 (15,458)
Amortization, net 9,330 (2,199)
Write-downs of other real estate owned -0- 10,661
Decrease in unamortized loan fees (9,185) (1,641)
Increase in loans held for resale (534,733) (487,593)
Increase in accrued interest receivable 29,695 736
Decrease (increase) in other assets 81,161 (206,768)
Increase in income taxes payable 248,737 323,730
Increase in accrued interest payable 9,033 166,545
Increase in other liabilities 1,331 241,499
Loss on sale of securities 109 41,668
Gain on sale of loans (15,685) (54,161)
Loss (gain) on sale of other real estate owned 1,997 (19,503)
----------- -----------
Net cash provided by operating activities 763,820 903,536
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits
Maturities and redemptions 198,000 99,000
Purchases (276,024) (1,387,000)
Securities available-for-sale
Sales and maturities 3,234,502 335,630
Purchases (3,439,540) (3,006,538)
Purchase of Federal Home Loan Bank stock (15,600) (32,000)
Decrease in loans, net 3,515,292 4,846,961
Recoveries of loans charged off 12,605 15,215
Purchase of premises and equipment, net (27,743) (118,162)
Investments in limited partnerships (373,329) -0-
Proceeds from sales of other real
estate owned 23,915 124,572
----------- -----------
Net cash provided by investing activities 2,852,078 877,678
----------- -----------
</TABLE>
<PAGE> F-6
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net of repayments (35,167) 985,066
Proceeds from exercise of stock options 37,000 -0-
Net decrease in demand, NOW,
savings, and money market accounts (1,884,993) (696,872)
Net increase (decrease) in time deposits 1,869,822 (4,032,147)
Purchase of treasury stock -0- (21,960)
Dividends paid (447,511) (406,452)
----------- -----------
Net cash used in financing activities (460,849) (4,172,365)
----------- -----------
Increase (decrease) increase in cash
and cash equivalents 3,155,049 (2,391,151)
Cash and cash equivalents:
Beginning 11,648,072 13,047,980
----------- -----------
Ending $14,803,121 $10,656,829
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $ 1,386,768 $ 1,285,844
=========== ===========
Income taxes paid $ -0- $ -0-
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in
settlement of loans $ -0- $ 228,234
=========== ===========
Total change in unrealized gain on
securities available-for-sale $ (368,849) $ 112,510
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-7
UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policies of Union Bankshares, Inc. and Subsidiary
(the Company) are in conformity with generally accepted accounting
principles and general practices within the banking industry. The
following is a description of the more significant policies.
Basis of consolidation
The consolidated financial statements include the accounts of Union
Bankshares, Inc. and Union Bank, its wholly-owned subsidiary. All
significant intercompany transactions and balances have been
eliminated.
Earnings per common share
The FASB issued Statement No. 128, Earnings per Share, which became
effective for the Company during December, 1997. The statement
applies prospectively; earlier application is not permitted. The
adoption of this statement did not have a material effect on the
Company's financial statements.
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 and stock
dividends) and reduced for shares held in treasury. The weighted
average shares outstanding were 2,034,229 and 2,031,574 for the
three months ended March 31, 1999 and 1998, respectively.
Note 2. 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
5.10% to 6.75% and mature at various dates through 2003 with
approximately $887,024 scheduled to mature through December 31,
1999.
<PAGE> F-8
Note 3. Investment Securities
Investment securities available-for-sale consist of the following
at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
March 31, 1999:
U.S. Government and
agency and corporation
securities $23,648,006 $147,592 $ 39,294 $23,756,304
State and political
subdivisions 3,607,572 5,375 41,098 3,571,849
Corporate debt
securities 10,110,377 44,933 37,732 10,117,578
Marketable equity
securities 558,125 233,991 -0- 792,116
----------- -------- -------- -----------
$37,924,080 $431,891 $118,124 $38,237,847
=========== ======== ======== ===========
March 31, 1998:
U.S. Government and
agency and corporation
securities $22,599,718 $147,590 $ 8,096 $22,739,212
State and political
subdivisions 813,670 -0- 59,005 754,665
Corporate debt
securities 5,805,080 47,222 -0- 5,852,302
Marketable equity
securities 935,190 474,801 -0- 1,409,991
----------- -------- -------- -----------
$30,153,658 $669,613 $ 67,101 $30,756,170
=========== ======== ======== ===========
</TABLE>
Included in the caption "U.S. Government and agency and corporation
securities" are mortgage-backed securities with an amortized cost
of $4,959,038 and $5,689,763 at March 31, 1999 and 1998,
respectively.
Investment securities with a carrying amount of $6,861,000 and
$4,369,000 at March 31, 1999 and 1998, respectively, were pledged
as collateral on public deposits and for other purposes as required
or permitted by law.
<PAGE> F-9
Note 3. Investment Securities (Continued)
All realized gains and losses for the three months ended March 31,
1999 and 1998 were from the sale of securities available-for-sale.
Proceeds from the sale of securities available-for-sale were
$17,693 and $95,207 in 1999 and 1998, respectively. Realized
losses from sales of investments available-for-sale were $109 and
$41,668 for the three months ended March 31, 1999 and 1998,
respectively.
The amortized cost and fair value of securities available-for-sale
as of March 31, 1999 by contractual maturity is shown below.
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
following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 8,914,629 $ 8,970,313
Due from one to five years 13,447,433 13,466,953
Due from five to ten years 6,256,094 6,281,316
Due after ten years 3,788,761 3,723,642
Mortgage-backed securities 4,959,038 5,003,507
Marketable equity securities 558,125 792,116
----------- -----------
$37,924,080 $38,237,847
=========== ===========
</TABLE>
Note 4. Loans
The composition of net loans at March 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate $ 49,515,308 $ 45,860,744
Commercial and commercial real estate 59,617,408 56,671,791
Consumer 5,827,986 5,795,241
Municipal loans 7,830,681 14,882,557
------------ ------------
122,791,383 123,210,333
------------ ------------
Deduct:
Allowance for loan losses 1,841,041 1,833,272
Net deferred loan fees 272,816 317,009
------------ ------------
2,113,857 2,150,281
------------ ------------
$120,677,526 $121,060,052
============ ============
</TABLE>
<PAGE> F-10
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses for the three months ended
March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance, beginning (December 31) $1,805,073 $1,794,341
Provision for loan losses 37,500 37,500
Recoveries of amounts charged off 12,605 15,215
---------- ----------
1,855,178 1,847,056
Amounts charged off (14,137) (13,784)
---------- ----------
Balance, ending $1,841,041 $1,833,272
========== ==========
</TABLE>
Note 6. Deposits
The following is a summary of time certificates of deposit by
maturity at March 31, 1999:
<TABLE>
<S> <C>
Maturing in 1999 $33,513,847
Maturing in 2000 19,119,219
Maturing in 2001 1,945,947
Maturing in 2002 379,269
Maturing in 2003 and thereafter 389,636
-----------
$55,347,918
===========
</TABLE>
Note 7. Borrowed Funds
Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the
years ended March 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Community Investment Program
6.10% note payable to FHLB,
payable in monthly installments of
$8,727, including interest, through
January 24, 2014 $1,018,028 $1,058,580
6.10% note payable to FHLB,
payable in monthly installments of
$4,636, including interest, through
January 24, 2014 540,828 562,370
</TABLE>
<PAGE> F-11
Note 7. Borrowed Funds (Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Option Advances
6.06% note payable to FHLB,
payable in monthly installments of
$11,178, including interest, through
May 6, 2008 944,246 -0-
Community Investment Program "Plus"
5.01% term borrowing from FHLB
maturing June 25, 2008 1,000,000 -0-
5.66% term borrowing from FHLB
maturing February 4, 2003 1,000,000 1,000,000
---------- ----------
$4,503,102 $2,620,950
========== ==========
</TABLE>
Under the terms of the Community Investment Program agreement,
these funds have been loaned to provide housing for individuals and
families whose income is at or below 115% of the median income for
the area as defined by the U. S. Department of Housing and Urban
Development.
Principal maturities of borrowed funds as of March 31, 1999 are as
follows:
<TABLE>
<S> <C>
1999 $ 106,691
2000 150,427
2001 159,678
2002 170,935
2003 1,181,678
Thereafter 2,733,693
----------
$4,503,102
==========
</TABLE>
<PAGE> F-12
Note 8. 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 March 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Currently paid or payable $271,453 $320,492
Deferred 9,129 (15,458)
-------- --------
$280,582 $305,034
======== ========
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to income before
income taxes as a result of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed "expected" tax expense $351,844 $361,245
Tax exempt interest (43,425) (62,355)
Disallowed interest expense 5,689 8,829
Dividend exclusion (2,930) (2,685)
Nondeductible merger and acquisition costs 12,791 -0-
Tax credits (43,387) -0-
-------- --------
$280,582 $305,034
======== ========
</TABLE>
Note 9. 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 10. Subsequent Events
On February 18, 1999, Union Bankshares, Inc. announced plans to
acquire Citizens Savings Bank and Trust Company. It is anticipated
that the acquisition will be accounted for under the pooling of
interests method of accounting. The acquisition is contingent upon
receiving the approval of the respective shareholders of each
company and the appropriate regulatory authorities. Following the
acquisition, Citizens Savings Bank and Trust Company will continue
operations, but as a wholly owned subsidiary of Union Bankshares,
Inc.
<PAGE> F-13
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Union Bankshares, Inc. and Subsidiary
Morrisville, Vermont
We have audited the accompanying consolidated balance sheets of Union
Bankshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. 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 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 Subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
January 27, 1999
(Except for Note 19, as to which
the date is February 18, 1999)
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
<PAGE> F-14
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 6,772,078 $ 9,462,846
Federal funds sold and overnight deposits 4,875,994 3,585,134
------------ ------------
Cash and cash equivalents 11,648,072 13,047,980
Interest bearing deposits 1,873,000 -0-
Securities available-for-sale 38,411,097 28,012,221
Federal Home Loan Bank stock 626,200 594,200
Loans held for sale 7,399,856 6,195,098
Loans, net 124,233,737 126,151,320
Accrued interest receivable 1,381,670 1,335,387
Premises and equipment, net 2,645,917 2,511,151
Other real estate owned 524,756 557,975
Other assets 2,417,665 2,307,517
------------ ------------
$191,161,970 $180,712,849
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 24,682,079 $ 20,974,906
NOW accounts 25,010,674 20,232,995
Savings and money market 59,336,780 51,088,620
Time, $100,000 and over 9,625,837 20,275,668
Other time 43,861,259 44,225,062
------------ ------------
162,516,629 156,797,251
Borrowed funds 4,538,269 1,635,884
Accrued expenses and other liabilities 2,832,286 2,911,600
------------ ------------
169,887,184 161,344,735
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 2,400,000 shares
authorized; 2,268,100 shares issued in 1998;
2,264,000 shares in 1997 4,536,200 4,528,000
Paid-in capital 849,190 820,415
Retained earnings 17,031,320 15,246,927
Treasury stock at cost (233,960 shares at
December 31, 1998; 231,740 at
December 31, 1997) (1,592,451) (1,548,491)
Accumulated other comprehensive income 450,527 321,263
------------ ------------
21,274,786 19,368,114
------------ ------------
$191,161,970 $180,712,849
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-15
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans $12,326,229 $12,158,891
Interest and dividends on investment securities
U.S. Treasury 815,775 785,965
U.S. Government agencies and corporations 622,051 534,936
State and political subdivisions 71,433 50,763
Other 548,416 389,936
Interest on federal funds sold 268,353 194,856
Interest on interest bearing deposits 80,847 1,017
----------- -----------
14,733,104 14,116,364
----------- -----------
Interest expense
Interest on deposits 5,556,003 5,302,215
Interest on federal funds purchased 425 493
Interest on other borrowed money 223,175 128,581
----------- -----------
5,779,603 5,431,289
----------- -----------
Net interest income 8,953,501 8,685,075
Provision for loan losses 100,000 125,000
----------- -----------
Net interest income after provision
for loan losses 8,853,501 8,560,075
----------- -----------
Other income
Trust department income 7,160 8,394
Service fees 1,559,924 1,504,173
Gain (loss) on sale of securities 147,121 (23,129)
Gain on sale of loans 301,919 158,444
Other 151,473 82,500
----------- -----------
2,167,597 1,730,382
----------- -----------
Other expenses
Salaries and wages 2,724,564 2,562,719
Pension and other employee benefits 665,930 693,692
Occupancy expense, net 342,931 327,612
Equipment expense 627,330 436,167
Other operating expense 1,703,174 1,473,649
----------- -----------
6,063,929 5,493,839
----------- -----------
Income before income taxes 4,957,169 4,796,618
Income tax expense 1,507,257 1,450,500
----------- -----------
Net income $ 3,449,912 $ 3,346,118
=========== ===========
Earnings per common share $1.70 $1.64
===== =====
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-16
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
---------------------- Paid-in
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balances, December 31, 1996 1,018,430 $2,259,800 $795,865
Comprehensive income, net of taxes
Net income -0- -0- -0-
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- -0-
Reclassification adjustments for losses
included in net income -0- -0- -0-
Comprehensive income
Stock split effected in the form of a dividend 1,018,430 2,259,800 -0-
Cash dividends declared -0- -0- -0-
Treasury stock purchased (8,800) -0- -0-
Exercise of stock option 4,200 8,400 24,550
--------- ---------- --------
Balances, December 31,1997 2,032,260 4,528,000 820,415
Comprehensive income, net of taxes
Net income -0- -0- -0-
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- -0-
Reclassification adjustments for gains
included in net income -0- -0- -0-
Comprehensive income
Cash dividends declared -0- -0- -0-
Treasury stock purchased (2,220) -0- -0-
Exercise of stock option 4,100 8,200 28,775
--------- ---------- --------
Balances, December 31, 1998 2,034,140 $4,536,200 $849,190
========= ========== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-17
<TABLE>
<CAPTION>
Accumulated
other Total
Retained Treasury comprehensive stockholders'
earnings stock income equity
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 $15,686,534 $(1,429,688) $189,048 $17,501,559
Comprehensive income, net of taxes
Net income 3,346,118 -0- -0- 3,346,118
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- 120,403 120,403
Reclassification adjustments for losses
included in net income -0- -0- 11,812 11,812
-----------
Comprehensive income 3,478,333
-----------
Stock split effected in the form of a dividend (2,259,800) -0- -0- -0-
Cash dividends declared (1,525,925) -0- -0- (1,525,925)
Treasury stock purchased -0- (118,803) -0- (118,803)
Exercise of stock option -0- -0- -0- 32,950
1 ----------- ----------- -------- -----------
Balances, December 31,1997 15,246,927 (1,548,491) 321,263 19,368,114
Comprehensive income, net of taxes
Net income 3,449,912 -0- -0- 3,449,912
Net unrealized holding gain on
securities available-for-sale, net of tax -0- -0- 204,807 204,807
Reclassification adjustments for gains
included in net income -0- -0- (75,543) (75,543)
-----------
Comprehensive income 3,579,176
-----------
Cash dividends declared (1,665,519) -0- -0- (1,665,519)
Treasury stock purchased -0- (43,960) -0- (43,960)
Exercise of stock option -0- -0- -0- 36,975
----------- ----------- -------- -----------
Balances, December 31, 1998 $17,031,320 $(1,592,451) $450,527 $21,274,786
=========== =========== ======== ===========
</TABLE>
<PAGE> F-18
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,449,912 $ 3,346,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 510,474 341,115
Provision for loan losses 100,000 125,000
Provision (credit) for deferred income taxes 38,703 (3,250)
Amortization, net 74,707 84,515
Write-downs of other real estate owned 42,578 117,748
Decrease in unamortized loan fees (36,648) (30,434)
(Increase) decrease in loans held for resale (902,839) 213,877
Increase in accrued interest receivable (46,283) (5,131)
(Increase) decrease in other assets (215,441) 23,055
Decrease in income taxes receivable 47,986 34,750
(Decrease) increase in accrued interest payable (74,324) 56,901
(Decrease) increase in other liabilities (52,976) 45,784
(Gain) loss on sale of securities (147,121) 23,129
Gain on sale of loans (301,919) (158,444)
Gain on sale of other real estate owned (38,860) (89,710)
------------ ------------
Net cash provided by operating activities 2,447,949 4,125,023
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits
Maturities and redemptions 1,586,000 -0-
Purchases (3,459,000) -0-
Securities available-for-sale
Sales and maturities 10,775,678 13,719,490
Purchases (20,906,286) (13,453,143)
Purchase of Federal Home Loan Bank stock (32,000) (91,800)
Decrease (increase) in loans, net 1,310,561 (11,141,370)
Recoveries of loans charged off 71,002 55,118
Purchase of premises and equipment, net (649,900) (492,316)
Proceeds from sales of premises and equipment 4,660 1,244
Proceeds from sales of other real
estate owned 502,169 584,620
------------ ------------
Net cash used in investing activities (10,797,116) (10,818,157)
------------ ------------
</TABLE>
<PAGE> F-19
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net of repayments 2,902,385 (57,523)
Proceeds from exercise of stock options 36,975 32,950
Net increase in demand, NOW,
savings, and money market accounts 16,733,012 6,253,700
Net (decrease) increase in time deposits (11,013,634) 4,510,703
Purchase of treasury stock (43,960) (118,803)
Dividends paid (1,665,519) (1,525,925)
------------ ------------
Net cash provided by financing activities 6,949,259 9,095,102
------------ ------------
(Decrease) increase in cash and
cash equivalents (1,399,908) 2,401,968
Cash and cash equivalents:
Beginning 13,047,980 10,646,012
------------ ------------
Ending $ 11,648,072 $ 13,047,980
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $ 5,853,927 $ 5,374,388
============ ============
Income taxes paid $ 1,466,000 $ 1,419,000
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in
settlement of loans $ 595,346 $ 790,628
============ ============
Total change in unrealized gain on
securities available-for-sale $ 195,854 $ 200,325
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> F-20
UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policies of Union Bankshares, Inc. and Subsidiary
(the Company) are in conformity with generally accepted accounting
principles and general practices within the banking industry. The
following is a description of the more significant policies.
Basis of consolidation
The consolidated financial statements include the accounts of Union
Bankshares, Inc. and Union Bank, its wholly-owned subsidiary. 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, and
telebanking systems in northern Vermont which is primarily a small
business and tourism area. The Company's primary deposit products
are checking and savings 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. In addition, a
substantial portion of the Company's loans are secured by real
estate and/or are SBA guaranteed.
<PAGE> F-21
Note 1. Significant Accounting Policies (Continued)
Use of estimates
The preparation of financial statements in conformity with
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. In connection with the
determination of the allowances for losses on loans and foreclosed
real estate, management obtains independent appraisals for
significant properties. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio and the
recovery of a substantial portion of the carrying amount of
foreclosed real estate are susceptible to changes in local market
conditions.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Company's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
Because of these factors, it is reasonably possible that the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change
that is reasonably possible cannot be estimated.
Presentation of cash flows
For purposes of presentation in the 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.
<PAGE> F-22
Note 1. Significant Accounting Policies (Continued)
Investment securities
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 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 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 applicable income taxes. 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 a member of the Federal Home Loan Bank, the Company is required
to invest in $100 par value stock of the Federal Home Loan Bank.
The stock is nonmarketable, and when redeemed, the Company 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 aggregate cost or aggregate estimated fair
value. 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.
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 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.
<PAGE> F-23
Note 1. Significant Accounting Policies (Continued)
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 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 the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Land improvements 15 - 40
Buildings and improvements 10 - 40
Furniture and equipment 3 - 20
</TABLE>
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
The Company recognizes as separate assets rights to service
mortgage loans for others, however those servicing rights are
acquired. When the Company acquires mortgage servicing rights
through either the purchase or origination of mortgage loans
(originated mortgage loan servicing rights) and sells or
securitizes those loans with servicing rights retained, it
allocates the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage loan servicing
rights) based on their relative fair values. To determine the fair
value of the servicing rights created, the Company uses the market
prices under comparable servicing sales contracts. The cost of
mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash
flows based on a current market interest rate.
<PAGE> F-24
Note 1. Significant Accounting Policies (Continued)
Pension plans
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 132, "Employer's Disclosure About
Pensions and Other Postretirement Benefits". This Statement became
effective for fiscal years beginning after December 15, 1997. SFAS
No. 132 changes the disclosure requirements applicable to defined
benefit pension and postretirement plans of public and nonpublic
companies. Pension information disclosed in the December 31, 1998
and 1997 financial statements has been restated to conform to the
requirements of SFAS No. 132. The adoption of this Statement did
not have a material effect on the Company's financial statements.
The Company maintains a non-contributory defined benefit pension
plan covering all eligible employees who meet certain service
requirements. Pension costs are charged to pension and other
employee benefits expense and are funded as accrued.
The Company also has a contributory 401(k) pension plan covering
all employees who meet certain service requirements. The plan is
voluntary, and in 1998 and 1997, the Bank contributed fifty cents
for every dollar contributed by participants, up to three percent
of each participant's salary.
Advertising costs
The Company expenses advertising costs as incurred.
Stock split effected in the form of a dividend
On May 7, 1997, the shareholders authorized a two-for-one stock
split of the Company's $2.00 par value common stock. The stock
split was effected in the form of a dividend. All references in
the accompanying financial statements to the number of common
shares and per-share amounts have been restated to reflect the
stock split.
Earnings per common share
The FASB issued Statement No. 128, Earnings per Share, which became
effective for the Company during December, 1997. The statement
applies prospectively; earlier application is not permitted. The
adoption of this statement did not have a material effect on the
Company's financial statements.
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 and stock
dividends) and reduced for shares held in treasury. The weighted
average shares outstanding were 2,030,925 and 2,034,680 for the
years ended December 31, 1998 and 1997, respectively.
<PAGE> F-25
Note 1. Significant Accounting Policies (Continued)
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 fixed-rate 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.
<PAGE> F-26
Note 1. Significant Accounting Policies (Continued)
Deposits and borrowed funds: 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.
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.
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 pro forma 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 pro forma disclosures of Statement
No. 123.
Changes in accounting policies
The Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
which became effective for such transactions occurring after
December 31, 1996 and supersedes FASB Statement No. 122. (The
effective date of certain provisions of the statement was delayed
one year until January 1, 1998 by the subsequent issuance of FASB
Statement No. 127.) The statement applies prospectively; earlier
or retroactive application is not permitted.
Under this statement, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings and includes standards
for measuring and amortizing servicing assets and liabilities.
The adoption of Statement No. 125 (as amended by Statement No. 127)
did not have a material effect on the Company's financial
statements.
<PAGE> F-27
Note 1. Significant Accounting Policies (Continued)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. Comprehensive income
includes the reported net income of a company adjusted for items
that are currently accounted for as direct entries to equity, such
as the mark-to-market adjustment on securities available-for-sale,
foreign currency items, and minimum pension liability adjustments.
The December 31, 1998 and December 31, 1997 financial statements
have been reclassified to conform to the requirements of SFAS No.
130.
In 1998, 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. This Statement is effective for fiscal years beginning
after December 15, 1997. Management has determined that the
Company does not have reportable segments as defined with the
Statement.
Reclassifications
Certain amounts in the 1997 financial statements have been
reclassified to conform to the current year presentation.
Note 2. 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 6.75% and mature at various dates through 2003 with
approximately $1,283,000 scheduled to mature in 1999.
<PAGE> F-28
Note 3. Investment Securities
Investment securities available-for-sale consist of the following
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and
agency and corporation
securities $23,840,131 $202,114 $ 14,828 $24,027,417
State and political
subdivisions 3,654,676 10,449 10,364 3,654,761
Corporate debt
securities 9,675,549 125,579 9,800 9,791,328
Marketable equity
securities 558,125 379,466 -0- 937,591
----------- -------- -------- -----------
$37,728,481 $717,608 $ 34,992 $38,411,097
=========== ======== ======== ===========
December 31, 1997:
U.S. Government and
agency and corporation
securities $20,280,414 $117,064 $ 2,997 $20,394,481
State and political
subdivisions 859,431 -0- 59,005 800,426
Corporate debt
securities 5,313,549 8,737 5,991 5,316,295
Marketable equity
securities 1,072,066 473,953 45,000 1,501,019
----------- -------- -------- -----------
$27,525,460 $599,754 $112,993 $28,012,221
=========== ======== ======== ===========
</TABLE>
Included in the caption "U.S. Government and agency and corporation
securities" are mortgage-backed securities with a carrying amount
of $5,182,188 and $5,400,129 at December 31, 1998 and 1997,
respectively.
Investment securities with a carrying amount of $4,067,812 and
$4,369,156 at December 31, 1998 and 1997, respectively, were
pledged as collateral on public deposits and for other purposes as
required or permitted by law.
<PAGE> F-29
Note 3. Investment Securities (Continued)
All realized gains and losses in 1998 and 1997 were from the sale
of securities available-for-sale. Proceeds from the sale of
securities available-for-sale were $1,085,373 and $9,293,508 in
1998 and 1997, respectively. Realized gains from sales of
investments available-for-sale were $191,396 and $6,045 with
realized losses of $44,275 and $29,174 for the years 1998 and 1997,
respectively.
The amortized cost and fair value of securities available-for-sale
as of December 31, 1998 by contractual maturity is shown below.
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
following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 8,863,337 $ 8,926,156
Due from one to five years 12,839,417 12,995,906
Due from five to ten years 6,599,974 6,622,295
Due after ten years 3,737,303 3,746,961
Mortgage-backed securities 5,130,325 5,182,188
Marketable equity securities 558,125 937,591
----------- -----------
$37,728,481 $38,411,097
=========== ===========
</TABLE>
Note 4. Loans
The composition of net loans at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate $ 50,903,894 $ 40,795,144
Commercial and commercial real estate 60,777,600 58,049,646
Consumer 5,987,509 11,138,343
Term Federal funds sold 1,000,000 3,000,000
Municipal loans 7,651,809 15,281,178
------------ ------------
126,320,812 128,264,311
------------ ------------
Deduct:
Allowance for loan losses 1,805,073 1,794,341
Net deferred loan fees 282,002 318,650
------------ ------------
2,087,075 2,112,991
------------ ------------
$124,233,737 $126,151,320
============ ============
</TABLE>
<PAGE> F-30
Note 4. Loans (Continued)
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
$54,917,137 and $58,042,459 at December 31, 1998 and 1997,
respectively. Mortgage servicing rights of $90,582 and $36,204
were capitalized in 1998 and 1997, respectively.
Impairment of loans having recorded investments of $35,030 at
December 31, 1998 and $298,475 at December 31, 1997 has been
recognized in conformity with FASB Statement No. 114, as amended by
FASB Statement No. 118. Of these recorded investments, $-0- and
$55,707 had SBA guarantees applicable to them at December 31, 1998
and 1997, respectively. The average recorded investment in
impaired loans during 1998 and 1997 was $250,316 and $523,861,
respectively. The total allowance for loan losses related to these
loans was $350 and $34,050 on December 31, 1998 and 1997,
respectively. Interest income on impaired loans of $4,419 and
$23,650 was recognized for cash payments received in 1998 and 1997,
respectively.
The Company is not committed to lend additional funds to borrowers
with impaired loans.
Residential real estate loans aggregating $4,442,202 and $6,863,438
at December 31, 1998 and 1997, respectively, were pledged as
collateral on deposits of municipalities.
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning $1,794,341 $1,850,396
Provision for loan losses 100,000 125,000
Recoveries of amounts charged off 71,002 55,118
---------- ----------
1,965,343 2,030,514
Amounts charged off 160,270 236,173
---------- ----------
Balance, ending $1,805,073 $1,794,341
========== ==========
</TABLE>
Note 6. Premises and Equipment
The major classes of premises and equipment and the total
accumulated depreciation at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements $ 389,020 $ 371,940
Buildings and improvements 2,203,284 2,143,221
Furniture and equipment 3,642,989 3,246,789
---------- ----------
6,235,293 5,761,950
Less accumulated depreciation 3,589,376 3,250,799
---------- ----------
$2,645,917 $2,511,151
========== ==========
</TABLE>
<PAGE> F-31
Note 6. Premises and Equipment (Continued)
Depreciation included in occupancy and equipment expenses amounted
to $510,474 and $341,115 for the years ended December 31, 1998 and
1997, respectively.
The Company is obligated under noncancellable operating leases for
premises expiring in various years through the year 2002. 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, 1998 were as follows:
<TABLE>
<S> <C>
1999 $ 45,464
2000 41,454
2001 41,454
2002 11,443
--------
$139,815
========
</TABLE>
Rent expense for 1998 and 1997 amounted to $48,277 and $47,235,
respectively.
Occupancy expense is shown in the consolidated statements net of
rental income of $29,940 in 1998 and $29,865 in 1997.
Note 7. Deposits
The following is a summary of time certificates of deposit by
maturity at December 31, 1998:
<TABLE>
<S> <C>
Maturing in 1999 $37,128,780
Maturing in 2000 14,119,292
Maturing in 2001 1,588,021
Maturing in 2002 250,771
Maturing in 2003 and thereafter 400,232
-----------
$53,487,096
===========
</TABLE>
<PAGE> F-32
Note 8. Borrowed Funds
Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the
years ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Community Investment Program
6.10% note payable to FHLB,
payable in monthly installments of
$8,727, including interest, through
January 24, 2014 $1,028,569 $1,068,332
6.10% note payable to FHLB,
payable in monthly installments of
$4,636, including interest, through
January 24, 2014 546,427 567,552
Option Advances
6.06% note payable to FHLB,
payable in monthly installments of
$11,178, including interest, through
May 6, 2008 963,273 -0-
Community Investment Program "Plus"
5.01% term borrowing from FHLB
maturing June 25, 2008 1,000,000 -0-
5.66% term borrowing from FHLB
maturing February 4, 2003 1,000,000 -0-
---------- ----------
$4,538,269 $1,635,884
========== ==========
</TABLE>
Under the terms of the Community Investment Program agreement,
these funds have been loaned to provide housing for individuals and
families whose income is at or below 115% of the median income for
the area as defined by the U. S. Department of Housing and Urban
Development.
Principal maturities of borrowed funds as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999 $ 141,858
2000 150,427
2001 159,678
2002 170,935
2003 1,181,678
Thereafter 2,733,693
----------
$4,538,269
==========
</TABLE>
<PAGE> F-33
Note 8. Borrowed Funds (Continued)
Under the terms of the Community Investment Program "Plus", the
Company has unadvanced funds available of $10,159,098. This
funding commitment expires January 13, 2000.
In addition, the Company maintains an IDEAL Way Line of Credit with
the Federal Home Loan Bank of Boston which approximates 2% of the
Bank's assets. The total line available was $3,356,000 as of
December 31, 1998 and 1997, respectively. Total borrowings against
this line of credit were $-0- at December 31, 1998 and 1997.
Interest on these borrowings is chargeable at a rate determined by
the Federal Home Loan Bank and payable monthly. Should the Company
utilize this line of credit, qualified portions of the loan and
investment portfolios would collateralize these borrowings.
Note 9. 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, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Currently paid or payable $1,468,554 $1,453,750
Deferred 38,703 (3,250)
---------- ----------
$1,507,257 $1,450,500
========== ==========
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to income before
income taxes as a result of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax expense $1,685,437 $1,630,850
Tax exempt interest (202,374) (193,193)
Disallowed interest expense 27,735 26,349
Dividend exclusion (11,576) (19,456)
Increase in CSV life (27,494) (25,139)
Other 35,529 31,089
---------- ----------
$1,507,257 $1,450,500
========== ==========
</TABLE>
<PAGE> F-34
Note 9. Income Taxes (Continued)
The deferred income tax provision consisted of the following items
at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Bad debts $ (3,649) $ 19,058
Mark-to-market, loans (130) (48,632)
Deferred loan fees 18,681 14,167
Nonaccrual loan interest 13,823 (10,322)
OREO 9,984 (22,047)
Deferred compensation 4,626 764
Pension (23,846) 22,774
Depreciation (5,692) 834
Mortgage servicing rights 9,764 2,130
Other 15,142 18,024
-------- ---------
$ 38,703 $ (3,250)
======== =========
</TABLE>
Listed below are the significant components of the net deferred tax
asset at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Components of the deferred tax asset:
Bad debts $ 487,129 $ 483,480
Mark-to-market loans 34,047 33,917
Deferred loan fees 41,388 60,069
Nonaccrual loan interest 14,638 28,461
OREO writedowns 14,480 24,464
Deferred compensation 618,865 623,491
Pension 20,736 -0-
Other -0- 2,914
---------- ----------
Total deferred tax asset 1,231,283 1,256,796
Valuation allowance -0- (1,146)
---------- ----------
Total deferred tax asset, net of
valuation allowance 1,231,283 1,255,650
---------- ----------
Components of the deferred tax liability:
Depreciation (55,409) (61,101)
Pension -0- (3,110)
Mortgage servicing rights (25,965) (16,201)
Other (42,947) (29,573)
Unrealized gain on securities
available-for-sale (232,089) (165,498)
---------- ----------
Total deferred tax liability (356,410) (275,483)
---------- ----------
Net deferred tax asset $ 874,873 $ 980,167
========== ==========
</TABLE>
<PAGE> F-35
Note 9. Income Taxes (Continued)
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, 1998 and 1997,
respectively.
Note 10. Employee Benefits
The Company sponsors a non-contributory defined benefit pension
plan covering all eligible employees. The Company's policy is to
accrue annually an amount equal to the actuarially calculated
expense.
The following table sets forth the Plan's funded status and amounts
recognized in the accompanying consolidated balance sheets at
December 31:
<TABLE>
<CAPTION>
Pension Benefits
1998 1997
---- ----
<S> <C> <C>
Fair value of plan assets at December 31 $3,747,456 $3,666,212
Benefit obligation at December 31 3,875,397 3,294,662
---------- ----------
Projected benefit obligation in excess of
(less than) plan assets $ 127,941 $ (371,550)
========== ==========
(Accrued) prepaid benefit cost recognized
in the balance sheet $ (60,989) $ 9,143
Weighted average assumptions as of
December 31:
Discount rate 6.50% 7.25%
Expected long-term rate of return on
plan assets 7.25% 8.00%
Rate of increase in compensation 3.25% 4.00%
Benefit cost $ 120,982 $ 121,016
Employer contributions 50,850 187,994
Benefits paid 109,244 119,417
</TABLE>
Contributions to the plan are invested in diversified portfolios,
mainly corporate stocks and bonds.
Contributions to the Company's defined contribution 401(k) plan are
at the discretion of the Board of Directors. Contributions to the
plan were $63,375 and $59,439 for 1998 and 1997, respectively.
<PAGE> F-36
Note 10. Employee Benefits (Continued)
The Company has 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 retirement or death over a 15 year period. The
Company has purchased life insurance contracts for each
participant in order to fund these benefits. The annual cost of
the plan is immaterial to the financial statements of the
Corporation.
Note 11. 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.
<TABLE>
<CAPTION>
Contract or
Notional
Amount
1998
-----------
<S> <C>
Financial instruments whose contract amount
represent credit risk:
Commitments to extend credit $14,189,160
===========
Standby letters of credit and
commercial letters of credit $ 851,384
===========
Credit card arrangements $ 1,129,109
===========
Home equity lines $ 2,466,636
===========
</TABLE>
<PAGE> F-37
Note 11. Financial Instruments With Off-Balance-Sheet Risk (Continued)
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.
The Company enters into a variety of interest rate contracts,
including interest rate caps and floors written on adjustable rate
loans in managing its interest rate exposure. Interest rate caps
and floors on loans, written by the Company enables customers to
transfer, modify, or reduce their interest rate risk.
Note 12. 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.
<PAGE> F-38
Note 13. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $11,648,072 $11,648,072
Interest bearing deposits 1,873,000 1,887,766
Securities available-for-sale 38,411,097 38,411,097
Federal Home Loan Bank stock 626,200 626,200
Loans and loans held for sale, net 131,633,593 133,014,891
Accrued interest receivable 1,381,670 1,381,670
Financial liabilities:
Deposits 162,516,629 163,232,957
Borrowed funds 4,538,269 4,737,999
Accrued interest payable 543,042 543,042
</TABLE>
The estimated fair values of the Company's financial instruments at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,047,980 $ 13,047,980
Securities available-for-sale 28,012,221 28,012,221
Federal Home Loan Bank stock 594,200 594,200
Loans and loans held for sale, net 132,346,418 131,766,229
Accrued interest receivable 1,335,387 1,335,387
Financial liabilities:
Deposits 156,797,251 157,293,954
Borrowed funds 1,635,884 1,642,465
Accrued interest payable 617,366 617,366
</TABLE>
The estimated fair values of deferred fees on commitments to extend
credit and letters of credit were immaterial at December 31, 1998
and 1997.
The carrying amounts in the preceding table are included in the
balance sheet under the applicable captions.
<PAGE> F-39
Note 14. 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning $1,013,576 $ 490,197
New loans 937,793 435,255
Repayments (613,400) (346,343)
Other, net (574,172) 434,467
---------- ----------
Balance, ending $ 763,797 $1,013,576
========== ==========
Balance available on lines of credit $ 137,707 $ 169,555
========== ==========
</TABLE>
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 $1,212,197 and
$728,343 at December 31, 1998 and 1997, respectively.
Note 15. 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:
<TABLE>
<CAPTION>
Shares
Under Option
----------------
1998 1997
---- ----
<S> <C> <C>
Outstanding, January 1 15,300 17,000
Granted during the year 2,500 2,500
Exercised during the year
(4,000 shares at $9.00 per share and 100
shares at $9.75 in 1998 and 4,000 shares
at $7.75 per share and 200 shares at
$9.75 per share during 1997) (4,100) (4,200)
------ ------
Outstanding, December 31 13,700 15,300
====== ======
</TABLE>
<PAGE> F-40
Note 15. Incentive Stock Option Plan (Continued)
<TABLE>
<CAPTION>
Shares
Under Option
----------------
1998 1997
---- ----
<S> <C> <C>
Eligible, December 31, for exercise
currently at:
$ 9.00 per share -0- 4,000
$ 9.25 per share 4,000 4,000
$ 9.75 per share 4,700 4,800
$18.00 per share 2,500 2,500
$22.00 per share 2,500 -0-
------ ------
13,700 15,300
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net income
As reported $3,449,912 $3,346,118
========== ==========
Pro forma $3,446,469 $3,344,093
========== ==========
</TABLE>
Note 16. Regulatory Capital Requirements
Union Bank is 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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Bank's 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 Bank 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, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
<PAGE> F-41
Note 16. Regulatory Capital Requirements (Continued)
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank 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 Bank's category.
The Bank's actual capital amounts (000's omitted) and ratios are
also presented in the table.
<TABLE>
<CAPTION>
Minimums
To be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to
risk weighted
assets) $22,353 18.70% $9,563 8.0% $11,954 10.0%
Tier I capital
(to risk weighted
assets) $20,688 17.31% $ 4,781 4.0% $ 7,172 6.0%
Tier I capital
(to average
assets) $20,688 11.49% $ 7,200 4.0% $ 9,000 5.0%
As of December 31, 1997:
Total capital (to
risk weighted
assets) $20,398 18.29% $ 8,924 8.0% $11,154 10.0%
Tier I capital
(to risk weighted
assets) $19,003 17.04% $ 4,462 4.0% $ 6,693 6.0%
Tier I capital
(to average
assets) $19,003 11.30% $ 6,728 4.0% $ 8,410 5.0%
</TABLE>
<PAGE> F-42
Note 17. 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 the Bank to transfer, at
a minimum, 10% of annual net profits to restricted retained
earnings until such amounts of capital equal 10% of Bank deposits
and other liabilities.
Note 18. Subsequent Events
On February 18, 1999, Union Bankshares, Inc. announced plans to
acquire Citizens Savings Bank and Trust Company. It is anticipated
that the acquisition will be accounted for under the pooling of
interests method of accounting. The acquisition is contingent upon
receiving the approval of the respective shareholders of each
company and the appropriate regulatory authorities. Following the
acquisition, Citizens Savings Bank and Trust Company will continue
operations as a wholly owned subsidiary of Union Bankshares, Inc.
On January 4, 1999, Union Bankshares, Inc. declared a $0.22 per
share dividend payable January 11, 1999 to stockholders of record
on January 4, 1999.
<PAGE> F-43
CITIZENS SAVINGS BANK AND TRUST COMPANY
BALANCE SHEETS
March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,718,792 $ 2,702,355
Federal funds sold 1,660,000 2,050,000
----------- -----------
Cash and cash equivalents 4,378,792 4,752,355
Securities available-for-sale 20,961,898 17,130,627
Federal Home Loan Bank stock, at cost 277,800 277,800
Loans, net 69,440,462 67,622,699
Premises and equipment, net 1,906,408 1,905,312
Accrued interest receivable 792,367 717,225
Other real estate owned, net 20,000 51,025
Other assets 320,145 389,205
----------- -----------
$98,097,872 $92,846,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 7,325,063 $ 6,520,247
NOW accounts 9,825,663 9,612,666
Savings and money markets 23,490,447 21,542,152
Time, $100,000 and over 9,729,047 8,550,654
Other time 35,365,196 34,788,994
----------- -----------
85,735,416 81,014,713
Borrowed funds 1,490,250 1,690,000
Accrued interest and other liabilities 297,969 262,621
----------- -----------
87,523,635 82,967,334
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 304,000
shares authorized, 152,000 shares
issued and outstanding 152,000 152,000
Surplus 1,192,800 1,192,800
Retained earnings 9,216,973 8,459,972
Accumulated other comprehensive income 12,464 74,142
----------- -----------
10,574,237 9,878,914
----------- -----------
$98,097,872 $92,846,248
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> F-44
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF INCOME
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans $1,556,356 $1,607,621
Interest and dividends on investment securities
U.S. Treasury 31,993 57,473
U. S. Government agencies and corporations 139,911 118,407
States and political subdivisions -0- 1,007
Other 151,577 107,849
Dividends 4,481 4,312
Interest on federal funds sold 32,544 11,134
---------- ----------
1,916,862 1,907,803
---------- ----------
Interest expense
Interest on deposits 829,354 829,140
Interest on federal funds purchased -0- 1,055
Interest on borrowed funds 23,003 -0-
---------- ----------
852,357 830,195
---------- ----------
Net interest income 1,064,505 1,077,608
Provision for loan losses (62,499) (75,000)
---------- ----------
Net interest income after provision for loan
losses 1,002,006 1,002,608
Other income
Trust department income 30,482 22,575
Service fees 105,664 89,110
Securities gains 621 -0-
Loss on sale of other real estate owned -0- (3,165)
Other 33,178 39,220
---------- ----------
169,945 147,740
Other expenses
Salaries and wages 330,881 367,839
Pension and other employee benefits 102,108 112,223
Occupancy expense, net 49,492 42,665
Equipment expense 70,882 62,817
Other operating expense 279,650 236,383
---------- ----------
833,013 821,927
---------- ----------
Income before income taxes 338,938 328,421
Income tax expense 120,000 107,000
---------- ----------
Net income $ 218,938 $ 221,421
========== ==========
Earnings per common share $1.44 $1.46
========== ==========
</TABLE>
See accompanying notes.
<PAGE> F-45
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock Surplus
------ -------
<S> <C> <C>
Balances, December 31, 1997 $152,000 $1,192,800
Comprehensive income, net of tax:
Net income -0- -0-
Net unrealized holding gain on securities
available-for-sale, net of tax -0- -0-
Comprehensive income
Cash dividends declared -0- -0-
-------- ----------
Balances, March 31, 1998 $152,000 $1,192,800
======== ==========
Balances, December 31, 1998 $152,000 $1,192,800
Comprehensive income, net of tax:
Net income -0- -0-
Net unrealized holding loss on securities
available-for-sale, net of tax -0- -0-
Comprehensive income
Cash dividends declared -0- -0-
-------- ----------
Balances, March 31, 1999 $152,000 $1,192,800
======== ==========
</TABLE>
See accompanying notes.
<PAGE> F-46
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive stockholders'
earnings income equity
-------- ------------- -------------
<S> <C> <C> <C>
Balances, December 31, 1997 $8,238,551 $ 71,441 $ 9,654,792
Comprehensive income, net of tax:
Net income 221,421 -0- -0-
Net unrealized holding gain on securities
available-for-sale, net of tax -0- 2,701 -0-
Comprehensive income 224,122
Cash dividends declared -0- -0- -0-
---------- --------- -----------
Balances, March 31, 1998 $8,459,972 $ 74,142 $ 9,878,914
========== ========= ===========
Balances, December 31, 1998 $8,998,035 $ 144,602 $10,487,437
Comprehensive income, net of tax:
Net income 218,938 -0- -0-
Net unrealized holding loss on securities
available-for-sale, net of tax -0- (132,138) 86,800
Comprehensive income
Cash dividends declared -0- -0- -0-
---------- --------- -----------
Balances, March 31, 1999 $9,216,973 $ 12,464 $10,574,237
========== ========= ===========
</TABLE>
<PAGE> F-47
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 218,938 $ 221,421
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 72,276 62,020
Provision for loan losses 62,499 75,000
Securities gains (621) -0-
Loss on sales of other real estate owned -0- 3,165
Premium/discount accretion, net 5,041 1,476
Increase in taxes payable 120,000 107,000
Increase in interest receivable (68,335) (29,817)
Decrease (increase) in other assets 54,080 (8,679)
Increase in deferred loan fees 23,076 1,327
Increase (decrease) increase in interest payable 509 (4,299)
Increase in other liabilities 15,102 38,969
---------- ----------
Net cash provided by operating activities 502,565 467,583
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale 798,318 1,008,766
Purchase of investment securities
available-for-sale (1,790,443) (248,530)
Purchase of FHLB stock -0- (14,600)
Loan originations, net of repayments (1,605,368) (944,101)
Purchases of premises and equipment, net (50,530) (36,276)
Recoveries of loans charged off 9,393 8,953
Proceeds from sales of other real estate owned -0- 48,372
Proceeds from sale of repossessed property 30,697 42,364
---------- ----------
Net cash used in investing activities (2,607,933) (135,052)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW, savings,
and money market accounts (448,448) (510,201)
Net decrease in time deposits (217,723) (907,458)
Dividends paid (342,000) (304,000)
Other borrowings, net (55,849) 1,690,000
---------- ----------
Net cash used in financing activities (1,064,020) (31,659)
---------- ----------
Net (decrease) increase in cash
and cash equivalents (3,169,388) 300,872
Cash and cash equivalents
Beginning 7,548,180 4,451,483
---------- ----------
Ending $4,378,792 $4,752,355
========== ==========
</TABLE>
<PAGE> F-48
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest $ 851,848 $ 834,494
========== ==========
Income taxes, net $ -0- $ -0-
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate owned acquired in
settlement of loans $ 20,000 $ -0-
========== ==========
Repossessed property acquired in
settlement of loans $ 65,322 $ 69,276
========== ==========
Total increase (decrease) in unrealized gain
on securities available-for-sale $ 200,209 $ (4,092)
========== ==========
</TABLE>
See accompanying notes.
<PAGE> F-49
CITIZENS SAVINGS BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Accounting Policies
The unaudited financial statements as of and for the three months
ended March 31, 1999 and 1998 have not been audited but, in the
opinion of management, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
financial position and results of operation of the Bank as of such
date and for such periods. The unaudited financial statements
should be read in conjunction with the annual financial statements
of the Bank and the notes thereto appearing elsewhere herein. The
results of operation for the three months ended March 31, 1999 are
not necessarily indicative of the results of operations that may be
expected for the year ending December 31, 1999 or for any future
periods.
Note 2. Proposed Merger
On February 6, 1999, the Bank entered into a definitive merger
agreement with Union Bankshares, Inc. under which the Bank would
become a wholly-owned subsidiary of Union Bankshares, Inc. The
agreement provides for shareholders to receive 6.5217 shares of
Union Bankshares, Inc. common stock for each outstanding share of
the Bank. The transaction is expected to qualify as a tax-free
exchange and to be accounted for as a pooling of interests. The
merger is subject, among other conditions, to shareholder and
regulatory approvals.
<PAGE> F-50
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Citizens Savings Bank and Trust Company
St. Johnsbury, Vermont
We have audited the accompanying balance sheets of Citizens Savings Bank and
Trust Company as of December 31, 1998 and 1997, and the related statements of
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Savings Bank and
Trust Company as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
January 12, 1999
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
<PAGE> F-51
CITIZENS SAVINGS BANK AND TRUST COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,098,180 $ 3,351,483
Federal funds sold 4,450,000 1,100,000
----------- -----------
Cash and cash equivalents 7,548,180 4,451,483
Securities available-for-sale 20,174,402 17,888,247
Federal Home Loan Bank stock, at cost 277,800 263,200
Loans, net 67,989,836 66,760,449
Premises and equipment, net 1,928,154 1,931,056
Accrued interest receivable 724,032 687,408
Other real estate owned, net -0- 109,953
Other assets 324,294 475,239
----------- -----------
$98,966,698 $92,567,035
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 8,266,542 $ 8,089,649
NOW accounts 10,332,227 9,196,751
Savings and money markets 22,490,852 20,898,866
Time, $100,000 and over 9,816,367 9,083,173
Other time 35,495,599 35,163,933
----------- -----------
86,401,587 82,432,372
Borrowed funds 1,546,099 -0-
Accrued interest and other liabilities 531,575 479,871
----------- -----------
88,479,261 82,912,243
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 304,000
shares authorized, 152,000 shares
issued and outstanding 152,000 152,000
Surplus 1,192,800 1,192,800
Retained earnings 8,998,035 8,238,551
Accumulated other comprehensive income 144,602 71,441
----------- -----------
10,487,437 9,654,792
----------- -----------
$98,966,698 $92,567,035
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> F-52
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $6,509,904 $6,324,165 $6,029,934
Interest and dividends on investment
securities
U.S. Treasury 174,352 292,002 331,172
U. S. Government agencies and
corporations 556,162 379,068 337,247
States and political subdivisions 2,423 6,549 16,009
Other 439,648 412,247 335,583
Dividends 17,398 16,891 16,014
Interest on federal funds sold 193,188 119,135 122,116
---------- ---------- ----------
7,893,075 7,550,057 7,188,075
---------- ---------- ----------
Interest expense
Interest on deposits 3,402,726 3,350,233 3,299,611
Interest on federal funds purchased 1,222 540 937
Interest on borrowed funds 68,913 -0- -0-
---------- ---------- ----------
3,472,861 3,350,773 3,300,548
---------- ---------- ----------
Net interest income 4,420,214 4,199,284 3,887,527
Provision for loan losses 300,000 300,000 280,000
---------- ---------- ----------
Net interest income after provision
for loan losses 4,120,214 3,899,284 3,607,527
---------- ---------- ----------
Other income
Trust department income 113,250 85,911 80,000
Service fees 406,707 356,866 279,862
Securities gains (losses) 2,917 5,091 537
Gain on sale of other real estate owned 11,145 5,077 -0-
Gain on pension termination -0- -0- 166,543
Other 209,337 228,867 164,199
---------- ---------- ----------
743,356 681,812 691,141
---------- ---------- ----------
Other expenses
Salaries and wages 1,386,499 1,351,610 1,235,550
Pension and other employee benefits 391,638 369,407 368,011
Occupancy expense, net 159,618 177,968 172,277
Equipment expense 286,658 269,235 282,968
Other operating expense 990,023 905,304 843,124
---------- ---------- ----------
3,214,436 3,073,524 2,901,930
---------- ---------- ----------
Income before income taxes 1,649,134 1,507,572 1,396,738
Income tax expense (547,650) (498,186) (478,621)
---------- ---------- ----------
Net income $1,101,484 $1,009,386 $ 918,117
========== ========== ==========
Earnings per common share $7.25 $6.64 $6.04
========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE> F-53
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common
Stock Surplus
------- -------
<S> <C> <C>
Balances, December 31, 1995 $152,000 $1,192,800
Comprehensive income, net of tax:
Net income -0- -0-
Net unrealized holding loss on securities
available-for-sale -0- -0-
Reclassification adjustments for gains
included in net income -0- -0-
Comprehensive income
Cash dividends declared -0- -0-
-------- ----------
Balances, December 31, 1996 152,000 1,192,800
Comprehensive income, net of tax:
Net income -0- -0-
Net unrealized holding gain on securities
available-for-sale -0- -0-
Reclassification adjustments for gains
included in net income -0- -0-
Comprehensive income
Cash dividends declared -0- -0-
-------- ----------
Balances, December 31, 1997 152,000 1,192,800
Comprehensive income, net of tax:
Net income -0- -0-
Net unrealized holding gain on securities
available-for-sale -0- -0-
Reclassification adjustments for gains
included in net income -0- -0-
Comprehensive income
Cash dividends declared -0- -0-
-------- ----------
Balances, December 31, 1998 $152,000 $1,192,800
======== ==========
</TABLE>
See accompanying notes.
<PAGE> F-54
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive stockholders'
earnings income equity
-------- ------------- -------------
<S> <C> <C> <C>
Balances, December 31, 1995 $6,865,848 $117,452 $ 8,328,100
Comprehensive income, net of tax:
Net income 918,117 -0- -0-
Net unrealized holding loss on securities
available-for-sale -0- (102,920) -0-
Reclassification adjustments for gains
included in net income -0- (1,838) -0-
Comprehensive income 813,359
-----------
Cash dividends declared (250,800) -0- (250,800)
---------- -------- -----------
Balances, December 31, 1996 7,533,165 12,694 8,890,659
Comprehensive income, net of tax:
Net income 1,009,386 -0- -0-
Net unrealized holding gain on securities
available-for-sale -0- 65,568 -0-
Reclassification adjustments for gains
included in net income -0- (6,821) -0-
Comprehensive income 1,068,133
-----------
Cash dividends declared (304,000) -0- (304,000)
---------- -------- -----------
Balances, December 31, 1997 8,238,551 71,441 9,654,792
Comprehensive income, net of tax:
Net income -0- 1,101,484 -0-
Net unrealized holding gain on securities
available-for-sale -0- -0- 73,707
Reclassification adjustments for gains
included in net income -0- -0- (546)
Comprehensive income 1,174,645
-----------
Cash dividends declared (342,000) -0- (342,000)
---------- -------- -----------
Balances, December 31, 1998 $8,998,035 $144,602 $10,487,437
========== ======== ===========
</TABLE>
<PAGE> F-55
CITIZENS SAVINGS BANK AND TRUST COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,101,484 $ 1,009,386 $ 918,117
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 279,352 231,192 229,190
Provision for loan losses 300,000 300,000 280,000
Loss on disposal of fixed assets 2,358 -0- 5,570
Provision (credit) for deferred income taxes (10,053) (13,274) -0-
OREO writedowns 35,000 -0- -0-
Securities gains (2,917) (5,091) (537)
Gains on sales of other real estate owned (11,145) (5,077) -0-
Premium/discount accretion, net 34,111 46,490 69,337
Increase (decrease) in taxes payable 27,703 (81,848) 146,349
Increase in interest receivable (36,624) (39,536) (20,894)
Decrease (increase) in other assets 124,816 (123,364) 48,268
Increase (decrease) in deferred loan fees 48,009 (21,619) 5,804
(Decrease) increase in interest payable (5,325) 14,108 (13,357)
Increase (decrease) in other liabilities 19,029 12,914 (16,257)
----------- ----------- -----------
Net cash provided by operating activities 1,905,798 1,324,281 1,651,590
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale 5,841,003 4,839,282 4,289,488
Purchase of investment securities
available-for-sale (8,047,502) (6,524,614) (5,460,507)
Purchase of FHLB stock (14,600) (2,400) (31,200)
Loan originations, net of repayments (1,785,261) (3,273,030) (3,662,463)
Purchases of premises and equipment, net (278,808) (190,731) (127,985)
Recoveries of loans charged off 49,824 36,018 52,744
Proceeds from sales of other real estate owned 127,686 63,494 -0-
Proceeds from sale of repossessed property 87,243 106,995 140,040
----------- ----------- -----------
Net cash used in investing activities (4,020,415) (4,944,986) (4,799,883)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase demand deposits, NOW, savings,
and money market accounts 2,904,355 868,016 521,365
Net increase (decrease) in time deposits 1,064,860 3,178,102 (310,756)
Dividends paid (304,000) (250,800) (228,000)
Other borrowings, net 1,546,099 -0- -0-
----------- ----------- -----------
Net cash provided by (used in)
financing activities 5,211,314 3,795,318 (17,391)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 3,096,697 174,613 (3,165,684)
Cash and cash equivalents
Beginning 4,451,483 4,276,870 7,442,554
----------- ----------- -----------
Ending $ 7,548,180 $ 4,451,483 $ 4,276,870
=========== =========== ===========
</TABLE>
(Continued)
<PAGE> F-56
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest $ 3,478,186 $ 3,336,665 $ 3,313,905
=========== =========== ===========
Income taxes, net $ 530,000 $ 560,000 $ 365,581
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate owned acquired in
settlement of loans $ 41,588 $ 153,046 $ 41,343
=========== =========== ===========
Repossessed property acquired in
settlement of loans $ 295,405 $ 253,729 $ 322,203
=========== =========== ===========
Total increase (decrease) in unrealized gain
on securities available-for-sale $ 110,850 $ 89,011 $ (158,725)
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE> F-57
CITIZENS SAVINGS BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policies of Citizens Savings Bank and Trust Company
are in conformity with generally accepted accounting principles and
general practices within the banking industry. The following is a
description of the more significant policies.
Nature of operations
The Bank provides a variety of financial services to individuals
and commercial customers through its branches in northeastern
Vermont, which is primarily a small business and agricultural area.
The Bank's primary deposit products are checking and savings
accounts and certificates-of-deposit. Its primary lending products
are commercial, real estate, and consumer loans.
Concentration of risk
The Bank's operations are affected by various risk factors,
including interest-rate risk, credit risk and risk from the
geographic concentration of its 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 Bank. Although the Bank 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 Bank and its borrowers may be especially vulnerable
to the consequences of changes in the local economy. In addition,
a substantial portion of the Bank's loans are secured by real
estate.
Use of estimates
The preparation of financial statements in conformity with
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. In connection with the
determination of the allowances for losses on loans and foreclosed
real estate, management obtains independent appraisals for
significant properties. Accordingly, the ultimate collectibility
of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of
foreclosed real estate are susceptible to changes in local market
conditions.
<PAGE> F-58
Note 1. Significant Accounting Policies (Continued)
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions.In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
Because of these factors, it is reasonably possible that the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change
that is reasonably possible cannot be estimated.
Presentation of cash flows
For purposes of presentation in the 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 at
the Bank, are not included in these financial statements because
they are not assets of the Bank.
Investment securities
Debt securities the Bank has the positive intent and ability to
hold to maturity are classified as held to maturity and reported at
cost, adjusted for amortization of premium and accretion of
discounts using methods approximating the interest method. Debt
and equity securities purchased and held primarily for resale in
the near future are classified as trading. Trading securities are
carried at fair value with unrealized gains and losses included in
earnings. 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 applicable income taxes. 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 a member of the Federal Home Loan Bank, the Bank is required to
invest in $100 par value stock of the Federal Home Loan Bank. The
carrying amount of the investment was $277,800 and $263,200 at
December 31, 1998 and 1997, respectively. The stock is
nonmarketable, and when redeemed, the Bank would receive from the
Federal Home Loan Bank an amount equal to the par value of the
stock.
<PAGE> F-59
Note 1. Significant Accounting Policies (Continued)
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 outstanding 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 the outstanding balances.
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 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 amortized as an adjustment
of the related loan's yield using methods that approximate the
interest method. The Bank 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 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 the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 8 - 40
Furniture and equipment 3 - 10
</TABLE>
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.
<PAGE> F-60
Note 1. Significant Accounting Policies (Continued)
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 cost 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 real estate
owned expense.
Mortgage servicing
The Bank recognizes as separate assets rights to service mortgage
loans for others, however, those servicing rights are acquired.
When the Bank acquires mortgage servicing rights through either the
purchase or origination of mortgage loans (originated mortgage
servicing rights) and sells or securitizes those loans with
servicing rights retained, it allocates the total cost of the
mortgage loans to the mortgage servicing rights and the loans
(without the mortgage loan servicing rights) based on their
relative fair values. To determine the fair value of the servicing
rights created, the Bank uses the market prices under comparable
servicing sales contracts. The cost of mortgage servicing rights
is amortized in proportion to, and over the period of, estimated
net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market
interest rate.
Pension plan
The Bank has a contributory 401(k) pension plan covering all
employees who meet certain age and service requirements. The plan
is voluntary, and the Bank contributes fifty cents for every dollar
contributed by participants, up to six percent of each
participant's salary.
Pension costs are charged to salaries and employee benefits expense
and are funded as accrued.
The Bank terminated its defined benefit pension plan effective
February 15, 1996 by acquiring annuity contracts and by
transferring the participants' vested benefits to the Bank's 401(k)
plan or individual IRA contracts as directed by the employees. The
gain associated with this settlement for $166,543 is included in
the accompanying income statement for 1996.
Advertising costs
The Bank expenses advertising costs as incurred.
<PAGE> F-61
Note 1. Significant Accounting Policies (Continued)
Changes in accounting policies
Effective January 1, 1998, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of this statement had no impact on the Bank's net income
or stockholders' equity. Comprehensive income includes the
reported net income of a company adjusted for items that are
currently accounted for as direct entries to equity, such as the
mark-to-market adjustment on securities available-for-sale, foreign
currency items, and minimum pension liability adjustments. The
December 31, 1998, 1997, and 1996 financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective
for fiscal years beginning after June 15, 1999. Management is
currently evaluating the impact of this Statement on the Bank's
financial statements.
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. The number of shares outstanding during 1998, 1997, and
1996 was 152,000.
Income taxes
The Bank 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 Bank'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 Bank's deferred tax assets are recognized as
deferred income tax expense or benefit based on management's
judgments relating to the realizability of such assets.
Off balance sheet financial instruments
In the ordinary course of business, the Bank has entered into off
balance sheet financial instruments consisting of commitments to
extend credit, 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 Bank 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.
<PAGE> F-62
Note 1. Significant Accounting Policies (Continued)
Investment securities: Fair values for investment securities 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. Fair values for non-marketable
equity securities are based on their carrying amounts.
Federal Home Loan Bank stock: The carrying amount of this stock
approximates its fair value.
Loans: For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on
carrying amounts. The fair values for other loans (for example,
fixed rate 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.
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 are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to
a schedule of aggregated contractual maturities on such time
deposits.
Accrued interest: The carrying amounts of accrued interest
approximates their fair values.
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.
Transfer and servicing of financial assets and extinguishment of
liabilities
The Bank adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
which became effective for such transactions occurring after
December 31, 1996 and supersedes SFAS No. 122. (The effective date
of certain provisions of the statement was delayed one year until
January 1, 1998 by the subsequent issuance of FASB Statement No.
127.) The statement applies prospectively; earlier or retroactive
application is not permitted.
Under this statement, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings and includes standards
for measuring and amortizing servicing assets and liabilities.
The adoption of Statement No. 125 (as amended by Statement No. 127)
did not have a material effect on the Bank's financial statements.
<PAGE> F-63
Note 2. Investment Securities
Investment securities available-for-sale consist of the following
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $11,144,384 $130,489 $ 3,281 $11,271,592
State and political
subdivisions -0- -0- -0- -0-
Other securities 8,810,924 107,475 15,589 8,902.810
----------- -------- ------- -----------
$19,955,308 $237,964 $18,870 $20,174,402
=========== ======== ======= ===========
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $11,183,929 $ 54,279 $11,054 $11,227,154
State and political
subdivisions 85,000 1,599 -0- 86,599
Other securities 6,511,074 65,212 1,792 6,574,494
----------- -------- ------- -----------
$17,780,003 $121,090 $12,846 $17,888,247
=========== ======== ======= ===========
</TABLE>
Included in the caption "U.S. Government and agency securities" are
mortgage-backed securities with a carrying amount of $434,804 and
$730,777 at December 31, 1998 and 1997, respectively.
Investment securities with a carrying amount of $512,344 and
$499,610 at December 31, 1998 and 1997, respectively, were pledged
as collateral on public deposits and for other purposes as required
or permitted by law.
All realized gains and losses in 1998, 1997, and 1996 were from the
sale of securities available-for-sale. Proceeds on the sale of
securities available-for-sale were $1,264,662, $1,263,182, and
$502,031 in 1998, 1997 and 1996, respectively. Realized gains from
sales of investments available-for-sale were $3,167, $5,259, and
$537 with realized losses of $250, $168, and $-0- for the years
1998, 1997, and 1996, respectively.
The amortized cost and fair value of securities available for sale
as of December 31, 1998 by contractual maturity are shown below.
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
following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 1,751,881 $ 1,763,125
Due from one to five years 13,797,009 13,960,322
Due from five to ten years 3,969,114 4,011,563
Mortgage backed securities 434,804 436,892
Other securities 2,500 2,500
----------- -----------
$19,955,308 $20,174,402
=========== ===========
</TABLE>
<PAGE> F-64
Note 3. Loans
The composition of net loans at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and commercial real estate $25,553,341 $23,834,828
Real estate 25,928,555 22,874,671
Installment and other 17,531,262 21,003,478
----------- -----------
69,013,158 67,712,977
----------- -----------
Allowance for loan losses (1,039,856) (1,017,071)
Net deferred loan fees, premiums, and
discounts 16,534 64,543
----------- -----------
$67,989,836 $66,760,449
=========== ===========
</TABLE>
Mortgage loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of
mortgage loans serviced for others were $6,227,350 and $6,139,101
at December 31, 1998 and 1997, respectively. Mortgage servicing
rights of $4,025 and $5,762 were capitalized in 1998 and 1997,
respectively.
The Bank considers all nonaccrual loans as impaired loans. As of
December 31, 1998 and 1997, these approximated $423,229 and
$611,594, respectively. These loans were subject to allowances for
loan losses of $47,588 and $23,776 which represented the total
allowance for loan losses related to impaired loans at December 31,
1998 and 1997, respectively. The average balance of these loans
amounted to approximately $546,250 and $694,615 at December 31,
1998 and 1997, respectively. Cash receipts on impaired loans
approximated $49,130 and $69,228 in 1998 and 1997, respectively, of
which $41,556 and $57,064 was applied to the principal balances of
the loans, and $7,574 and $12,164 was recorded as interest income.
The Bank is not committed to lend additional funds to debtors whose
loans have been modified.
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $1,017,071 $ 993,463 $ 957,458
Provision for loan loss 300,000 300,000 280,000
Recoveries of amounts charged off 49,824 36,018 52,744
Transfer from other reserve -0- -0- 13,877
---------- ---------- ----------
1,366,895 1,329,481 1,304,079
Amounts charged off 327,039 312,410 310,616
---------- ---------- ----------
Balance, ending $1,039,856 $1,017,071 $ 993,463
========== ========== ==========
</TABLE>
<PAGE> F-65
Note 5. Premises and Equipment
The major classes of premises and equipment and the total
accumulated depreciation at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 176,329 $ 176,329
Buildings and improvements 1,461,817 1,443,241
Furniture and equipment 1,778,496 1,717,152
Computer software 601,133 480,615
Automobile 20,109 26,663
----------- -----------
4,037,884 3,844,000
Less accumulated depreciation (2,109,730) (1,912,944)
----------- -----------
$ 1,928,154 $ 1,931,056
=========== ===========
</TABLE>
Depreciation included in occupancy, equipment and other operating
expense amounted to $279,352, $231,192 and $229,190 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Occupancy expense is shown in the statements of income net of
rental income of $38,900 in 1998, $40,050 in 1997 and $38,200 in
1996.
The Bank leases the Green Mountain Mall branch from a director.
The lease is classified as an operating lease and provides for
minimum annual rentals of $24,412 expiring in 2000. The Bank has
the option to renew the lease for five years. In addition, the
Bank leases certain equipment under operating leases expiring at
various intervals through 1999. As of December 31, 1998, future
minimum rental payments under noncancellable operating leases were
as follows:
<TABLE>
<S> <C>
1999 $25,011
2000 12,206
-------
$37,217
=======
</TABLE>
Total rental expense amounted to $35,138, $30,353, and $37,479 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Note 6. Deposits
The following is a summary of time certificates of deposit by
maturity at December 31, 1998:
<TABLE>
<S> <C>
Maturing in 1999 $30,525,013
Maturing in 2000 7,739,409
Maturing in 2001 6,613,383
Maturing in 2002 275,567
Maturing in 2003 and after 158,594
-----------
$45,311,966
===========
</TABLE>
<PAGE> F-66
Note 6. Deposits (Continued)
A maturity distribution of time certificates of deposits in
denominations of $100,000 or more at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Three months or less $ 627,530 $1,892,132
Over three months through six months 1,136,129 548,436
Over six months through twelve months 3,265,671 1,721,603
Over twelve months 4,787,037 4,921,002
---------- ----------
$9,816,367 $9,083,173
========== ==========
</TABLE>
Note 7. Borrowed Funds
Federal Home Loan Bank borrowings for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
5.95% note payable to FHLB, payable in
monthly installments of $13,353 including
interest, through March 24, 2003 $ 609,595 $ -0-
6.06% note payable to FHLB, payable in
monthly installments of $7,341 including
interest, through March 23, 2005 461,118 -0-
6.06% note payable to FHLB, payable in
monthly installments of $5,589 including
interest, through March 24, 2008 475,386 -0-
---------- -----
$1,546,099 $ -0-
========== =====
</TABLE>
Principal maturities of borrowed funds as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999 $ 227,347
2000 241,337
2001 256,378
2002 272,894
2003 181,122
Thereafter 367,021
----------
$1,546,099
==========
</TABLE>
<PAGE> F-67
Note 7. Borrowed Funds (Continued)
The Company also maintains a $3,040,000 IDEAL Way Line of Credit
with the Federal Home Loan Bank of Boston. Outstanding advances
under this line were $-0- at December 31, 1998 and 1997. Interest
on these borrowings is chargeable at a rate determined daily by the
Federal Home Loan Bank and payable monthly.
Collateral on these borrowings consists of Federal Home Loan Bank
stock purchased by the Company, all funds placed in deposit with
the Federal Home Loan Bank, qualified first mortgages held by the
Company, and any additional holdings which may be pledged as
security.
Note 8. Income Taxes
Income taxes for the years ended December 31, 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently paid or payable $557,703 $511,460 $478,621
Deferred (10,053) (13,274) -0-
-------- -------- --------
$547,650 $498,186 $478,621
======== ======== ========
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U. S. federal income tax rate of 34 percent to income
before income taxes as a result of the following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $560,706 $512,574 $474,891
Tax exempt interest (20,888) (19,456) (18,596)
Excise taxes -0- -0- 11,325
Disallowed interest expense 3,822 4,227 5,558
Other 4,010 841 5,443
-------- -------- --------
$547,650 $498,186 $478,621
======== ======== ========
</TABLE>
The deferred income tax provision consisted of the following items
at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Depreciation $ (9,409) $ 13,185 $ 19,545
Deferred loan fees 8,247 7,504 6,199
Bad debts (11,472) (29,255) (10,351)
Pension -0- -0- (17,541)
Nonaccrual loan interest 1,985 (5,967) (8,159)
Automobile insurance provision -0- -0- 2,082
Other 596 1,259 8,225
-------- -------- --------
$(10,053) $(13,274) $ -0-
======== ======== ========
</TABLE>
<PAGE> F-68
Note 8. Income Taxes (Continued)
Listed below are the significant components of the net deferred tax
asset at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Bad debts $ 238,140 $ 226,668
Nonaccrual loan interest 23,078 25,063
Deferred loan fees 9,691 17,938
--------- ---------
Total deferred tax asset 270,909 269,669
Valuation allowance -0- -0-
--------- ---------
Total deferred tax asset, net
of valuation allowance 270,909 269,669
--------- ---------
Components of the deferred tax liability:
Depreciation (100,970) (110,379)
Other (18,739) (18,143)
Unrealized gain on securities
available-for-sale (74,492) (36,803)
--------- ---------
Total deferred tax liability (194,201) (165,325)
--------- ---------
Net federal deferred tax asset $ 76,708 $ 104,344
========= =========
</TABLE>
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 tax asset will be realized.
The net deferred income tax assets are included in the caption
"Other assets" on the balance sheets at December 31, 1998 and 1997,
respectively.
Note 9. Pension Plan
The Bank maintains a 401(k) plan and a discretionary profit sharing
plan. The plans cover all employees meeting certain eligibility
requirements. Employees are permitted to contribute any amount, up
to 10% of their compensation, to the 401(k) plan. The Bank makes
matching contributions up to 6% of an employee's compensation. The
Bank's 401(k) matching contributions were $30,852, $27,772, and
$21,295 for 1998, 1997, and 1996, respectively.
Contributions to the profit sharing plan are at the discretion of
the Board of Directors. Contributions to the plan were $74,934,
$67,935, and $11,704 for 1998, 1997, and 1996, respectively.
As discussed in Note 1, the Bank terminated its defined benefit
pension plan effective February 15, 1996.
<PAGE> F-69
Note 10. Financial Instruments with Off-Balance-Sheet Risk
The Bank 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 Bank has in
particular classes of financial instruments.
The Bank'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 Bank uses
the same credit policies in making commitments and conditional
obligations as they do 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 Bank controls the credit risk of their interest rate cap
agreements through credit approvals, limits, and monitoring
procedures.
The Bank generally requires collateral or other security to support
financial instruments with credit risk.
<TABLE>
<CAPTION>
Contract or
Notional Amount
--------------------
1998 1997
---- ----
<S> <C> <C>
Financial instruments whose contract
amount represent credit risk:
Commitments to extend credit $4,516,181 $ 484,535
========== ==========
Unused lines of credit $3,017,879 $3,300,876
========== ==========
Standby letters of credit and
commercial letters of credit $ 218,016 $ 212,768
========== ==========
Construction lines $ 239,093 $ 596,808
========== ==========
Home equity lines $1,142,764 $1,123,557
========== ==========
</TABLE>
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 Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of
the counter-party. Collateral held varies but may include real
estate, accounts receivable, inventory, property, plant, and
equipment, and income-producing commercial properties.
<PAGE> F-70
Note 10. Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit are conditional commitments issued by the
Bank 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.
The Bank enters into a variety of interest rate contracts,
including interest rate caps and floors written on adjustable rate
loans in managing its interest rate exposure. Interest rate caps
and floors on loans, written by the Bank enables customers to
transfer, modify, or reduce their interest rate risk.
Note 11. Commitments and Contingencies
In the normal course of business, the Bank is involved in various
legal proceedings. In the opinion of management, after consulting
with the Bank's legal counsel, any liability resulting from such
proceedings would not have a material adverse effect on the Bank's
financial statements.
Note 12. Fair Values of Financial Instruments
The estimated fair values of the Bank's financial instruments at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
-------- ---------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,548,180 $ 7,548,180
Securities available-for-sale 20,174,402 20,174,402
Federal Home Loan Bank stock 277,800 277,800
Loans, net 67,989,836 68,273,428
Accrued interest receivable 724,032 724,032
Financial liabilities:
Deposits 86,401,587 86,875,826
Borrowed funds 1,546,099 1,530,727
Accrued interest payable 113,880 113,880
</TABLE>
<PAGE> F-71
Note 12. Fair Values of Financial Instruments (Continued)
The estimated fair values of the Bank's financial instruments at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
-------- ---------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,451,483 $ 4,451,483
Securities available-for-sale 17,888,247 17,888,247
Federal Home Loan Bank stock 263,200 263,200
Loans, net 66,760,449 67,143,079
Accrued interest receivable 687,408 687,408
Financial liabilities:
Deposits 82,432,372 82,565,542
Accrued interest payable 119,205 119,205
</TABLE>
The estimated fair values of deferred fees on commitments to extend
credit and letters of credit were immaterial at December 31, 1998
and 1997.
The carrying amounts in the preceding table are included in the
balance sheets under the applicable captions.
Note 13. Transactions with Related Parties
The Bank 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 as of December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning $ 41,611 $ 60,269
New loans 287,753 23,079
Repayments (226,296) (41,737)
--------- --------
Balance, ending $ 103,068 $ 41,611
========= ========
</TABLE>
Total deposits of related parties approximated $831,418 and
$813,720 at December 31, 1998 and 1997.
<PAGE> F-72
Note 14. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash with
Federal Reserve Banks. The totals of those reserve balances were
approximately $418,000 and $363,000 at December 31, 1998 and 1997,
respectively. In addition, the Bank was required to maintain
contracted clearing balances of $150,000 at December 31, 1998 and
1997, respectively.
Note 15. Regulatory Matters
The Bank is 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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Bank's 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 Bank 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, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank 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 Institution's category.
<PAGE> F-73
Note 15. Regulatory Matters (Continued)
The Bank's actual capital amounts (000's omitted) and ratios are
also presented in the table.
<TABLE>
<CAPTION>
Minimums
To be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes: Action Provisions:
Actual ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to
risk weighted
assets) $11,219 16.02% $5,602 8.0% $7,003 10.0%
Tier I capital
(to risk weighted
assets) $10,342 14.77% $2,801 4.0% $4,202 6.0%
Tier I capital
(to average
assets) $10,342 10.37% $3,990 4.0% $4,988 5.0%
As of December 31, 1997:
Total capital (to
risk weighted
assets) $10,433 15.40% $5,419 8.0% $6,773 10.0%
Tier I capital
(to risk weighted
assets) $ 9,584 14.15% $2,709 4.0% $4,064 6.0%
Tier I capital
(to average
assets) $ 9,584 10.23% $3,749 4.0% $4,686 5.0%
</TABLE>
Note 16. Common Stock
The common stock of the Bank is not listed on any exchange. The
Bank is its own transfer agent. The approximate range of the high
and low bid prices for the Bank's common stock has been as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Qtr. $59.00 $58.00 $43.00 $43.00
2nd Qtr. $66.00 $61.00 $45.00 $45.00
3rd Qtr. $90.00 $53.00 $49.00 $40.00
4th Qtr. $72.00 $70.00 $58.00 $50.00
</TABLE>
Cash dividends were declared in 1998, 1997, and 1996 in the amounts
of $2.25, $2.00, and $1.65 per share payable to stockholders of
record as of February 16, 1999, February 16, 1998, and February 17,
1997, respectively.
<PAGE> F-74
Note 17. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 1998, 1997,
and 1996 is presented below:
<TABLE>
<CAPTION>
Quarters in 1998 ended
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating income $2,054,942 $2,131,529 $2,171,098 $2,278,862
Operating expenses 1,833,519 1,815,935 1,904,795 1,980,698
---------- ---------- ---------- ----------
Net income $ 221,423 $ 315,594 $ 266,303 $ 298,164
========== ========== ========== ==========
Earnings per common share $1.46 $2.08 $1.75 $1.96
========== ========== ========== ==========
<CAPTION>
Quarters in 1997 ended
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating income $1,951,527 $2,021,343 $2,043,330 $2,215,669
Operating expenses 1,733,529 1,737,043 1,831,474 1,920,437
---------- ---------- ---------- ----------
Net income $ 217,998 $ 284,300 $ 211,856 $ 295,232
========== ========== ========== ==========
Earnings per common share $1.43 $1.87 $1.39 $1.95
========== ========== ========== ==========
<CAPTION>
Quarters in 1996 ended
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating income $1,876,851 $1,909,971 $1,941,268 $2,047,946
Operating expenses 1,682,464 1,651,035 1,718,500 1,805,920
---------- ---------- ---------- ----------
Net income $ 194,387 $ 258,936 $ 222,768 $ 242,026
========== ========== ========== ==========
Earnings per common share $1.28 $1.70 $1.47 $1.59
========== ========== ========== ==========
</TABLE>
<PAGE> F-75
Note 18. Other Income and Other Expenses
The components of other income and other expenses which are in
excess of one percent of total revenues are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
NSF charges $ 364,824 $ 311,341 $ 234,189
Trust income 113,250 85,911 80,000
Gain on pension termination -0- -0- 166,543
Commissions, fees, and collections 112,415 131,053 79,463
Other 152,867 153,507 130,946
---------- ---------- ----------
$ 743,356 $ 681,812 $ 691,141
========== ========== ==========
Expenses
Employee group insurance $ 136,770 $ 131,198 $ 133,441
Employer's FICA expense 100,430 98,699 89,549
Depreciation - Furniture
and fixtures 159,549 134,535 137,501
Equipment maintenance contracts 102,214 93,764 101,961
Postage 86,199 78,389 71,486
Other outside services 78,815 75,506 102,952
Directors' fees 87,400 86,400 85,000
Other 2,463,059 2,375,033 2,180,040
---------- ---------- ----------
$3,214,436 $3,073,524 $2,901,930
========== ========== ==========
</TABLE>
Note 19. Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the current year presentation.
<PAGE> F-76
APPENDIX A
AFFILIATION AGREEMENT
BETWEEN
UNION BANKSHARES, INC.
AND
CITIZENS SAVINGS BANK AND TRUST COMPANY
dated as of February 16, 1999
<PAGE> A-1
TABLE OF CONTENTS
BACKGROUND 5
Section 1.01 The Merger of Interim Bank with and into CSBT 6
Section 1.02 Shareholder Agreements 6
Section 1.03 Affiliate Letters 6
Section 1.04 Stock Registration Agreement 7
Section 1.05 Closing; Certificate of Merger 7
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CSBT 8
Section 2.01 Organization 8
Section 2.02 Capitalization 8
Section 2.03 Corporate Authority; No Violation 9
Section 2.04 Consents and Approvals 11
Section 2.05 Regulatory Reports and Financial Statements 11
Section 2.06 Taxes 12
Section 2.07 No Material Adverse Change 12
Section 2.08 Contracts 12
Section 2.09 Ownership of Property 13
Section 2.10 Loans 14
Section 2.11 Allowance for Possible Loan Losses 14
Section 2.12 Employee Benefit Plans; ERISA 15
Section 2.13 Labor Matters 16
Section 2.14 Brokers and Finders 17
Section 2.15 Certain Accounting Matters 17
Section 2.16 Real Estate Owned 17
Section 2.17 Legal Proceedings 18
Section 2.18 Compliance with Laws 18
Section 2.19 Insurance 19
Section 2.20 Repurchase Agreements 19
Section 2.22 Environmental Matters 19
Section 2.23 Certain Information 20
Section 2.24 Administration of Trust Accounts 20
Section 2.25 Information in Applications 21
Section 2.26 Accounting, Tax and Regulatory Matters 21
Section 2.27 Derivative Transactions 21
Section 2.28 Year 2000 21
Section 2.29 Related Party Transactions 22
Section 2.30 Quality of Representations 22
<PAGE> A-2
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UBI 22
Section 3.01 Organization 22
Section 3.02 Capitalization 23
Section 3.03 Corporate Authority; No Violation 24
Section 3.04 Consents and Approvals 25
Section 3.05 Regulatory Reports and Financial Statements 26
Section 3.06 Taxes 26
Section 3.07 No Material Adverse Change 27
Section 3.08 Ownership of Property 27
Section 3.09 Loans 27
Section 3.10 Allowance for Possible Loan Losses 28
Section 3.11 Employee Benefit Plans; ERISA 28
Section 3.12 Brokers and Finders 30
Section 3.13 Certain Accounting Matters 30
Section 3.14 Legal Proceedings 30
Section 3.15 Compliance with Laws 31
Section 3.16 Insurance 31
Section 3.17 Deposit Insurance; No Brokered Deposits 31
Section 3.18 Environmental Matters 31
Section 3.19 Certain Information 32
Section 3.20 Information in Applications 32
Section 3.21 Accounting, Tax and Regulatory Matters 33
Section 3.22 Year 2000 33
Section 3.23 Quality of Representations 33
ARTICLE IV
COVENANTS 33
Section 4.01 Shareholders' Meetings 33
Section 4.02 Proxy Statement; Registration Statement 34
Section 4.03 Applications 34
Section 4.04 Best Efforts 35
Section 4.05 Investigation and Confidentiality 35
Section 4.06 Publicity 36
Section 4.07 Covenants of CSBT 36
Section 4.08 Covenants of UBI 39
Section 4.09 Affiliates 40
Section 4.10 Boards of Directors 41
Section 4.11 Management; Employees; Employee Benefits 41
Section 4.12 Listing of UBI Common Stock 42
<PAGE> A-3
Section 4.13 Reservation of Right to Revise Transaction 42
ARTICLE V
CONDITIONS PRECEDENT 43
Section 5.01 Conditions Precedent - Mutual 43
Section 5.02 Conditions Precedent - UBI 45
Section 5.03 Conditions Precedent - CSBT 46
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT 47
Section 6.01 Termination 47
Section 6.02 Effect of Termination 48
Section 6.03 Termination Fee 49
Section 6.04 Survival of Representations, Warranties and Covenants 50
Section 6.05 Waiver 50
Section 6.06 Indemnification and Directors' and Officers'
Liability Insurance 50
ARTICLE VII
DEFINITIONS 52
Section 7.01 Definitions 52
ARTICLE VIII
MISCELLANEOUS 58
Section 8.01 Expenses 58
Section 8.02 Entire Agreement 58
Section 8.03 No Third Party Beneficiaries 59
Section 8.04 No Assignment 59
Section 8.05 Notices 59
Section 8.06 No Employment Solicitation 60
Section 8.07 Captions 60
Section 8.08 Counterparts 60
Section 8.09 Governing Law 60
Section 8.10 Construction and Interpretation 61
Section 8.11 Effect of Investigations 61
Section 8.12 Severability 61
Section 8.13 Amendment or Supplement 61
<PAGE> A-4
THIS AFFILIATION AGREEMENT dated as of February 16, 1999 is made by and
between Union Bankshares, Inc. ("UBI"), a Vermont corporation, having its
principal place of business at 20 Main Street, Morrisville, Vermont 05661, and
Citizens Savings Bank and Trust Company ("CSBT"), a Vermont-chartered
commercial bank, having its principal place of business at 61 Railroad Street,
St. Johnsbury, Vermont 05819.
BACKGROUND
1. UBI, and CSBT desire to effect an affiliation pursuant to which CSBT
will become a wholly-owned subsidiary of UBI, through a merger of CSBT with an
interim Vermont-chartered commercial bank to be organized by UBI as a wholly-
owned subsidiary for the sole purpose of accomplishing the affiliation
("Interim Bank") under the Articles of Association and name of CSBT, all in
accordance with the terms and conditions set forth herein and in the Agreement
and Plan of Merger to be executed by and among CSBT, Interim Bank and UBI,
substantially in the form attached as Exhibit A (the "Plan of Merger").
2. At or prior to the execution and delivery of this Agreement, and as
a condition and inducement to UBI's execution of this Agreement, the
directors, executive officers and 5% or more shareholders of CSBT have
executed, in favor of UBI, a Shareholder Agreement dated the date hereof in
the form attached hereto as Exhibit B (the "CSBT Shareholder Agreement").
3. At or prior to the execution and delivery of this Agreement, and as
a condition and inducement to CSBT's execution of this Agreement, the
directors, executive officers and 5% or more shareholders of UBI have
executed, in favor of CSBT, a Shareholder Agreement dated the date hereof in
the form attached hereto as Exhibit C (the "UBI Shareholder Agreement").
4. UBI and CSBT desire to provide the terms and conditions that will
govern their proposed affiliation.
Capitalized terms not otherwise defined herein are defined in Article
VII of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, the
parties hereto, intending to be legally bound, do hereby agree as follows:
<PAGE> A-5
Section 1.01 The Merger of Interim Bank with and into CSBT
Subject to the terms and conditions of this Agreement, the Plan of
Merger and the provisions of applicable federal and state law, Interim Bank
will merge with and into CSBT, with CSBT being the surviving corporation
(sometimes hereafter referred to as the "Continuing Bank"), pursuant to
provisions of, and with the effect provided in, the VBL and the Plan of
Merger. The Plan of Merger provides for the terms and conditions of the
Merger, including but not limited to the conversion and exchange of CSBT
Common Stock into UBI Common Stock and the exercise of dissenters' rights by
CSBT shareholders under Section 1006 of the VBL, all of which terms and
provisions are incorporated herein and made a part of this Agreement by
reference, whether or not the Plan of Merger is executed on or subsequent to
the date hereof. As a result of the Merger, CSBT shall become a wholly owned
subsidiary of UBI and the holders of CSBT Common Stock, other than such
holders who have exercised their dissenters' rights under the VBL, shall
become holders of UBI Common Stock.
Section 1.02 Shareholder Agreements
(a) CSBT Shareholder Agreement. As a condition to, and in
consideration of, UBI's obligations hereunder, each CSBT director, executive
officer and beneficial owner of 5% or more of the outstanding CSBT Common
Stock has executed and delivered to UBI a Shareholder Agreement in the form
attached hereto as Exhibit B, pursuant to which such Person has agreed to vote
all shares of CSBT Common Stock beneficially owned by such Person in favor of
the Merger.
(b) UBI Shareholder Agreement. As a condition to, and in consideration
of, CSBT's obligations hereunder, each UBI director, executive officer and,
except as otherwise set forth on the UBI Disclosure Schedules, each beneficial
owner of 5% or more of the outstanding UBI Common Stock has executed and
delivered to CSBT a Shareholder Agreement in the form attached hereto as
Exhibit C, pursuant to which each such Person has agreed to vote all shares of
UBI Common Stock beneficially owned by such Person in favor of a charter
amendment increasing UBI's authorized Common Stock in order to provide a
sufficient number of shares to effect the Merger.
Section 1.03 Affiliate Letters
(a) CSBT Affiliate Letters. CSBT will identify in writing to UBI,
after consultation with counsel and within fifteen (15) days after execution
of the Agreement, all Persons it believes may be deemed to be "affiliates" of
CSBT, as that term is defined for
<PAGE> A-6
purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act and SEC
Accounting Series Releases Nos. 130 and 135 (the "CSBT Affiliates"). CSBT will
use all reasonable efforts to cause each Person who is identified as a CSBT
Affiliate to deliver to UBI at least forty(40) days prior to the anticipated
Effective Time an executed copy of the CSBT Affiliate Letter in the form
attached as Exhibit D. Prior to the Effective Time, CSBT will amend and
supplement its written list of CSBT Affiliates as circumstances warrant and use
all reasonable efforts to cause each additional person who is identified as a
CSBT Affiliate to execute a copy of the CSBT Affiliate Letter.
(b) UBI Affiliate Letters. UBI will identify in writing to CSBT, after
consultation with counsel and within fifteen (15) days after execution of this
Agreement, all Persons it believes may be deemed to be "affiliates" of UBI, as
that term is defined for purposes of paragraphs (c) and (d) of Rule 145 under
the Securities Act and SEC Accounting Series Releases Nos. 130 and 135 (the
"UBI Affiliates"). UBI will use all reasonable efforts to cause each Person
who is identified as a UBI Affiliate to deliver to CSBT at least forty(40)
days prior to the anticipated Effective Time an executed copy of the UBI
Affiliate Letter in the form attached as Exhibit E. Prior to the Effective
Time, UBI will amend and supplement its written list of UBI Affiliates as
circumstances warrant and use all reasonable efforts to cause each additional
person who is identified as a UBI Affiliate to execute a copy of the UBI
Affiliate Letter.
(c) Publication of Combined Financial Results. UBI will use its best
efforts to publish promptly following the end of the first whole calendar
month after the Effective Time, financial results covering at least thirty
(30) days of post-Merger combined operations, as contemplated by and in
accordance with the terms of SEC Accounting Series Release No. 135.
Section 1.04 Stock Registration Agreement
UBI and certain Affiliates of CSBT shall enter into a Stock Registration
Agreement in the form attached hereto as Exhibit F, pursuant to which UBI will
agree to register for resale by such Affiliates up to 150,000 shares of UBI
Common Stock, upon and subject to the terms and conditions specified therein.
Section 1.05 Closing; Certificate of Merger
The transactions contemplated by the Transaction Documents shall be
consummated at a closing to be held at such location as the parties shall
agree on the fifth business day following satisfaction of the conditions to
consummation of the Merger set forth in Article
<PAGE> A-7
5 hereof or such other date as may be agreed upon by the parties hereto (the
"Closing Date"). In connection with such Closing, UBI, Interim Bank and CSBT
shall execute a certificate of merger and shall cause such certificate to be
filed with the Vermont Department and the Vermont Secretary of State in
accordance with the VBL. The Merger shall be effective at the time and on the
date specified in such certificate of merger (the "Effective Time").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CSBT
CSBT hereby represents and warrants to UBI that, except as specifically
set forth in the CSBT Disclosure Schedules delivered to UBI on the date
hereof:
Section 2.01 Organization
(a) Organization and Qualification. CSBT is a Vermont-chartered
commercial bank duly organized, validly existing and in good standing under
the laws of the State of Vermont. CSBT has the corporate power and authority
to carry on its business and operations as now being conducted and to own and
operate its properties and assets. CSBT is not qualified or licensed to do
business as a foreign corporation in any other jurisdiction and is not
required to be so qualified or licensed as the result of the ownership or
leasing of property or the conduct of its business, except where the failure
to be so qualified would not have a material adverse effect on CSBT.
(b) Subsidiaries and Parent Companies. CSBT has no Subsidiaries and is
not under the control of any bank holding company, within the meaning of the
BHC Act.
(c) Record Books. The minute books of CSBT accurately record, in all
material respects, all material corporate actions of CSBT's shareholders and
board of directors (including committees) through the date of this Agreement.
(d) Charter and By-Laws. CSBT has delivered to UBI true and correct
copies of the Articles of Association and By-Laws of CSBT, as in effect on the
date hereof.
Section 2.02 Capitalization
(a) Authorized Stock. The authorized capital stock of CSBT consists of
304,000 shares of common stock, with a par value of $1.00 ("CSBT Common
Stock"), of which 152,000 shares were outstanding, validly issued, fully paid
and nonassessable and not
<PAGE> A-8
subject to any preemptive rights as of December 31, 1998 and as of the date
hereof. CSBT has no other authorized classes of capital stock.
(b) Options, Rights, Etc. CSBT does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments, rights
agreements or other agreements of any character requiring CSBT to issue,
deliver or sell, or cause to be issued, delivered or sold any shares of CSBT
Common Stock or any other equity or debt security of CSBT or any securities
convertible into, exchangeable for or representing the right to subscribe for,
purchase or otherwise receive, any shares of CSBT Common Stock or any other
equity or debt security of CSBT, or obligating CSBT to grant, extend or enter
into any such subscriptions, options, warrants, calls, commitments, rights, or
agreements. As of the date hereof, there are no outstanding contractual
obligations of CSBT to repurchase, redeem or otherwise reacquire any
outstanding shares of CSBT Common Stock. CSBT has not repurchased, redeemed
or otherwise reacquired any shares of CSBT Common Stock at any time since
December 31, 1996.
(c) Debt Securities. CSBT does not have outstanding any debentures,
capital notes or other debt securities.
(d) Ownership of Other Companies. CSBT does not own any equity
interest, directly or indirectly, in any other company nor does it control any
other company, except for equity interests held as a legal investment of CSBT
in its investment securities portfolio, equity interests held by CSBT in a
fiduciary capacity, and equity interests held as collateral in connection with
the commercial loan activities of CSBT. CSBT does not own or hold any
outstanding subscriptions, options, warrants, calls, commitments, agreements
or other rights to acquire any other company's capital stock or other equity
interests in any other Person.
(e) Significant Shareholders. Except as set forth in the CSBT
Disclosure Schedules, to the best knowledge of CSBT, (i) no person or "group"
(as that term is used in Section 13(d)(3) of the Exchange Act) is the
beneficial owner (as defined in Section 13(d) of the Exchange Act) of 5% or
more of the outstanding shares of CSBT Common Stock, and (ii) each such 5% or
more shareholder has or will execute the CSBT Shareholder Agreement on or as
of the date of this Affiliation Agreement.
Section 2.03 Corporate Authority; No Violation
(a) Corporate Authority. CSBT has full corporate power and authority
to execute and deliver this Agreement and the other Transaction Documents and
to consummate the transactions contemplated by the Transaction Documents. The
execution and delivery
<PAGE> A-9
of the Transaction Documents by CSBT and the consummation by CSBT of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of CSBT and, except for approval by the
shareholders of CSBT as required under the VBL and CSBT's Articles of
Association and By-Laws, no other corporate proceedings on the part of CSBT
are necessary to consummate the transactions contemplated in the Transaction
Documents. This Agreement has been, and upon their execution the other
Transaction Documents will be, duly and validly executed and delivered
by CSBT, subject only to approval of the shareholders of CSBT as required
under the VBL and CSBT's Articles of Association and By-Laws and to receipt of
the Regulatory Approvals referred to in Section 3.04, and each such
Transaction Document constitutes, or upon its execution will constitute, the
valid and binding obligation of CSBT, enforceable against CSBT in accordance
with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting depository institutions and creditors' rights generally and subject,
as to enforceability, to general principles of equity.
(b) No Violation. Subject to receipt of CSBT shareholder approval and
to receipt of the Regulatory Approvals referred to in Section 3.04 and
compliance with any conditions contained therein, neither (i) the execution
and delivery of the Transaction Documents by CSBT, (ii) the consummation of
the transactions contemplated in the Transaction Documents, nor (iii)
compliance by CSBT with any of the terms or provisions of the Transaction
Documents, does or will (A) conflict with or result in a breach of any
provision of the Articles of Association or By-Laws of CSBT; (B) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to CSBT or any of its properties or assets; or (C)
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in a right of termination or acceleration
or the creation of any lien, security interest, charge or other encumbrance
upon any of the properties or assets of CSBT under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement, commitment or other instrument or obligation
to which CSBT is a party, or by which it or any of its properties or assets
may be bound or affected, except for such violations, conflicts, breaches or
defaults under clause (ii) or (iii) hereof which, either individually or in
the aggregate, will not result in a Material Adverse Change with respect to
CSBT or impair the ability of CSBT to perform any of its material obligations
under this Agreement.
<PAGE> A-10
Section 2.04 Consents and Approvals
Except for the Regulatory Approvals referred to in Section 3.04 hereof and
compliance with any conditions contained therein, and the approval of this
Agreement and the Plan of Merger by the shareholders of CSBT under the VBL, no
consents or approvals of, or filings or registrations with, any Regulatory
Authority are necessary, and no consents or approvals of any third parties are
now, or will be, necessary in connection with (i) the execution and delivery
of the Transaction Documents by CSBT; (ii) the consummation by CSBT of the
transactions contemplated by the Transaction Documents; or (iii) compliance by
CSBT with the terms and provisions of the Transaction Documents. CSBT has no
reason to believe that any required Regulatory Approvals will not be received
or will be received with materially burdensome conditions, limitations or
restrictions unacceptable to the parties hereto or which would adversely
impact CSBT's ability to consummate the transactions contemplated by this
Agreement.
Section 2.05 Regulatory Reports and Financial Statements
(a) CSBT Regulatory Reports. CSBT has previously delivered, or will
deliver, to UBI the CSBT Regulatory Reports. The CSBT Regulatory Reports have
been, or will be, prepared in accordance with applicable regulatory accounting
principles and practices applied on a consistent basis throughout the periods
covered by such reports, and fairly present, or will fairly present, the
financial position, results of operations and changes in shareholder's equity
of CSBT as of and for the periods ended on the dates thereof.
(b) CSBT Financials. CSBT has previously delivered, or will deliver to
UBI the CSBT Financials. The CSBT Financials have been, or will be, prepared
in accordance with GAAP applied on a consistent basis throughout the periods
covered by such statements, and fairly present, or will fairly present, the
financial position, results of operations and cash flows of CSBT as of and for
the periods ended or ending on the dates thereof.
(c) No Undisclosed Liabilities. At the date of each balance sheet
included in the CSBT Financials, CSBT did not, or will not, have any
liabilities, obligations or loss contingencies of any nature (whether
absolute, accrued, contingent or otherwise) of a type required to be reflected
in such CSBT Financials or in the footnotes thereto which are not fully
reflected or reserved against therein or fully disclosed in a footnote
thereto, except for (i) liabilities, obligations and loss contingencies which
are not material in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice and (ii) in the case of any
unaudited statements, normal, recurring audit adjustments and the absence of
footnotes.
<PAGE> A-11
Section 2.06 Taxes
(a) Tax Filings. CSBT has duly filed, and will timely file, in correct
form all federal, state, local and foreign Tax Returns required to be filed by
or with respect to CSBT on or prior to the Closing Date (all such returns
being accurate and correct in all material respects) and has duly paid or will
pay, or made or will make, provisions for the payment of all Taxes of whatever
nature which have been incurred by or are due or claimed to be due from CSBT
by any taxing authority on or prior to the Closing Date, other than Taxes
which (i) are not delinquent or are being contested in good faith and (ii)
have not been finally determined.
(b) No Audits. No Tax Return of CSBT is now under examination or
subject to audit by any applicable taxing authority. There are no liens for
Taxes (other than current Taxes not yet due and payable) on any of the assets
of CSBT.
(c) Provisions for Taxes. Adequate provision has been made in the CSBT
Financials for all Taxes of CSBT of whatever nature in respect of all periods
through the date hereof.
Section 2.07 No Material Adverse Change
CSBT has not suffered any Material Adverse Change since December 31,
1997.
Section 2.08 Contracts
(a) Compensatory Arrangements; Other Obligations. Except as described
in the CSBT Disclosure Schedules, CSBT is not a party to or subject to: (i)
any employment, consulting or severance contract or arrangement with any past
or present officer, director or employee of CSBT, except for "at will"
arrangements; (ii) any plan, arrangement or contract providing for bonuses,
pensions, options, deferred compensation, retirement payments, profit sharing
or similar arrangements for or with any past or present officers, directors or
employees of CSBT; (iii) any collective bargaining agreement with any labor
union relating to employees of CSBT; (iv) any contract or instrument
evidencing indebtedness for borrowed money in excess of $50,000, or any
contract or agreement of purchase, conditional sale, lease, lease-purchase,
guaranty or otherwise, in respect of which CSBT is an obligor to any person,
which instrument evidences any payment obligation of CSBT in an aggregate
amount in excess of $25,000 (but not including deposits, repurchase
agreements, bankers acceptances and "treasury tax and loan" accounts
established in the ordinary course of business and
<PAGE> A-12
transactions in "federal funds" or FHLB advances), or which contains financial
covenants or other restrictions which would be applicable on or after the
Closing Date to UBI; (v) any contract (other than the Transaction Documents)
limiting the freedom of CSBT to engage in any type of banking or bank-related
business permissible under law; or (vii) any contract, plan or arrangement
which provides for payments or benefits in certain circumstances which,
together with other payments or benefits payable to any participant therein or
party thereto, might render any portion of any such payments or benefits
subject to disallowance of deduction therefor as a result of the application
of Section 280G of the Code.
(b) Copies of Contracts. CSBT has furnished to UBI true and correct
copies of agreements, plans, arrangements and instruments referred to in
Section 2.08(a). All such agreements, plans, arrangements and instruments are
in full force and effect on the date hereof and neither CSBT nor, to the
knowledge of CSBT, any other party to any such contract, plan, arrangement or
instrument, has breached any provision thereof, or is in default in any
material respect thereunder.
(c) Certain Contracts. No contract, agreement, plan or arrangement to
which CSBT is a party or by which it is bound provides for (i) acceleration in
the vesting of benefits or payments due thereunder upon the occurrence of a
change in ownership or control of CSBT; or (ii) a benefit in the form of CSBT
Common Stock or determined by reference to the value of CSBT Common Stock.
Section 2.09 Ownership of Property
CSBT has good and marketable title free and clear of all liens,
encumbrances, charges, defaults or equitable interests to all of the
properties and assets, real and personal, reflected in the CSBT Financials as
of September 30, 1998 or acquired after such date, except (i) liens for
current taxes not yet due and payable, (ii) pledges to secure deposits and
other liens incurred in the ordinary course of CSBT's banking business, (iii)
such imperfections of title, easements and encumbrances, if any, as are
customary under local practice or are not material in character, amount or
extent, and (iv) dispositions and encumbrances for adequate consideration in
the ordinary course of business. CSBT, as lessee, has the right under valid
and subsisting leases of all properties not owned by CSBT and used by it in
the conduct of its banking business, to occupy and use all such properties as
presently occupied and used by it. Each of the real properties used by CSBT
has been maintained in all material respects in good condition and is suitable
for its current use by CSBT. Each of such properties conforms in all material
respects to currently applicable ordinances, regulations and zoning
requirements and, if required, is occupied pursuant to a certificate of
occupancy authorizing its current use. Since September 30, 1998, none of such
<PAGE> A-13
properties which are material to the operation of CSBT has been materially
damaged by fire, storm or other identifiable event or other act of God, except
to the extent that any property owned or leased by CSBT, if so damaged, is
insured to the extent necessary to satisfactorily repair the damaged premises.
Section 2.10 Loans
(a) Documentation, Security and Validity. To the best knowledge of
CSBT, each loan reflected as an asset in the CSBT Financials (i) is evidenced
by notes, agreements or other evidences of indebtedness which are true,
genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, (iii)
is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, and (iv) is not
subject to any defense, offset or counterclaim. All loans and extensions of
credit made by CSBT that are subject to Regulation O of the FRB comply
therewith.
(b) Loan Classification. The classification on the books and records of
CSBT of loans as nonaccrual, troubled debt restructuring, in-substance
foreclosure or other real estate owned, or other similar classification,
complies in all material respects with generally accepted accounting
principles and applicable regulatory accounting policy or principles.
Section 2.11 Allowance for Possible Loan Losses
In the opinion of management of CSBT, the allowance for possible loan or
credit losses shown on the most recent balance sheet of CSBT included in the
most recent CSBT Financials dated prior to the date of this Agreement was, and
the allowance for possible loan or credit losses shown on the balance sheets
of CSBT included in the CSBT Financials as of dates subsequent to the
execution of this Agreement will be, as of the respective dates thereof,
adequate (within the meaning of GAAP and applicable regulatory requirements or
guidelines) to provide for all known or reasonably anticipated losses relating
to or inherent in the loan and lease portfolios (including accrued interest
receivables ) of CSBT and other extensions of credit (including letters of
credit and commitments to make loans or extend credit) by CSBT as of the
respective dates thereof, except where the failure of such allowance to be so
adequate is not reasonably likely to result in a Material Adverse Change, with
respect to CSBT. Since December 31, 1995, no Regulatory Authority has
requested, in writing, that CSBT increase its allowance for loan and credit
losses, which request has not been responded to in a manner satisfactory to
such regulatory authority.
<PAGE> A-14
Section 2.12 Employee Benefit Plans; ERISA
(a) CSBT Plans. CSBT has listed on the CSBT Disclosure Schedules each
CSBT Plan.
(b) Copies of Documents. With respect to each CSBT Plan, CSBT has made
available to UBI true and complete copies of each of the following documents:
(1) the CSBT Plan and related documents (including all amendments thereto and
related trust documents); (2) the most recent annual reports, financial
statements, and actuarial reports, if any; (3) the most recent summary plan
description, together with each summary of material modifications, required
under ERISA with respect to such CSBT Plan; and (4) the most recent
determination letter received from the IRS with respect to each CSBT Plan that
is intended to be qualified under the Code.
(c) No Title IV ERISA Liability. Except as shown on the CSBT Disclosure
Schedule, no liability under Title IV of ERISA has been incurred by CSBT since
the effective date of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to CSBT of incurring a
liability under such Title.
(d) No Prohibited Transactions. Neither CSBT, nor any of the CSBT
Plans, nor any trust created thereunder, nor, to the best knowledge of CSBT
any trustee or administrator thereof, has engaged in a prohibited transaction
(within the meaning of Section 406 of ERISA and Section 4975 of the Code) in
connection with which CSBT could, either directly or indirectly, incur a
material liability or cost.
(e) Certain Payments. CSBT has made, or will make, full payment in
accordance with Section 404(a)(6) of the Code, of all amounts that CSBT is
required to pay under Section 412 of the Code or under the terms of the CSBT
Plans.
(f) Plan Termination; Reportable Events. The termination of CSBT's
defined benefit pension plan as of February 15, 1996 constituted a "standard
termination" of such CSBT plan under Section 4042(b) of ERISA and no
additional contributions were required to be made by CSBT in connection with
such termination. All liabilities to participants in connection with the
terminated defined benefit pension plan have been satisfied in full and no
adverse claim or demand has been made, or to the best knowledge of CSBT is
threatened, by or on behalf of any plan participant, the IRS, the United
States Department of Labor or the Pension Benefit Guaranty Corporation in
connection with such plan termination. No reportable event under Section 4043
of ERISA has occurred with respect to any CSBT Plan on or before the Closing
Date other than (i) termination of CSBT's defined benefit pension
<PAGE> A-15
plan, (ii) any reportable event occurring by reason of the transactions
contemplated by this Agreement or (iii) a reportable event for which the
requirement of notice to the Pension Benefit Guaranty Corporation has been
waived.
(g) No Multiemployer Plans, Etc.. None of the CSBT Plans is a
"multiemployer pension plan," as such term is defined in Section 3(37) of
ERISA, a "multiple employer welfare arrangement," as such term is defined in
Section 3(40) of ERISA, or a single employer plan that has two or more
contributing sponsors, at least two of whom are not under common control,
within the meaning of Section 4063(a) of ERISA.
(h) Tax Qualification. A favorable determination letter has been issued
by the IRS with respect to each CSBT Plan that is intended to be "qualified"
within the meaning of Section 401(a) of the Code to the effect that such plan
is so qualified and each such CSBT Plan satisfies the requirements of Section
401(a) of the Code in all material respects. Each CSBT Plan has been operated
and administered in all material respects in accordance with its terms and
applicable laws, including but not limited to ERISA and the Code.
(i) No Actions or Claims. There are no actions, suits or claims
pending, or, to the knowledge of CSBT, threatened or anticipated (other than
routine claims for benefits) against any CSBT Plan, the assets of any CSBT
Plan or against CSBT with respect to any CSBT Plan, including a plan
termination. There is no judgment, decree, injunction, rule or order of any
court, governmental body, commission, agency or arbitrator outstanding against
or in favor of any CSBT Plan or any fiduciary thereof (other than rules of
general applicability). There are no pending or threatened audits,
examinations or investigations by any governmental body, commission or agency
involving any CSBT Plan.
Section 2.13 Labor Matters
CSBT is not a party to any labor agreement with any labor organization,
group or association and CSBT is in material compliance with all applicable
laws respecting employment practices, terms and conditions of employment and
wages and hours and has not engaged in any unfair labor practice. CSBT has not
experienced any attempt by organized labor or its representatives to make CSBT
conform to demands of organized labor relating to their employees or to enter
into a binding agreement with organized labor that would cover the employees
of CSBT. There is no unfair labor practice charge or other claim or complaint
by any employee or former employee of CSBT against it pending, or to the best
knowledge of CSBT threatened, before any governmental agency arising out of
CSBT's activities; there is no labor strike or labor disturbance pending or,
to the best knowledge of CSBT threatened,
<PAGE> A-16
against it; and CSBT has not experienced a work stoppage or other labor
difficulty since January 1, 1996.
Section 2.14 Brokers and Finders
Neither CSBT, nor any of its officers, directors, employees or agents,
has employed any broker, finder or financial advisor or incurred any liability
or commitment for any fees or commissions to any such person in connection
with the transactions contemplated by the Transaction Documents, except for
CSBT's engagement or agreement to pay Has Associates Inc. a fee or commission,
as disclosed in the CSBT Disclosure Schedules, which liability shall be the
sole obligation of CSBT.
Section 2.15 Certain Accounting Matters
CSBT has not, during the period since December 31, 1995, controlled
expenses through elimination of employee benefits without providing comparable
substitute benefits, deferral of routine maintenance of real property or
leased premises, elimination of reserves where the liability related to such
reserve has remained, reduction of capital improvements from previous levels,
failure to depreciate capital assets in accordance with past practice or
eliminate capital assets which are no longer used in the business of CSBT,
capitalization of loan production expenses other than in accordance with FAS
91, extraordinary reduction or deferral of ordinary or necessary expenses, or
over- or under-reserving for reasonably anticipated loan losses.
Section 2.16 Real Estate Owned
(a) Title to REO. Except for liens, security interests, claims,
charges, or such other encumbrances as have been appropriately reserved for in
the CSBT Financials or are not material and are in the process of being
cleared, title to the REO is good and marketable, and there are no adverse
claims or encumbrances on the REO.
(b) Insurance Claims. All title, hazard and other insurance claims and
mortgage guaranty claims with respect to the REO have been timely filed and
CSBT has not received any notice of denial of any such claim.
(c) Lender in Possession. CSBT is in possession of all of the REO or,
if any of the REO remains occupied by the mortgagor, eviction or summary
proceedings have been commenced or rental arrangements providing for market
rental rates have been agreed upon
<PAGE> A-17
and CSBT is diligently pursuing such eviction or summary proceedings or such
rental arrangements.
(d) Legal Proceedings. No legal proceeding or quasi-legal proceeding is
pending or, to the knowledge of CSBT, threatened concerning any REO, including
claims under Environmental Laws.
(e) No Environmental Hazards. CSBT is not aware of any condition at or
upon any REO which constitutes a violation of any of the Environmental Laws.
Section 2.17 Legal Proceedings
There are no actions, suits or proceedings instituted, pending or, to
the best knowledge of CSBT, threatened against CSBT or against any asset,
interest or right of CSBT, that might result in a Material Adverse Change with
respect to CSBT. To the best knowledge of CSBT, there are no actual or
threatened actions, suits or proceedings which present a claim to restrain or
prohibit the transactions contemplated herein. There are no actions, suits or
proceedings instituted, pending or, to the best knowledge of CSBT, threatened
against any present or former director or officer of CSBT that might give rise
to a claim for indemnification, and, to the best knowledge of CSBT, there is
no reasonable basis for any such action, suit or proceeding.
Section 2.18 Compliance with Laws
CSBT is in compliance in all material respects with all statutes and
regulations applicable to the conduct of its business, and CSBT has not
received notification from any agency or department of federal, state or local
government (i) asserting a material violation of any such statute or
regulation, (ii) threatening to revoke any license, franchise, permit or
government authorization or (iii) restricting or in any way limiting its
operations. CSBT is not subject to any regulatory or supervisory cease and
desist order, agreement, directive, memorandum of understanding or commitment
of or with any Regulatory Authority which has not been lifted or dissolved,
and has not received any communication requesting that it enter into any of
the foregoing. Without limiting the generality of the foregoing, CSBT has
timely filed all currency transaction reports required to be filed and taken
all other actions required under the Currency and Foreign Transactions
Reporting Act, as amended, codified at 31 U.S.C. ss. 5301 et seq., and its
implementing regulations.
<PAGE> A-18
Section 2.19 Insurance
CSBT currently maintains insurance in amounts reasonably necessary for
its operations and, to the best knowledge of CSBT, similar in scope and
coverage to that maintained by other entities similarly situated. CSBT has not
received any advance notice of a material premium increase or cancellation
with respect to any of its insurance policies or bonds, and within the last
three years, CSBT has not been refused any insurance coverage sought or
applied for, and CSBT has no reason to believe that existing insurance
coverage cannot be renewed as and when the same shall expire, upon terms and
conditions as favorable as those presently in effect, other than possible
increases in premiums or unavailability in coverage that have not resulted
from any extraordinary loss experience of CSBT.
Section 2.20 Repurchase Agreements
With respect to all agreements pursuant to which CSBT has purchased
securities subject to an agreement to resell, if any, CSBT has a valid,
perfected first lien or security interest in the government securities or
other collateral securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured thereby.
Section 2.21 Deposit Insurance; No Brokered Deposits
The deposits of CSBT are insured under the Bank Insurance Fund of the
FDIC in accordance with the FDIA, and CSBT has paid all assessments and filed
all reports required by the FDIA. CSBT did not have as of December 31, 1997,
and does not presently have, any brokered deposits within the meaning of 12
C.F.R. [SECTION] 337.6.
Section 2.22 Environmental Matters
(a) Claims. Except for any violation, liability or noncompliance which
has not resulted, or will not result, in a Material Adverse Change with
respect to CSBT, to the best of CSBT's knowledge: (i) CSBT has not violated
during the last five years or become liable under any Environmental Law; (ii)
none of the properties owned or leased by CSBT (including, without limitation,
soils and surface and ground waters) are contaminated with any hazardous
substance; (iii) CSBT is not liable for any off-site contamination; and (iv)
CSBT is, and during the last five years has been, in compliance with, all of
its respective permits, licenses and other authorizations issued under any
Environmental Laws. CSBT has no outstanding liabilities or obligations with
respect to remediation efforts previously
<PAGE> A-19
undertaken by CSBT for the removal of asbestos at any of its properties. For
purposes of the foregoing, all references to "properties" include, without
limitation, any owned real property or leased real property.
(b) Notice of Violations. CSBT has not received any written notice of
any legal, administrative, arbitration or other proceeding, claim or action
and, to the knowledge of CSBT, there is no governmental investigation of any
nature ongoing, in each case that could reasonably be expected to result in
the imposition, on CSBT of any liability arising under any Environmental Law,
which liability would result in a Material Adverse Change with respect to
CSBT; to the best knowledge of CSBT, there are no facts or circumstances which
could reasonably be expected to form the basis for any such proceeding, claim,
action or governmental investigation that would impose any such liability; and
CSBT is not subject to any agreement, order, judgment, decree or memorandum by
or with any court, governmental authority, regulatory agency or third party
imposing any such liability.
Section 2.23 Certain Information
When the Registration Statement or any post-effective amendment thereto
shall become effective, and at all times subsequent to such effectiveness up
to and including the time of the later of the CSBT and UBI special
shareholders' meetings to vote upon the Merger, such Registration Statement
and all amendments or supplements thereto, with respect to all information set
forth therein furnished by CSBT relating to CSBT, (i) shall comply in all
material respects with the applicable provisions of the Securities Laws, and
(ii) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
Section 2.24 Administration of Trust Accounts
CSBT has properly administered, in all respects material and which could
reasonably be expected to be material to the business, operations, financial
condition or future prospects of CSBT, all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, executor,
conservator or investment advisor, in accordance with the terms of the
governing documents and applicable state and federal law and regulation and
common law. Neither CSBT, nor any director, officer or employee of CSBT has
committed any breach of trust with respect to any such fiduciary account which
is material to or could reasonably be expected to be material to the business,
operations, financial condition or future prospects of CSBT and the
accountings for each such fiduciary account are true and correct in all
<PAGE> A-20
material respects and accurately reflect the assets of such fiduciary account
in all material respects.
Section 2.25 Information in Applications
All information concerning CSBT and its officers, directors and
shareholders, included (or submitted for inclusion) in the applications for
the Regulatory Approvals described in Section 3.04 hereof shall be true,
correct and complete in all material respects.
Section 2.26 Accounting, Tax and Regulatory Matters
CSBT has not taken or agreed to take any action, nor to the best of its
knowledge is it aware, of any fact or circumstances that is reasonably likely
to (i) prevent the Merger from qualifying for pooling of interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Regulatory Approvals referred to in Section 3.04 or result in the imposition
of a materially burdensome condition or restriction with respect to any such
Regulatory Approval.
Section 2.27 Derivative Transactions
CSBT has not engaged in transactions in or involving forwards, futures,
options on futures, swaps or other derivative instruments other than Federal
Agency derivatives at any time since December 31, 1997.
Section 2.28 Year 2000
CSBT has not received and does not reasonably expect to receive, a "Year
2000 Deficiency Notification Letter" (as such term is employed in the Federal
Reserve's Supervision and Regulation Letter No. SR 98-3 (SUP), dated March 4,
1998). CSBT has disclosed to UBI a complete and accurate copy of CSBT's plan,
including an estimate of the anticipated associated costs, for addressing the
issues ("Year 2000 Issues") set forth in the statements of the Federal
Financial Institutions Examination Council, dated May 5, 1997, entitled "Year
2000 Project Management Awareness," and December 1997, entitled "Safety and
Soundness Guidelines Concerning the Year 2000 Business Risk," as such issues
affect CSBT. Between the date of this Agreement and the Effective Time, CSBT
shall use its reasonable best efforts to implement such plan.
<PAGE> A-21
Section 2.29 Related Party Transactions
CSBT is not a party to any transaction (including any loan or other
credit accommodation) with any Affiliate of CSBT other than transactions which
(a) were made in the ordinary course of business, (b) were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other Persons,
and (c) did not involve more than the normal risk of collectability or present
other unfavorable features. No loan or credit accommodation to any Affiliate
of CSBT is presently in default or, during the three year period prior to the
date of this Agreement, has been in default or has been restructured, modified
or extended. CSBT has no reason to believe that principal and interest with
respect to any such loan or other credit accommodation will not be paid when
due or that the loan grade classification accorded such loan or credit
accommodation by CSBT is inappropriate.
Section 2.30 Quality of Representations
No representations made by CSBT in this Agreement contain any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements made not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UBI
UBI hereby represents and warrants to CSBT that, except as specifically
set forth in the UBI Disclosure Schedules delivered to CSBT on the date
hereof:
Section 3.01 Organization
(a) Organization and Qualification of UBI. UBI is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Vermont. UBI is a bank holding company registered under the BHC Act. UBI
has the corporate power and authority to carry on its business and operations
as now being conducted and to own and operate its properties and assets. UBI
is not qualified or licensed to do business as a foreign corporation in any
other jurisdiction and is not required to be so qualified or licensed as the
result of the ownership or leasing of property or the conduct of its business,
except where the failure to be so qualified would not have a material adverse
effect on UBI.
(b) Organization and Qualification of UB. UB is a Vermont-chartered
commercial bank duly organized, validly existing and in good standing under
the laws of the
<PAGE> A-22
State of Vermont. UB has the corporate power and authority to carry on its
business and operations as now being conducted and to own and operate its
properties and assets. UB is not qualified or licensed to do business as a
foreign corporation in any other jurisdiction and is not required to be so
qualified or licensed as the result of the ownership or leasing of property or
the conduct of its business, except where the failure to be so qualified would
not have a material adverse effect on UB.
(c) Subsidiaries. UBI's sole Subsidiary is UB. UB has no Subsidiaries.
(d) Record Books. The minute books of UBI accurately record, in all
material respects, all material corporate actions of UBI's shareholders and
Board of Directors (including committees) through the date of this Agreement.
(e) Charter and By-Laws. UBI has delivered to CSBT true and correct
copies of the Articles of Association and By-Laws of UBI, as in effect on the
date hereof.
Section 3.02 Capitalization
(a) Authorized Stock. The authorized capital stock of UBI consists of
2,400,000 shares of common stock, with a par value of $2.00 ("UBI Common
Stock"), of which 2,034,140 shares were outstanding, validly issued, fully
paid and nonassessable and not subject to any preemptive rights as of December
31, 1998 and as of the date hereof. UBI has no other authorized classes of
capital stock.
(b) Options, Rights, Etc. Except for employee stock options listed in
the UBI Disclosure Schedules, UBI does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments, rights
agreements or other agreements of any character requiring UBI to issue,
deliver or sell, or cause to be issued, delivered or sold any shares of UBI
Common Stock or any other equity or debt security of UBI or any securities
convertible into, exchangeable for or representing the right to subscribe for,
purchase or otherwise receive, any shares of UBI Common Stock or any other
equity or debt security of UBI, or obligating UBI to grant, extend or enter
into any such subscriptions, options, warrants, calls, commitments, rights, or
agreements. As of the date hereof, there are no outstanding contractual
obligations of UBI to repurchase, redeem or otherwise reacquire any
outstanding shares of UBI Common Stock. Except as otherwise set forth in the
UBI Disclosure Schedules, UBI has not repurchased, redeemed or otherwise
reacquired any shares of UBI Common Stock at any time since December 31, 1996.
<PAGE> A-23
(c) Debt Securities. UBI does not have outstanding any debentures,
capital notes or other debt securities.
(d) Ownership of Other Companies. UBI does not own any equity
interest, directly or indirectly, in any other company nor does it control any
other company, except for (i) its ownership of all of the outstanding capital
stock of UB, (ii) equity interests held as a legal investment of UBI in its
investment securities portfolio, (iii) equity interests held by UBI in a
fiduciary capacity, and (iv) equity interests held as collateral in connection
with the commercial loan activities of UBI. UBI does not own or hold any
outstanding subscriptions, options, warrants, calls, commitments, agreements
or other rights to acquire any other company's capital stock or other equity
interests in any other Person.
(e) Significant Shareholders. Except as set forth in the UBI
Disclosure Schedules, to the best knowledge of UBI, (i) no person or "group"
(as that term is used in Section 13(d)(3) of the Exchange Act) is the
beneficial owner (as defined in Section 13(d) of the Exchange Act) of 5% or
more of the outstanding shares of UBI Common Stock, and (ii) except as
otherwise set forth on the UBI Disclosure Schedules, each such 5% or more
shareholder has or will execute the UBI Shareholder Agreement on or as of the
date of this Affiliation Agreement.
Section 3.03 Corporate Authority; No Violation
(a) Corporate Authority. UBI has full corporate power and authority to
execute and deliver this Agreement and the other Transaction Documents and to
consummate the transactions contemplated by the Transaction Documents. The
execution and delivery of the Transaction Documents by UBI and the
consummation by UBI of the transactions contemplated hereby and thereby have
been duly and validly approved by the Board of Directors of UBI and, except
for approval by the shareholders of UBI as required under the VBL and UBI's
Articles of Association and By-Laws, no other corporate proceedings on the
part of UBI are necessary to consummate the transactions contemplated in the
Transaction Documents. This Agreement has been, and upon their execution the
other Transaction Documents will be, duly and validly executed and delivered
by UBI, subject only to approval of the shareholders of UBI as required under
the VBL and UBI's Articles of Association and By-Laws and to receipt of the
Regulatory Approvals referred to in Section 3.04, and each such Transaction
Document constitutes, or upon its execution will constitute, the valid and
binding obligation of UBI, enforceable against UBI in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
depository institutions and creditors' rights generally and subject, as to
enforceability, to general principles of equity.
<PAGE> A-24
(b) No Violation. Subject to receipt of UBI shareholder approval and
to receipt of the Regulatory Approvals referred to in Section 3.04 and
compliance with any conditions contained therein, neither (i) the execution
and delivery of the Transaction Documents by UBI, (ii) the consummation of the
transactions contemplated in the Transaction Documents, nor (iii) compliance
by UBI with any of the terms or provisions of the Transaction Documents, does
or will (A) conflict with or result in a breach of any provision of the
Articles of Association or By-Laws of UBI; (B) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to UBI or any of its properties or assets; or (C) violate, conflict
with, result in a breach of any provisions of, constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in a right of termination or acceleration or the
creation of any lien, security interest, charge or other encumbrance upon any
of the properties or assets of UBI under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement, commitment or other instrument or obligation to which UBI is
a party, or by which it or any of its properties or assets may be bound or
affected, except for such violations, conflicts, breaches or defaults under
clause (ii) or (iii) hereof which, either individually or in the aggregate,
will not result in a Material Adverse Change with respect to UBI or impair the
ability of UBI to perform any of its material obligations under this
Agreement.
Section 3.04 Consents and Approvals
Except for (i) the approval of the Vermont Department of the organization of
the Interim Bank and the Merger under the VBL, (ii) the approval of the FDIC
of the Interim Bank's application for deposit insurance under the FDIA and
approval of the Merger under the federal Bank Merger Act, and (iii) approval
by the FRB of UBI's acquisition of control of CSBT under the BHC Act
(together, "Regulatory Approvals"), and except for the approval of the
shareholders of UBI of the transactions contemplated in the Transaction
Documents, including an amendment to increase the number of shares of
authorized UBI Common Stock, no consents or approvals of, or filings or
registrations with, any Regulatory Authority are necessary, and no consents or
approvals of any third parties are now, or will be, necessary in connection
with (A) the execution and delivery of the Transaction Documents by UBI; (B)
the consummation by UBI of the transactions contemplated by the Transaction
Documents; or (C) compliance by UBI with the terms and provisions of the
Transaction Documents. UBI has no reason to believe that any required
Regulatory Approvals will not be received or will be received with materially
burdensome conditions, limitations or restrictions unacceptable to the parties
hereto or which would adversely impact UBI's ability to consummate the
transactions contemplated by this Agreement.
<PAGE> A-25
Section 3.05 Regulatory Reports and Financial Statements
(a) UBI Regulatory Reports. UBI has previously delivered, or will
deliver, to CSBT the UBI Regulatory Reports. The UBI Regulatory Reports have
been, or will be, prepared in accordance with applicable regulatory accounting
principles and practices applied on a consistent basis throughout the periods
covered by such reports, and fairly present, or will fairly present, the
financial position, results of operations and changes in shareholder's equity
of UBI (or UB, as the case may be) as of and for the periods ended on the
dates thereof.
(b) UBI Financials. UBI has previously delivered, or will deliver to
CSBT the UBI Financials. The UBI Financials have been, or will be, prepared
in accordance with GAAP applied on a consistent basis throughout the periods
covered by such statements, and fairly present, or will fairly present, the
consolidated financial position, results of operations and cash flows of UBI
as of and for the periods ended or ending on the dates thereof.
(c) No Undisclosed Liabilities. At the date of each balance sheet
included in the UBI Financials, UBI did not, or will not, have any
liabilities, obligations or loss contingencies of any nature (whether
absolute, accrued, contingent or otherwise) of a type required to be reflected
in such UBI Financials or in the footnotes thereto which are not fully
reflected or reserved against therein or fully disclosed in a footnote
thereto, except for (i) liabilities, obligations and loss contingencies which
are not material in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice and (ii) in the case of any
unaudited statements, normal, recurring audit adjustments and the absence of
footnotes.
Section 3.06 Taxes
(a) Tax Filings. UBI has duly filed, and will timely file, in correct
form all federal, state, local and foreign Tax Returns required to be filed by
or with respect to UBI on or prior to the Closing Date (all such returns being
accurate and correct in all material respects) and has duly paid or will pay,
or made or will make, provisions for the payment of all Taxes of whatever
nature which have been incurred by or are due or claimed to be due from UBI by
any taxing authority on or prior to the Closing Date, other than Taxes which
(i) are not delinquent or are being contested in good faith and (ii) have not
been finally determined.
<PAGE> A-26
(b) No Audits. No Tax Return of UBI is now under examination or
subject to audit by any applicable taxing authority. There are no liens for
Taxes (other than current Taxes not yet due and payable) on any of the assets
of UBI.
(c) Provisions for Taxes. Adequate provision has been made in the UBI
Financials for all Taxes of UBI of whatever nature in respect of all periods
through the date hereof.
Section 3.07 No Material Adverse Change
UBI has not suffered any Material Adverse Change since December 31,
1997.
Section 3.08 Ownership of Property
UBI has good and marketable title free and clear of all liens,
encumbrances, charges, defaults or equitable interests to all of the
properties and assets, real and personal, reflected in the UBI Financials as
of September 30, 1998 or acquired after such date, except (i) liens for
current taxes not yet due and payable, (ii) pledges to secure deposits and
other liens incurred in the ordinary course of UBI's banking business, (iii)
such imperfections of title, easements and encumbrances, if any, as are
customary under local practice or are not material in character, amount or
extent, and (iv) dispositions and encumbrances for adequate consideration in
the ordinary course of business. UBI, as lessee, has the right under valid and
subsisting leases of all properties not owned by UBI and used by it in the
conduct of its banking business, to occupy and use all such properties as
presently occupied and used by it. Each of the real properties used by UBI
has been maintained in all material respects in good condition and is suitable
for its current use by UBI. Each of such properties conforms in all material
respects to currently applicable ordinances, regulations and zoning
requirements and, if required, is occupied pursuant to a certificate of
occupancy authorizing its current use. Since September 30, 1998, none of such
properties which are material to the operation of UBI has been materially
damaged by fire, storm or other identifiable event or other act of God, except
to the extent that any property owned or leased by UBI, if so damaged, is
insured to the extent necessary to satisfactorily repair the damaged premises.
Section 3.09 Loans
(a) Documentation, Security and Validity. To the best knowledge of UBI,
each loan reflected as an asset in the UBI Financials (i) is evidenced by
notes, agreements or other evidences of indebtedness which are true, genuine
and what they purport to be, (ii) to the extent secured, has been secured by
valid liens and security interests which have been
<PAGE> A-27
perfected, (iii) is the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent conveyance and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles, and (iv) is not subject to any defense, offset or counterclaim.
All loans and extensions of credit made by UBI that are subject to Regulation
O of the FRB comply therewith.
(b) Loan Classification. The classification on the books and records of
UBI of loans as nonaccrual, troubled debt restructuring, in-substance
foreclosure or other real estate owned, or other similar classification,
complies in all material respects with generally accepted accounting
principles and applicable regulatory accounting policy or principles.
Section 3.10 Allowance for Possible Loan Losses
In the opinion of management of UBI, the allowance for possible loan or
credit losses shown on the most recent balance sheet of UBI included in the
most recent UBI Financials dated prior to the date of this Agreement was, and
the allowance for possible loan or credit losses shown on the balance sheets
of UBI included in the UBI Financials as of dates subsequent to the execution
of this Agreement will be, as of the respective dates thereof, adequate
(within the meaning of GAAP and applicable regulatory requirements or
guidelines) to provide for all known or reasonably anticipated losses relating
to or inherent in the loan and lease portfolios (including accrued interest
receivables ) of UBI and other extensions of credit (including letters of
credit and commitments to make loans or extend credit) by UBI as of the
respective dates thereof, except where the failure of such allowance to be so
adequate is not reasonably likely to result in a Material Adverse Change, with
respect to UBI. Since December 31, 1995, no Regulatory Authority has
requested, in writing, that UBI increase its allowance for loan and credit
losses, which request has not been responded to in a manner satisfactory to
such regulatory authority.
Section 3.11 Employee Benefit Plans; ERISA
(a) UBI Plans. UBI has listed on the UBI Disclosure Schedules each UBI
Plan.
(b) Copies of Documents. With respect to each UBI Plan, UBI has made
available to CSBT true and complete copies of each of the following documents:
(1) the UBI Plan and related documents (including all amendments thereto and
related trust documents); (2) the most recent annual reports, financial
statements, and actuarial reports, if any; (3) the most recent summary plan
description, together with each summary of material modifications, required
under ERISA with respect to such UBI Plan; and (4) the most recent
<PAGE> A-28
determination letter received from the IRS with respect to each UBI Plan that
is intended to be qualified under the Code.
(c) No Title IV ERISA Liability. Except as shown on the UBI Disclosure
Schedule, no liability under Title IV of ERISA has been incurred by UBI since
the effective date of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to UBI of incurring a liability
under such Title.
(d) No Prohibited Transactions. Neither UBI, nor any of the UBI Plans,
nor any trust created thereunder, nor, to the best knowledge of UBI any
trustee or administrator thereof, has engaged in a prohibited transaction
(within the meaning of Section 406 of ERISA and Section 4975 of the Code) in
connection with which UBI could, either directly or indirectly, incur a
material liability or cost.
(e) Certain Payments. UBI has made, or will make, full payment in
accordance with Section 404(a)(6) of the Code, of all amounts that UBI is
required to pay under Section 412 of the Code or under the terms of the UBI
Plans.
(f) Reportable Events. No reportable event under Section 4043 of ERISA
has occurred with respect to any UBI Plan on or before the Closing Date other
than (i) any reportable event occurring by reason of the transactions
contemplated by this Agreement or (ii) a reportable event for which the
requirement of notice to the Pension Benefit Guaranty Corporation has been
waived.
(g) No Multiemployer Plans, Etc.. None of the UBI Plans is a
"multiemployer pension plan," as such term is defined in Section 3(37) of
ERISA, a "multiple employer welfare arrangement," as such term is defined in
Section 3(40) of ERISA, or a single employer plan that has two or more
contributing sponsors, at least two of whom are not under common control,
within the meaning of Section 4063(a) of ERISA.
(h) Tax Qualification. A favorable determination letter has been issued
by the IRS with respect to each UBI Plan that is intended to be "qualified"
within the meaning of Section 401(a) of the Code to the effect that such plan
is so qualified and each such UBI Plan satisfies the requirements of Section
401(a) of the Code in all material respects. Each UBI Plan has been operated
and administered in all material respects in accordance with its terms and
applicable laws, including but not limited to ERISA and the Code.
(i) No Actions or Claims. There are no actions, suits or claims
pending, or, to the knowledge of UBI, threatened or anticipated (other than
routine claims for benefits)
<PAGE> A-29
against any UBI Plan, the assets of any UBI Plan or against UBI with respect
to any UBI Plan. There is no judgment, decree, injunction, rule or order of
any court, governmental body, commission, agency or arbitrator outstanding
against or in favor of any UBI Plan or any fiduciary thereof (other than rules
of general applicability). There are no pending or threatened audits,
examinations or investigations by any governmental body, commission or agency
involving any UBI Plan.
Section 3.12 Brokers and Finders
Neither UBI, nor any of its officers, directors, employees or agents,
has employed any broker, finder or financial advisor or incurred any liability
or commitment for any fees or commissions to any such person in connection
with the transactions contemplated by the Transaction Documents, except for
UBI's engagement or agreement to pay Bank Analysis Center, Inc. a fee or
commission, as disclosed in the UBI Disclosure Schedules, which liability
shall be the sole obligation of UBI.
Section 3.13 Certain Accounting Matters
UBI has not, during the period since December 31, 1995, controlled
expenses through elimination of employee benefits, deferral of routine
maintenance of real property or leased premises, elimination of reserves where
the liability related to such reserve has remained, reduction of capital
improvements from previous levels, failure to depreciate capital assets in
accordance with past practice or eliminate capital assets which are no longer
used in the business of UBI, capitalization of loan production expenses other
than in accordance with FAS 91, extraordinary reduction or deferral of
ordinary or necessary expenses, or over- or under-reserving for reasonably
anticipated loan losses.
Section 3.14 Legal Proceedings
There are no actions, suits or proceedings instituted, pending or, to
the best knowledge of UBI, threatened against UBI or against any asset,
interest or right of UBI, that might result in a Material Adverse Change with
respect to UBI. To the best knowledge of UBI, there are no actual or
threatened actions, suits or proceedings which present a claim to restrain or
prohibit the transactions contemplated herein. There are no actions, suits or
proceedings instituted, pending or, to the best knowledge of UBI, threatened
against any present or former director or officer of UBI that might give rise
to a claim for indemnification, and, to the best knowledge of UBI, there is no
reasonable basis for any such action, suit or proceeding.
<PAGE> A-30
Section 3.15 Compliance with Laws
UBI is in compliance in all material respects with all statutes and
regulations applicable to the conduct of its business, and UBI has not
received notification from any agency or department of federal, state or local
government (i) asserting a material violation of any such statute or
regulation, (ii) threatening to revoke any license, franchise, permit or
government authorization or (iii) restricting or in any way limiting its
operations. UBI is not subject to any regulatory or supervisory cease and
desist order, agreement, directive, memorandum of understanding or commitment
of or with any Regulatory Authority which has not been lifted or dissolved,
and has not received any communication requesting that it enter into any of
the foregoing. Without limiting the generality of the foregoing, UBI has
timely filed all currency transaction reports required to be filed and taken
all other actions required under the Currency and Foreign Transactions
Reporting Act, as amended, codified at 31 U.S.C. ss. 5301 et seq., and its
implementing regulations.
Section 3.16 Insurance
UBI currently maintains insurance in amounts reasonably necessary for
its operations and, to the best knowledge of UBI, similar in scope and
coverage to that maintained by other entities similarly situated. UBI has not
received any advance notice of a material premium increase or cancellation
with respect to any of its insurance policies or bonds, and within the last
three years, UBI has not been refused any insurance coverage sought or applied
for, and UBI has no reason to believe that existing insurance coverage cannot
be renewed as and when the same shall expire, upon terms and conditions as
favorable as those presently in effect, other than possible increases in
premiums or unavailability in coverage that have not resulted from any
extraordinary loss experience of UBI.
Section 3.17 Deposit Insurance; No Brokered Deposits
The deposits of UB are insured under the Bank Insurance Fund of the
FDIC in accordance with the FDIA, and UB has paid all assessments and filed
all reports required by the FDIA. UB did not have, as of December 31,
1997,and does not presently have, any brokered deposits, within the meaning of
12 C.F.R. [SECTION] 337.6.
Section 3.18 Environmental Matters
(a) Claims. Except for any violation, liability or noncompliance which
has not resulted, or will not result, in a Material Adverse Change with
respect to UBI, to the best of UBI's knowledge: (i) UBI has not violated
during the last five years or become liable under
<PAGE> A-31
any Environmental Law; (ii) none of the properties owned or leased by UBI
(including, without limitation, soils and surface and ground waters) are
contaminated with any hazardous substance; (iii) UBI is not liable for any
off-site contamination; and (iv) UBI is, and during the last five years has
been, in compliance with, all of its respective permits, licenses and other
authorizations issued under any Environmental Laws. For purposes of the
foregoing, all references to "properties" include, without limitation, any
owned real property or leased real property.
(b) Notice of Violations. UBI has not received any written notice of
any legal, administrative, arbitration or other proceeding, claim or action
and, to the knowledge of UBI, there is no governmental investigation of any
nature ongoing, in each case that could reasonably be expected to result in
the imposition, on UBI of any liability arising under any Environmental Law,
which liability would result in a Material Adverse Change with respect to UBI;
to the best knowledge of UBI, there are no facts or circumstances which could
reasonably be expected to form the basis for any such proceeding, claim,
action or governmental investigation that would impose any such liability; and
UBI is not subject to any agreement, order, judgment, decree or memorandum by
or with any court, governmental authority, regulatory agency or third party
imposing any such liability.
Section 3.19 Certain Information
When the Registration Statement or any post-effective amendment thereto
shall become effective, and at all times subsequent to such effectiveness up
to and including the time of the later of the UBI and CSBT special
shareholders' meetings to vote upon the Merger, such Registration Statement
and all amendments or supplements thereto, with respect to all information set
forth therein furnished by UBI relating to UBI, (i) shall comply in all
material respects with the applicable provisions of the Securities Laws, and
(ii) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
Section 3.20 Information in Applications
All information concerning UBI and its officers, directors and
shareholders, included (or submitted for inclusion) in the applications for
Regulatory Approvals described in Section 3.04 shall be true, correct and
complete in all material respects.
<PAGE> A-32
Section 3.21 Accounting, Tax and Regulatory Matters
UBI has not taken or agreed to take any action, nor to the best of its
knowledge is it aware, of any fact or circumstances that is reasonably likely
to (i) prevent the Merger from qualifying for pooling of interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Regulatory Approvals referred to in Section 3.04 or result in the imposition
of a materially burdensome condition or restriction with respect to any such
Regulatory Approval.
Section 3.22 Year 2000
UBI has not received and does not reasonably expect to receive, a "Year
2000 Deficiency Notification Letter" (as such term is employed in the Federal
Reserve's Supervision and Regulation Letter No. SR 98-3 (SUP), dated March 4,
1998). UBI has disclosed to CSBT a complete and accurate copy of UBI's plan,
including an estimate of the anticipated associated costs, for addressing the
issues ("Year 2000 Issues") set forth in the statements of the Federal
Financial Institutions Examination Council, dated May 5, 1997, entitled "Year
2000 Project Management Awareness," and December 1997, entitled "Safety and
Soundness Guidelines Concerning the Year 2000 Business Risk," as such issues
affect UBI. Between the date of this Agreement and the Effective Time, UBI
shall use its reasonable best efforts to implement such plan.
Section 3.23 Quality of Representations
No representations made by UBI in this Agreement contain any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements made not misleading.
ARTICLE IV
COVENANTS
Section 4.01 Shareholders' Meetings
As soon as practicable following execution of this Agreement, CSBT shall
submit to the CSBT shareholders for approval this Affiliation Agreement, the
Plan of Merger and such related matters as the parties shall reasonably and in
good faith agree, and UBI shall submit to the UBI shareholders for approval a
proposed charter amendment to increase the
<PAGE> A-33
number of authorized shares of UBI Common Stock for the purpose of effecting
the Merger, and such related matters as the parties shall reasonably and in
good faith agree. Except to the extent legally required for the discharge by
the Boards of Directors of CSBT and UBI of their fiduciary duties as
determined by such Boards of Directors after consultation with their
respective counsel, the Boards of Directors of CSBT and UBI shall recommend at
the respective shareholders' meetings that the shareholders vote in favor of
and approve the transactions contemplated in the Transaction Documents.
Section 4.02 Proxy Statement; Registration Statement
As promptly as practicable after the date hereof, UBI and CSBT shall
cooperate in the preparation of the Registration Statement, which shall
include the Joint Proxy Statement/ Prospectus to be mailed to the shareholders
of UBI and CSBT in connection with the Merger. UBI will advise CSBT, promptly
after it receives notice thereof, of the time when the Registration Statement
or any post-effective amendment thereto has become effective or any supplement
or amendment has been filed, of the issuance of any stop order, of the
suspension of qualification of the UBI Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or the initiation or
threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of the Registration Statement or for
additional information. CSBT will advise UBI of approval of its proxy
statement by the FDIC.
Section 4.03 Applications
The parties hereto shall use their best efforts to submit or cause to be
submitted, as promptly as practicable after the date hereof, any requisite
applications or notices for prior approval of the transactions contemplated
herein and in the Plan of Merger, or requests for waivers thereof, to any
state or federal government agency, department or body the approval of which
is required for consummation of the Merger. At a reasonable time prior to the
making of any such filings with any regulatory authority or any third persons,
UBI and CSBT shall submit to each other the materials to be filed, mailed or
released. Any such materials must be acceptable to both UBI and CSBT prior to
the filings with any regulatory authorities or any third persons, except to
the extent that UBI or CSBT is legally required to proceed prior to obtaining
the acceptance of the other. Each party agrees to consult with the other with
respect to obtaining all necessary approvals and consents and each will keep
the other apprised of the status of matters relating to such approvals and
consents.
<PAGE> A-34
Section 4.04 Best Efforts
UBI and CSBT shall each use its best efforts in good faith to (i)
furnish such information as may be necessary or desirable in connection with
the preparation of the documents referred to in Sections 4.02 and 4.03 above,
and (ii) take or cause to be taken all action necessary or desirable on its
part so as to permit consummation of the Merger as soon as is reasonably
practicable, including, without limitation, (1) obtaining the consent or
approval of each individual, partnership, corporation, association or other
business or professional entity whose consent or approval is necessary or
desirable for consummation of the transactions contemplated hereby, and (2)
requesting the delivery of appropriate opinions, consents and letters from its
counsel and independent auditors. No party hereto shall take, or cause or to
the best of its ability permit to be taken, any action that would adversely
affect the qualification of the Merger for pooling of interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Code. In the event that any party hereto has taken any action, whether before,
on or after the date hereof, that would adversely affect such qualification,
each party shall take such action as any other party may reasonably request to
cure such effect to the extent curable without resulting in a Material Adverse
Change with respect to such party.
Section 4.05 Investigation and Confidentiality
(a) Investigation. UBI and CSBT each will keep the other advised of all
material developments relevant to its business and to consummation of the
transactions contemplated herein. UBI and CSBT each may make or cause to be
made such investigation of the financial and legal condition of the other as
such party reasonably deems necessary or advisable in connection with the
transactions contemplated herein and in the Plan of Merger, provided, however,
that such investigation shall be reasonably related to such transactions and
shall not interfere unnecessarily with normal operations. UBI and CSBT agree
to furnish to the other and the other's advisors such financial data and other
information with respect to its business and properties as such other party
shall from time to time reasonably request. No investigation pursuant to this
Section 4.05 shall affect or be deemed to modify any representation or
warranty made by, or the conditions to the obligations to consummate the
Merger of, either UBI or CSBT.
(b) Confidentiality. Each of UBI and CSBT shall, and shall cause its
directors, officers, attorneys and advisors to, maintain the confidentiality
of all information obtained in such investigation which is not otherwise
publicly disclosed by the other parties, said undertaking with respect to
confidentiality to survive any termination of this Agreement pursuant to
Section 6.01 hereof. Each party hereto shall hold all information furnished
by
<PAGE> A-35
any other party or such other party's subsidiaries or representatives pursuant
hereto in confidence to the extent required by, and in accordance with, the
provisions of the Confidentiality Agreements. In the event of termination of
this Agreement each party shall return to the furnishing party, or destroy and
certify the destruction of, all information previously furnished in connection
with the transactions contemplated by this Agreement.
(c) Notice of Certain Facts or Events. CSBT shall give prompt notice to
UBI, and UBI shall give prompt notice to CSBT, of (i) the occurrence, or
failure to occur, of any Material Adverse Change with respect to such party or
other material event which occurrence or failure would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect any time from the date hereof to the
Closing Date and (ii) any material failure of CSBT or UBI as the case may be,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder, and each party shall use all reasonable
efforts to remedy such failure.
Section 4.06 Publicity
The parties hereto shall agree with each other as to the form and
substance of any press releases or other publicity related to this Agreement,
the Plan of Merger, or the transactions contemplated hereby or thereby, and
shall consult with each other as to the form and substance of all public
disclosures related thereto; provided, however, that nothing contained herein
shall prohibit either party, following notification to the other party, from
making any disclosure which its counsel deems necessary.
Section 4.07 Covenants of CSBT
(a) Preservation of Business. Prior to the Closing Date, and except as
otherwise provided for by this Agreement or consented to or approved by UBI,
CSBT will use its best efforts to preserve its properties, business and
relationships with customers, employees and other persons and will carry on
its business in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted;
(b) Negative Covenants. Except with the prior written consent of UBI or
as otherwise provided below, between the date hereof and the Effective Time,
CSBT will not:
(1) Dividends. Declare, set aside, make or pay any dividend or
other distribution in respect of its capital stock other than the
regular annual 1998 cash dividend to shareholders of record February 16,
1999; and if the Effective Date is after the record date for the payment
of UBI's 1999 third quarter dividend, then CSBT shall be entitled to
declare,
<PAGE> A-36
set aside, make or pay a dividend or other distribution with respect
to its capital stock consistent with its past practice, and in
accordance with applicable law, regulation and contractual and
regulatory commitments, and representing one fourth of the amount that
would otherwise be paid as CSBT's annual dividend for 1999.
(2) Issuance of Securities. Issue any additional shares of its
capital stock out of treasury or otherwise, or incur any additional debt
obligation or other obligation for borrowed money other than in the
ordinary course of CSBT's business consistent with past practice;
(3) Rights and Recapitalization. Issue, grant or authorize any
options, warrants or rights with respect to the CSBT Common Stock or
effect any recapitalization, reclassification, stock dividend, stock
split or like change in capitalization, or redeem, repurchase or
otherwise acquire any shares of its capital stock;
(4) Charter and By-Law Amendments. Amend its Articles of
Association or By-Laws, except as contemplated in the Transaction
Documents and as set forth in a proposed By-Law amendment changing the
date of the CSBT annual meeting, or as agreed to by the parties hereto
to facilitate the consummation of the transactions contemplated hereby;
(5) Business Combinations. Merge or consolidate with any other
entity; sell, lease, liquidate or dispose of all or any material portion
of its assets or business or any material asset; make any acquisition of
all or any substantial portion of the business or assets of any other
person, firm, association, corporation or business organization other
than in connection with the collection of any loan or credit arrangement
between it and any other person; enter into or consummate a purchase and
assumption transaction with respect to deposits and liabilities; revoke
or surrender its certificate of authority to maintain, or apply for the
relocation of, any existing branch office or apply for a certificate of
authority to establish a new branch office; or enter into an agreement
or commitment to do any of the foregoing;
(6) Compliance with Laws. Fail to comply in any material respect
with any laws, regulations, ordinances or governmental actions
applicable to it and to the conduct of its business;
(7) Acquisitions and Expenditures. Acquire any material assets;
make any capital expenditures except those identified in the CSBT
Disclosure Schedules; or enter
<PAGE> A-37
into or modify any leases or other contracts that involve annual
payments exceeding $25,000 in the aggregate;
(8) Compensation. Increase the rate of compensation of, pay or
agree to pay any bonus to, or provide any additional employee benefit or
incentive to (i) any director or any executive officer; or (ii) any
other officer or employee except in the ordinary course of business in
a manner consistent with CSBT's established salary and bonus policies
and procedures and past practice; enter into, modify or extend any
employment or severance contracts with any of CSBT's present or former
directors, officers or employees; or enter into or modify (except as may
be required by applicable law) any pension, retirement, stock option,
stock purchase, stock appreciation right, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or other employees;
(9) Policies; Loans. Change its lending, investment,
asset/liability management or other material banking policies in any
material respect except as may be required by changes in applicable law;
or make any loan or extend any credit (including any letter of credit or
guarantee, but excluding investment decisions made in accordance with
existing investment policy) in an amount greater than $300,000;
(10) Accounting Methods. Change its methods of accounting in
effect at December 31, 1997, except as required by changes in GAAP or
regulatory accounting principles concurred in by its independent
certified public accountants, or change any of its methods of reporting
income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns for the
year ended December 31, 1997, except as required by changes in law;
(11) Other Proposals. Solicit or encourage inquiries or proposals
from any Person with respect to any acquisition or purchase of all or a
substantial portion of the assets of, or a substantial equity interest
in, CSBT or any merger with, acquisition of, or business combination
with CSBT; or authorize or permit any officer, director, agent or
Affiliate of CSBT to do any of the above; or fail to notify UBI
immediately if any such inquiries or proposals are received by CSBT;
(12) Certain Foreclosures. Foreclose on any commercial loan
secured by real property (other than those commercial loans in which it
already has commenced action seeking foreclosure) unless CSBT first has
obtained an environmental audit, analysis
<PAGE> A-38
or survey that indicates that it will not incur material potential
liability under Environmental Laws as a result of such foreclosure; or
(13) Purchase of UBI Common Stock. Purchase or acquire, or agree
to purchase or acquire, any of the outstanding shares of capital stock
of UBI.
Section 4.08 Covenants of UBI
(a) Preservation of Business. Prior to the Closing Date, and except as
otherwise provided for by this Agreement or consented to or approved by CSBT,
UBI will use its best efforts, and cause UB to use its best efforts, to
preserve its properties, business and relationships with customers, employees
and other persons and UBI will, and will cause UB to, carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted.
(b) Negative Covenants. Except with the prior written consent of CSBT
or as otherwise provided below, between the date hereof and the Effective
Date, UBI will not and will not permit UB to:
(1) Dividends. In the case of UBI only, declare, set aside, make
or pay any dividend or other distribution in respect of its capital
stock other than regular quarterly cash dividends, consistent with past
practice and in accordance with applicable law, regulation and
contractual and regulatory commitments;
(2) Issuance of Securities. In the case of UBI only, issue any
additional shares of UBI capital stock out of treasury or otherwise,
other than pursuant to outstanding employee stock options; or incur any
additional debt obligation or other obligation for borrowed money other
than in the ordinary course of business of UBI or UB, consistent with
past practice;
(3) Rights and Recapitalization. Issue, grant or authorize any
options, warrants or rights with respect to the UBI Common Stock, other
than employee stock option grants in amounts and on terms consistent
with past practice, or effect any recapitalization, reclassification,
stock dividend, stock split or like change in capitalization, or redeem,
repurchase or otherwise acquire any shares of its capital stock;
(4) Charter and By-Law Amendments. Amend its Articles of
Association or By-Laws except as contemplated in the Transaction
Documents or as agreed
<PAGE> A-39
to by the parties hereto to facilitate the
consummation of the transactions contemplated hereby;
(5) Business Combinations. Merge or consolidate with any other
entity; sell, lease, liquidate or dispose of all or any material portion
of its assets or business or any material asset; or make any acquisition
of all or any substantial portion of the business or assets of any other
person, firm, association, corporation or business organization other
than in connection with the collection of any loan or credit arrangement
between it and any other person;
(6) Compliance with Laws. Fail to comply in any material respect
with any laws, regulations, ordinances or governmental actions
applicable to UBI or UB, as the case may be, and to the conduct of their
respective business;
(7) Accounting Methods. Change its methods of accounting in
effect at December 31, 1997, except as required by changes in GAAP or
regulatory accounting principles concurred in by its independent
certified public accountants, or change any of its methods of reporting
income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns for the
year ended December 31, 1997, except as required by changes in law;
(8) Other Proposals. Solicit or encourage inquiries or proposals
from any Person with respect to any acquisition or purchase of all or
a substantial portion of the assets of, or a substantial equity interest
in, UBI or UB, or any merger with, acquisition of or business
combination with UBI or UB, or authorize or permit any officer,
director, agent or Affiliate of UBI or UB to do any of the above; or
fail to notify CSBT immediately if any such inquiries or proposals are
received by UBI or UB; or
(9) Purchase of CSBT Common Stock. Purchase or acquire, or agree
to purchase or acquire, any of the outstanding shares of capital stock
of CSBT other than as contemplated by the Transaction Documents.
Section 4.09 Affiliates
UBI and CSBT shall cooperate and use their best efforts to identify
those persons who may be deemed to be "affiliates" of UBI or CSBT within the
meaning of Rule 144 or 145 promulgated by the SEC under the Securities Act, as
appropriate. CSBT and UBI shall use their best efforts to cause each person
so identified to deliver to UBI or CSBT, no later than 40 days prior to the
Effective Time, an Affiliate Letter providing that such person
<PAGE> A-40
will not dispose of any CSBT Common Stock or UBI Common Stock except in
compliance with the Securities Act, the rules and regulations promulgated
thereunder and the Commission's rules relating to pooling of interests
accounting treatment. Shares of UBI Common Stock held by such Affiliates shall
not be transferable following the Merger except in compliance with applicable
securities laws (including SEC Rules 144 and 145) and in conformance with
applicable criteria for use of pooling of interests accounting treatment.
Section 4.10 Boards of Directors
(a) Appointments. At the Effective Time (i) the Board of Directors of
UBI shall consist of 13 persons, which shall include those persons who were
directors of UBI immediately prior to the Effective Time and, in addition,
CSBT President and Chief Executive Officer Jerry S. Rowe or his successor and
two other individuals now serving as directors of CSBT who shall be designated
by CSBT prior to the mailing of the Joint Proxy Statement/Prospectus and the
Registration Statement and approved by UBI in its reasonable business
judgment; and (ii) the Board of Directors of the Continuing Bank shall consist
of 9 persons, which shall include those persons who were directors of CSBT
immediately prior to the Effective Time and, in addition to UBI President and
Chief Executive Officer Kenneth D. Gibbons or his successor and one other
individual now serving as a director of UBI who shall be designated by UBI
prior to the mailing of the Joint Proxy Statement/Prospectus and the
Registration Statement and approved by CSBT in its reasonable business
judgment.
(b) Disclosure of New Directors. The persons to be designated by UBI
and CSBT as members of the Boards of Directors of the Continuing Bank and UBI,
respectively, after the Effective Time shall be named in the Joint Proxy
Statement/Prospectus and the Registration Statement, subject to receipt of the
consent of such individuals to be so named.
Section 4.11 Management; Employees; Employee Benefits
(a) Officers. At the Effective Date, Jerry S. Rowe or his successor
shall continue to serve as the President and Chief Executive Officer of the
Continuing Bank and shall be appointed as a Vice President of UBI, with such
duties and responsibilities as may be delegated to him from time to time by
the Board of Directors of UBI. The officers of the Continuing Bank from and
after the Effective Time shall be as provided in the Plan of Merger.
Following the Effective Time, UBI and the Continuing Bank shall honor the
terms of the Employment Agreement dated December 10, 1998 between CSBT and
Jerry S. Rowe.
(b) Compensation and Benefits. At the Effective Time, the officers and
employees of the Continuing Bank will remain entitled to participate in the
compensation,
<PAGE> A-41
benefit, and related plans, programs or arrangements in effect at CSBT
immediately prior to the Effective Time; provided, however, that nothing
herein shall be deemed to prevent or restrict the right of the Continuing Bank
or UBI, in the exercise of its reasonable business judgment, to modify, amend
or terminate any of such CSBT compensation, benefit and welfare plans,
programs or arrangements following the Effective Time.
(c) Severance Payments. Any employee of the Continuing Bank whose
employment is terminated by UBI for other than cause within ten (10) months
after the Effective Time, will be entitled to receive a lump sum cash
severance payment equal to two weeks salary for each year of employment with
CSBT, but not exceeding an amount equal to one year's base compensation. For
salaried employees, base compensation will be equal to the employee's then
current base salary (exclusive of bonuses or other benefits). For non-
salaried employees, base compensation will equal such employee's then current
hourly rate (exclusive of bonuses or other benefits), multiplied by 2,080
hours. For any part-time employee, base compensation will be proportionately
decreased.
(d) Vacation, Leave and Sick Day Policies. The vacation, leave and sick
day policies of CSBT in effect immediately prior to the Effective Time shall
continue in effect following the Effective Time and the Continuing Bank and
UBI shall honor all accruals under these policies for which a liability has
been recorded on the books of CSBT through the Effective Time; provided,
however, that nothing herein shall be deemed to prevent or restrict the right
of the Continuing Bank or UBI, in the exercise of its reasonable business
judgment, to modify, amend or terminate and replace such policies after the
Effective Time.
(e) No Rights to Employment Created. Except as provided under Section
4.11(a) hereof, nothing herein shall be construed as giving any employee of
CSBT or the Continuing Bank a right to continuing employment with CSBT, the
Continuing Bank or UBI after the Effective Time.
Section 4.12 Listing of UBI Common Stock
UBI shall use its best efforts to cause the shares UBI Common Stock to
be listed on the American Stock Exchange, Inc., or to be quoted on the NASDAQ
National Market, as soon as practicable following the Merger.
Section 4.13 Reservation of Right to Revise Transaction
The parties hereto may hereafter agree in writing to change the method
of effecting the Merger to the extent permitted by applicable law and to the
extent they deem
<PAGE> A-42
any such change to be desirable; provided, however, that no such change shall
materially alter the benefits of the Merger as is presently contemplated in
the Transaction Documents to either CSBT or UBI, or to their respective
shareholders.
ARTICLE V
CONDITIONS PRECEDENT
Section 5.01 Conditions Precedent - Mutual
The respective obligations of UBI and CSBT to effect the Merger shall be
subject to satisfaction or waiver of the following conditions at or prior to
the Closing Date:
(a) Corporate Actions. All corporate action necessary on the part
of UBI and CSBT to authorize the execution, delivery and performance of
the Transaction Documents and consummation of the transactions
contemplated hereby and thereby shall have been duly and validly taken,
and all required shareholder approvals shall have been duly received.
(b) Regulatory Approvals. All Regulatory Approvals required or
mutually deemed necessary in connection with the transactions
contemplated by the Transaction Documents shall have been received, all
notice periods and waiting periods required after the granting of any
such Regulatory Approvals shall have passed and all conditions contained
in any such Regulatory Approvals required to have been satisfied prior
to consummation of such transactions shall have been satisfied;
provided, however, that no such Regulatory Approval shall have imposed
any condition or requirement which, in the reasonable good faith opinion
of the Boards of Directors of UBI and CSBT (as they shall so agree) so
materially and adversely affects the anticipated economic and business
benefits to such parties of the transactions contemplated by this
Agreement as to render consummation of such transactions inadvisable.
(c) Tax Opinion. The parties hereto shall have received an
opinion of A.M. Peisch & Company dated as of the dates of the Joint
Proxy Statement/Prospectus and updated as of the Closing Date,
satisfactory in form and substance to UBI and CSBT, to the effect that
(i) the Merger when consummated in accordance with the terms of the
Transaction Documents will constitute a reorganization within the
meaning of Section 368(a) of the Code; (ii) receipt by CSBT shareholders
of UBI Common Stock solely in exchange of CSBT Common Stock will not
give rise to recognition of gain or loss for federal income tax
purposes, except to the extent that cash is received (A) in lieu of
fractional share interests of UBI Common Stock, or (B) by dissenting
shareholders pursuant to the exercise of statutory
<PAGE> A-43
dissenters' rights under the VBL; (iii) neither UBI, CSBT nor Interim
Bank will recognize gain or loss as a result of the Merger; and (iv) in
respect of such other substantial federal income tax effects of the
Merger as the parties hereto may reasonably require and which are
customary in similar transactions. In rendering such tax opinion, A.M.
Peisch & Company shall be entitled to rely upon representations of
officers of UBI, CSBT and the Interim Bank reasonably satisfactory in
form and substance to A.M. Peisch & Company.
(d) Pooling of Interests. No event shall have occurred that shall
preclude the Merger from being accounted for as a pooling of interests,
and the parties shall have received from each of their respective
independent accountants a letter to the effect that they are not aware
of any reason that would preclude the Merger from being accounted for as
a pooling of interests.
(e) Comfort Letters. Each of UBI and CSBT (each, in such
capacity, the "Client") shall use all reasonable efforts to cause to be
delivered to the other party (each, in such capacity, the "Recipient")
a letter of their respective independent accounting firm, in form and
substance reasonably acceptable to the Recipient, stating that (a) they
are independent public accountants with respect to Client within the
meaning of the Securities Act and the published rules and regulations
thereunder, (b) in their opinion the financial information of Client
included in the Registration Statement complies as to form in all
material respects with the applicable accounting requirements of the
Securities Act and the published rules and regulations thereunder, and
(c) a reading of the latest available unaudited financial statements of
Client and inquiries of certain officials of Client responsible for
financial and accounting matters as to transactions and events since the
date of the most recent statement of condition included in their most
recent audit report with respect to Client did not cause them to believe
that (i) such latest available unaudited financial statements of Client
are not stated on a basis consistent with that followed in Client's
audited financial statements; or (ii) except as disclosed in the letter,
at a specified date not more than five business days prior to the date
of such letter, there was any change in Client's capital stock or any
change in long-term debt or any decrease in the net assets of Client or
the allowance for loan and credit losses of Client as compared with the
respective amounts shown in the most recent Client audited financial
statements. Each such letter shall also cover such other matters
pertaining to Client's financial data and statistical information
included in the Registration Statement as may be reasonably requested by
Recipient and as are customarily covered in such letters in transactions
of the type contemplated hereby.
(f) Registration Statement. The Registration Statement shall have
been declared effective by the SEC under the Securities Act, and no
proceeding shall be pending or threatened by the SEC to suspend the
effectiveness of such Registration Statement, and
<PAGE> A-44
UBI shall have received all state securities or "Blue Sky" permits or
other authorizations, or confirmations as to the availability of an
exemption from registration requirements as may be necessary, and no
proceedings shall be pending or threatened by any state "Blue Sky"
securities administrator to suspend the effectiveness of any Blue Sky
filing.
(g) FDIC Review. The Joint Proxy Statement/Prospectus shall have
been approved by the FDIC for solicitation of proxies by CSBT.
(h) Third Party Consents. To the extent that any lease, license,
loan, financing agreement or other contract or agreement to which any
party hereto is a party requires the consent of or waiver from the other
party thereto as a result of the transactions contemplated by the
Transaction Documents, such consent or waiver shall have been obtained,
unless the failure to obtain such consent or waiver would not reasonably
be expected to result in a Material Adverse Change with respect to UBI
or CSBT, as the case may be, as the parties shall reasonably and in good
faith agree.
(i) Litigation. Neither CSBT nor UBI shall be subject to any
order, decree or injunction of a court or agency of competent
jurisdiction, which enjoins or prohibits the consummation of the
transactions contemplated by the Transaction Documents and there shall
be no action or proceeding by or before any such court or agency that,
in the reasonable business judgment of CSBT or UBI, with the advice of
its respective counsel, shall present a bona fide and meritorious claim
to restrain, prohibit or invalidate the transactions contemplated
hereby.
Section 5.02 Conditions Precedent - UBI
The obligations of UBI to effect the Merger shall be subject to
satisfaction of the following additional conditions at or prior to the Closing
Date unless waived by UBI pursuant to Section 6.04 hereof:
(a) Representations and Warranties. The representations and
warranties of CSBT set forth in Article II hereof shall be true and
correct in all material respects as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date (or on
the date when made in the case of any representation and warranty which
specifically relates to an earlier date), except as otherwise
contemplated by this Agreement or consented to in writing by UBI or
where the failure to be true and correct would not, or would not
reasonably be expected to, result in a Material Adverse Change with
respect to CSBT;
<PAGE> A-45
(b) Covenants. CSBT shall have in all material respects performed
all obligations and complied with all covenants required by the
Transaction Documents, except where the failure to perform or comply
would not, or would not reasonably be expected to, result in a Material
Adverse Change with respect to CSBT;
(c) Fairness Opinion. UBI shall have received from Bank Analysis
Center, Inc. a letter dated as of the date of the Joint Proxy
Statement/Prospectus, to the effect that, in the opinion of such firm,
the consideration to be paid by UBI to the shareholders of CSBT in
connection with the Merger is fair, from a financial point of view, to
the shareholders of UBI;
(d) Officers' Certificate. CSBT shall have delivered to UBI a
certificate, dated the Closing Date and signed by its President and
Chief Executive Officer and by its Chief Financial Officer, to the
effect that the conditions set forth in paragraphs (a), (b) and (f) of
this Section 5.02 have been satisfied;
(e) Legal Opinion. UBI shall have received an opinion of Zuccaro,
Willis & Bent, counsel to CSBT, dated as of the Closing Date, in form
and substance reasonably acceptable to UBI; and
(f) CSBT Affiliate Letters. The CSBT Affiliate Letters shall have
been executed and delivered to UBI.
(g) No Material Adverse Change. CSBT shall not have experienced
or suffered any Material Adverse Change since the date hereof.
Section 5.03 Conditions Precedent - CSBT
The obligations of CSBT to effect the Merger shall be subject to
satisfaction of the following additional conditions at or prior to the Closing
Date unless waived by CSBT pursuant to Section 6.04 hereof:
(a) Representations and Warranties. The representations and
warranties of UBI set forth in Article III hereof shall be true and
correct in all material respects as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date (or on
the date when made in the case of any representation and warranty which
specifically relates to an earlier date), except as otherwise
contemplated by this Agreement or consented to in writing by CSBT or
where the failure to be true and correct would not, or would not
reasonably be expected to result in, a Material Adverse Change with
respect to UBI;
<PAGE> A-46
(b) Covenants. UBI shall have in all material respects performed
all obligations and complied with all covenants required by the
Transaction Documents, except where the failure to perform or comply
would not, or would not reasonably be expected to, result in a Material
Adverse Change with respect to UBI;
(c) Fairness Opinion. CSBT shall have received from Has
Associates, Inc. a letter dated as of the date of the Joint Proxy
Statement/Prospectus to the effect that, in the opinion of such firm,
the consideration to be received by the shareholders of CSBT in
connection with the Merger is fair, from a financial point of view, to
such shareholders;
(d) Officers' Certificate. UBI shall have delivered to CSBT a
certificate, dated the Closing Date and signed by its President and
Chief Executive Officer and by its Chief Financial Officer, to the
effect that the conditions set forth in paragraphs (a), (b) and (f) of
this Section 5.02 have been satisfied;
(e) Legal Opinion. CSBT shall have received an opinion of Primmer
& Piper, P.C., dated as of the Closing Date, in form reasonably
acceptable to CSBT; and
(f) UBI Affiliate Letters. The UBI Affiliate Letters shall have
been executed and delivered to CSBT.
(g) No Material Adverse Change. UBI shall not have experienced or
suffered any Material Adverse Change since the date hereof.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination
This Agreement and the Plan of Merger may be terminated, either before
or after approval by the shareholders of UBI or CSBT:
(a) Mutual Consent. At any time at or prior to the Effective
Time, by the mutual consent in writing of the parties;
(b) Breach of Agreement. At any time on or prior to the Closing
Date, by either party, upon notice in writing to the other party if such
other party has, in any material respect, breached (i) any of its
covenants or agreements contained herein or in the Plan of
<PAGE> A-47
Merger or (ii) any of its representations or warranties contained
herein; provided that termination pursuant to this subsection may occur
only if (A) such breach has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the
party committing such breach or the Closing Date, and (B) such breach,
in the reasonable opinion of the non-breaching party, individually or in
the aggregate, has resulted in, or is reasonably likely to result in, a
Material Adverse Change with respect to the breaching party or would
otherwise materially reduce or impair the benefits of the Merger to the
non-breaching party;
(c) Failure to Satisfy Conditions. On the Closing Date, by either
party (provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other obligation
under this Agreement) in writing, if any of the conditions precedent to
such terminating party's obligations as set forth in Article V hereof
with respect to such party have not been satisfied or fulfilled;
(d) Denial of Regulatory Approval. At any time, by either party
(provided that the terminating party is not then in material breach of
any representation, warranty, covenant or other obligation under this
Agreement) in writing, if any of the Regulatory Approvals referred to in
Section 3.04 hereof have been denied, and the time period for appeals
and requests for reconsideration has run;
(e) Failure of Shareholders to Approve. At any time, by either
party (provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other obligation
under this Agreement) in writing, if the shareholders of CSBT or UBI do
not approve the transactions contemplated herein at the annual or
special meetings duly called for that purpose; or
(f) Passage of Time. By either party (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other obligation under this Agreement) in writing
if the Closing Date has not occurred on or before the close of business
on December 31, 1999.
Section 6.02 Effect of Termination
In the event this Agreement and the Plan of Merger are terminated
pursuant to Section 6.01 hereof, this Agreement and the Plan of Merger shall
become void and have no effect, except that (i) the provisions relating to
confidentiality, payment of a termination fee and payment of expenses set
forth in Sections 4.05, 6.03 and 8.01 hereof, respectively, shall survive any
such termination, and (ii) a termination pursuant to Section 6.01(b) shall not
<PAGE> A-48
relieve the breaching party from liability (including monetary damages and
expenses) for any uncured, intentional and willful breach of such
representation, warranty, covenant or agreement giving rise to such
termination.
Section 6.03 Termination Fee
(a) Termination Payment by CSBT. As an inducement to UBI to enter into
this Agreement and the Plan of Merger and to provide reimbursement for
incurring the costs and expenses related to entering into this Agreement and
the Plan of Merger and consummating the transactions contemplated hereby and
thereby, CSBT has agreed to make a lump sum cash payment to UBI of $2,000,000,
as liquidated damages and not as a penalty, if and only if: (i) UBI terminates
this Agreement and the Plan of Merger pursuant to a breach of a
representation, warranty, covenant, or agreement of CSBT which was caused by
the action, failure to take action, or an occurrence which is within the
control of CSBT or (ii) CSBT terminates this Agreement or the Plan of Merger
and at the time of such termination any Person other than UBI or any
subsidiary or Affiliate of UBI has made a bona fide proposal to CSBT or its
stockholders to engage in an Acquisition Transaction by public announcement or
written communication, or at the time of or within six months after any such
termination, CSBT enters into an agreement to engage in an Acquisition
Transaction with any Person other than UBI or any subsidiary or other
Affiliate of UBI, or the Board of Directors of CSBT approves an Acquisition
Transaction or recommends that the shareholders of CSBT approve or adopt any
Acquisition Transaction with any Person other than UBI or any subsidiary or
other Affiliate of UBI.
(b) Termination Payment by UBI. As an inducement to CSBT to enter into
this Agreement and the Plan of Merger and to provide reimbursement for
incurring the costs and expenses related to entering into this Agreement and
the Plan of Merger and consummating the transactions contemplated hereby and
thereby, UBI has agreed to make a lump sum cash payment to CSBT of $1,250,000,
as liquidated damages and not as a penalty, if and only if: (i) CSBT
terminates this Agreement or the Plan of Merger pursuant to a breach of a
representation, warranty, covenant, or agreement of UBI which was caused by
the action, failure to take action, or an occurrence which is within the
control of UBI or (ii) UBI terminates this Agreement or the Plan of Merger and
at the time of such termination any Person other than CSBT has made a bona
fide proposal to UBI or its stockholders to engage in an Acquisition
Transaction by public announcement or written communication, or at the time of
or within six months after any such termination, UBI enters into an agreement
to engage in an Acquisition Transaction with any Person other than CSBT, or
the Board of Directors of UBI approves an Acquisition Transaction or
recommends that the shareholders of UBI approve or adopt any Acquisition
Transaction with any Person other than CSBT.
<PAGE> A-49
Section 6.04 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement, the
Plan of Merger or in any instrument delivered pursuant hereto or thereto shall
expire on, and be terminated and extinguished at, the Effective Time and from
and after the Effective Time, neither of the parties hereto shall have any
liability to the other on account of any breach or failure of any of these
representations, warranties or covenants; provided, however, that the
foregoing clause (i) shall not apply to agreements or covenants of the parties
that by their terms are to survive or be performed after the Effective Time,
and (ii) no such representations, warranties or covenants shall be deemed to
be terminated or extinguished so as to deprive UBI or CSBT (or any director,
officer or controlling person thereof) of any defense in law or equity which
otherwise would be available against the claims of any person, including,
without limitation, any shareholder or former shareholder of either UBI or
CSBT, the aforesaid representations, warranties and covenants being material
inducements to the consummation by UBI and CSBT of the transactions
contemplated herein.
Section 6.05 Waiver
Except with respect to any required shareholder or Regulatory Approvals,
UBI and CSBT respectively, by written instrument signed by an executive
officer of such party, may at any time (whether before or after approval of
this Agreement and the Plan of Merger by the shareholders of UBI and CSBT)
extend the time for the performance of any of the obligations or other acts of
the other party hereto and may waive (i) any inaccuracies of such parties in
the representations or warranties contained in this Agreement, the Plan of
Merger, or any document delivered pursuant hereto or thereto, (ii) compliance
with any of the covenants, undertakings or agreements of such parties, or
satisfaction of any of the conditions precedent to its obligations, contained
herein or in the Plan of Merger or (iii) the performance by such parties of
any of its obligations set out herein or therein; provided, however, that no
such waiver executed after approval of this Agreement and the Plan of Merger
by the shareholders of UBI and/or CSBT shall alter the number of shares of UBI
Common Stock into which each share of CSBT Common Stock shall be converted
pursuant to the Merger.
Section 6.06 Indemnification and Directors' and Officers' Liability Insurance
(a) Indemnification for Prior Acts and Omissions. After the Effective
Time, UBI shall provide to the present and former directors and officers of
CSBT indemnification against losses, claims, damages, costs, expenses
(including attorneys' fees), liabilities, judgments and amounts paid in
settlement of claims (which settlement shall require the prior
<PAGE> A-50
written consent of UBI, which consent shall not be unreasonably withheld)
actually and necessarily incurred by such persons in connection with any
claim, action, suit or proceeding in which such person is made a party by
virtue of such person's status as a director or officer of CSBT if such claim
pertains to any matter arising or occurring before the Effective Time,
regardless of whether such claim is asserted before, or at or after the
Effective Time, to the fullest extent that indemnification for similar claims
would be provided by UBI to the officers and directors of UBI, pursuant to the
By-Laws of UBI, as they may be amended from time to time hereafter, and
subject to applicable federal and state law.
(b) Insurance. For a period of six (6) years after the Effective Time,
UBI shall maintain CSBT's existing directors' and officers' liability
insurance (the "CSBT D&O Insurance") covering those persons who are currently
covered by the CSBT D&O Insurance on terms no less favorable than those in
effect on the date hereof, with respect to claims arising from acts or
omissions which occurred before the Effective Time; provided, however, that
UBI may substitute therefor policies providing at least comparable coverage
and containing terms and conditions no less favorable than those in effect
under the CSBT D&O Insurance on the date hereof. With respect to claims
against persons who may serve as directors or officers of CSBT arising from
acts or omissions that occur after the Effective Date, such directors or
officers shall be covered by the directors' and officers' liability insurance
policy or policies maintained by UBI from time to time for the directors and
officers of UBI and its subsidiaries.
(c) Self Dealing Claims Prohibited. No Person shall be entitled to
indemnification under this Section 6.06 if such Person is seeking
indemnification based on a claim (other than a claim arising as a supplier to,
customer of or borrower from, CSBT) brought by such Person or by an entity of
which such Person is a general partner, executive officer, director, trustee,
beneficiary or controlling Person, unless such Person has irrevocably waived
any right to participate in any damage or other award to such claiming party
or other entity in any such action, suit or proceeding.
<PAGE> A-51
ARTICLE VII
DEFINITIONS
Section 7.01 Definitions. As used in this Agreement, the following terms
shall have the indicated meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
Acquisition Transaction means (i) a merger, consolidation or other
similar transaction with UBI or CSBT, (ii) any sale, lease or other
disposition of 25 percent or more of the assets of UBI or CSBT, taken as
a whole, in a single transaction or series of transactions, or (iii) any
tender or exchange offer for 25 percent or more of the outstanding
shares of UBI Common Stock or CSBT Common Stock or the economic value of
equity interests therein.
Affiliate means, with respect to any Person, any Person that
directly, or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person and,
without limiting the generality of the foregoing, includes any executive
officer, director or 5% equity owner of such Person and any Affiliate
of such executive officer, director or 5% equity owner.
Agreement means this Affiliation Agreement, and any subsequent
modification, amendment or supplement hereto or restatement hereof.
AMEX means the American Stock Exchange.
Applications means the applications for regulatory approval or
consent which are required by the transactions contemplated hereby,
including but not limited to, applications to be filed with the FRB,
FDIC and Vermont Department.
BHC Act means the federal Bank Holding Company Act of 1956, as
amended.
Blue Sky Laws means the laws of any state or foreign jurisdiction
regulating the offer or sale of securities.
Certificate of Merger means the certificate of merger to be
executed by Interim Bank, CSBT and UBI and to be filed with the Vermont
Department and in the Office of the Vermont Secretary of State in
accordance with the VBL.
<PAGE> A-52
Closing Date means the date upon which the Merger is consummated,
which shall be the fifth business day after the last condition precedent
pursuant to this Agreement has been fulfilled or waived, or such other
date as UBI and CSBT shall agree upon.
Code means the Internal Revenue Code of 1986, as amended.
Confidentiality Agreements means the letter agreements between UBI
and CSBT dated December 17, 1998 and January 7, 1999 relating to the
confidentiality of certain information.
Continuing Bank means the bank resulting from the merger of
Interim Bank with and into CSBT, under the Articles of Association and
name of CSBT.
CSBT Affiliate Letters has the meaning assigned to such term in
Section 1.03(a).
CSBT Common Stock means the common stock of CSBT described in
Section 2.02(a).
CSBT Disclosure Schedules means the disclosure schedules delivered
by CSBT to UBI pursuant to Article II of this Agreement.
CSBT D&O Insurance has the meaning assigned to such term in
Section 6.06(b).
CSBT Financials means (i) the audited financial statements of CSBT
as of December 31, 1996 and 1997 and for the three years ended December
31, 1997 (copies of which have been delivered to UBI), and (ii) the
unaudited interim financial statements of CSBT as of March 31, June 30
and September 30, 1998 and (iii) when available, (A) the audited
financial statements of CSBT as of December 31, 1998 and for the three
years then ended and (B) the unaudited interim financial statements of
CSBT for each calendar quarter ending after December 31, 1998 and prior
to the Closing Date.
CSBT Plan means each bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay, medical, life
or other insurance, profit-sharing, or pension plan, program, agreement
or arrangement, and each other employee benefit plan, program, agreement
or arrangement, sponsored, maintained or contributed to or required to
be contributed to by CSBT for the benefit of any employee or director or
former employee or former director of CSBT. The term shall also be
deemed to
<PAGE> A-53
include, as the context may require, the defined benefit pension plan of
CSBT terminated as of February 15, 1996.
CSBT Regulatory Reports means the Call Reports, annual reports on
Form F-2 and quarterly reports on Form F-4, together with accompanying
schedules, filed by CSBT with any Regulatory Authority, for each
calendar quarter or year, beginning with the year ended December 31,
1996, through the Closing Date.
CSBT Shareholder Agreement means the Agreement referred to in
Section 1.02(a), to be executed by the CSBT directors, executive
officers and 5% or more shareholders of CSBT, the form of which is
attached hereto as Exhibit B.
Effective Time means the time and date specified in the
Certificate of Merger.
Environmental Law means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction
or agreement with any Regulatory Authority that administers any
Environmental Law relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air,
water vapor, surface water, groundwater, drinking water supply, surface
soil, subsurface soil, plant and animal life or any other natural
resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any
material containing any such substance as a component.
ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
Exchange Act means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated from time to time
thereunder.
Exchange Ratio means the ratio at which CSBT Common Stock will be
converted into and exchanged for shares of UBI Common Stock, as provided
in Article II of the Plan of Merger.
FDIA means the Federal Deposit Insurance Act, as amended, and the
rules and regulations promulgated from time to time thereunder.
<PAGE> A-54
FDIC means the Federal Deposit Insurance Corporation.
FRB means the Board of Governors of the Federal Reserve System, or
its delegate, the Federal Reserve Bank of Boston.
GAAP means generally accepted accounting principles as in effect
from time to time.
IRS means the Internal Revenue Service.
Interim Bank means Union Interim Bank, a Vermont-chartered, FDIC-
insured commercial bank having full trust powers, to be organized by
UBI solely for the purpose of effecting the Merger.
Joint Proxy Statement/Prospectus means the joint proxy statement/
prospectus, together with any exhibits, appendices, supplements or
amendments thereto, to be sent to holders of UBI Common Stock and CSBT
Common Stock in connection with the transactions contemplated by this
Agreement.
Material Adverse Change means, with respect to UBI or CSBT, any
material adverse change in its assets, financial condition, results of
operations, or future prospects, but shall not be deemed to include the
impact of (i) changes in banking and similar laws of general
applicability to all depository institutions or their holding companies
or interpretations thereof by courts or other governmental authorities,
(ii) changes in generally accepted accounting principles or regulatory
accounting requirements generally applicable to financial institutions
and their holding companies, (iii) actions or omissions of a party
hereto taken with the prior written consent of the other party, and (iv)
the transaction costs associated with the Merger and compliance by
either party with the provisions of the Transaction Documents. With
respect to UBI, a Material Adverse Change shall mean a Material Adverse
Change to UBI and UB, taken as a whole.
Merger means the merger of the Interim Bank with and into CSBT,
with CSBT surviving such merger, in accordance with this Agreement and
the Plan of Merger.
Person means any individual, corporation, partnership, joint
venture, association, trust or "group" (as that term is defined under
the Exchange Act).
Plan of Merger has the meaning given to that term in paragraph 1
of the introductory section of this Agreement under the caption
"BACKGROUND".
<PAGE> A-55
Registration Statement means the registration statement on Form S-
4, including any pre-effective or post-effective amendments or
supplements thereto, as filed with (i) the SEC under the Securities Act
with respect to the UBI Common Stock to be issued in connection with the
transactions contemplated by this Agreement and the solicitation of
proxies by UBI in connection with the transactions contemplated by this
Agreement and (ii) the FDIC with respect to the solicitation of proxies
by CSBT in connection with the transactions contemplated by this
Agreement.
Regulatory Approvals means the approvals and consents of all
Regulatory Authorities having jurisdiction over the Merger or related
matters, including formation of the Interim Bank and UBI's acquisition
of control of CSBT.
Regulatory Authority means any federal or state banking
regulatory or supervisory agency or department, including without
limitation the FRB, the FDIC, the VBISHCA or the respective staffs
thereof.
REO means real property assets acquired as a result of
foreclosure, deed in lieu of foreclosure, or any other method in
satisfaction of indebtedness.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended, and
the rules and regulations promulgated from time to time thereunder.
Securities Documents means all registration statements, schedules,
statements, forms, reports, proxy materials, and other documents
required to be filed under the Securities Laws.
Securities Laws means the Securities Act and the Exchange Act and
applicable Blue Sky laws.
Stock Registration Agreement means the Agreement referred to in
Section 1.04, the form of which is attached as Exhibit F.
Subsidiary means any corporation, 50% or more of the capital stock
of which is owned, either directly or indirectly, by another entity,
except any corporation the stock of which is held in the ordinary course
of the lending activities of a bank.
<PAGE> A-56
Tax or Taxes means any federal, state, local or foreign income,
gross receipts, franchise, estimated, alternative minimum, sales, use,
transfer, registration, value added, excise, natural resources,
severance, stamp, occupation, premium, windfall profit, environmental,
customs, duties, real property, personal property, capital stock,
intangibles, social security, unemployment, medicare, disability,
payroll, license, employee or other tax or levy, of any kind whatsoever,
including any interest, penalties or additions to tax in respect of the
foregoing.
Tax Return means any return, declaration, report, claim for
refund, information return or other document (including any related or
supporting estimates, elections, schedules, statements or information)
filed or required to be filed in connection with the determination,
assessment or collection of any Tax or the administration of any laws,
regulations or administrative requirements relating to any Tax.
Transaction Documents means this Agreement, the Confidentiality
Agreements, the Plan of Merger, the CSBT Affiliate Letters, the UBI
Affiliate Letters, the CSBT Shareholder Agreement, the UBI Shareholder
Agreement, the Stock Registration Agreement, and each other agreement,
document or instrument executed in connection herewith or therewith.
UB means Union Bank, a Vermont chartered commercial bank and
wholly-owned subsidiary of UBI, with principal offices in Morrisville,
Vermont.
UBI Affiliate Letters has the meaning assigned to such term in
Section 1.03 (b).
UBI Common Stock has the meaning given to that term in Section
3.02(a) of this Agreement.
UBI Disclosure Schedules means the disclosure schedules delivered
by UBI to CSBT pursuant to Article III of this Agreement.
UBI Financials means (i) the audited consolidated financial
statements of UBI as of December 31, 1996 and 1997 and for the three
years ended December 31, 1997 (copies of which have been delivered to
CSBT), (ii) the unaudited interim consolidated financial statements of
UBI as of March 31, June 30 and September 30, 1998 and (iii) when
available, (A) the audited consolidated financial statements of UBI as
of December 31, 1998 and for the three years then ended, and (B) the
unaudited interim consolidated financial statements of UBI for each
calendar quarter ending after December 31, 1998 and prior to the Closing
Date.
<PAGE> A-57
UBI Plan means each bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay, medical, life
or other insurance, profit-sharing, or pension plan, program, agreement
or arrangement, and each other employee benefit plan, program, agreement
or arrangement, sponsored, maintained or contributed to or required to
be contributed to by UBI or UB for the benefit of any employee or
director or former employee or former director of UBI or UB.
UBI Regulatory Reports means the Annual Reports on Form Y-6, the
quarterly reports on Form Y-9C and the Call Reports of UB, together with
all accompanying schedules, filed by UBI or UB, as the case may be, with
any Regulatory Authority, for each calendar quarter or year, beginning
with the year ended December 31, 1996.
UBI Shareholder Agreement means the Agreement referred to in
Section 1.02(b), to be executed by the UBI directors, executive officers
and 5% or more shareholders of UBI, the form of which is attached hereto
as Exhibit C.
Vermont Department means the Vermont Department of Banking,
Insurance, Securities and Health Care Administration.
VBL means the banking laws of the State of Vermont, codified in
Title 8 of the Vermont Statutes Annotated.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Expenses
Except as provided in Section 6.02(b) above, each party hereto shall
bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated in this Agreement, including fees and expenses of
its own financial consultants, accountants and counsel, except that UBI and
CSBT each shall bear and pay 50% of all printing and mailing costs relating to
the Registration Statement and the Proxy Statement.
Section 8.02 Entire Agreement
This Agreement and the other Transaction Documents contain the entire
agreement between the parties with respect to the transactions contemplated
hereunder and thereunder and supersede all prior arrangements or
understandings with respect thereto, written or oral, other than documents
referred to herein or therein. The terms and conditions
<PAGE> A-58
of the Transaction Documents shall inure to the benefit of and be binding upon
the parties hereto and thereto and their respective successors. Nothing in
this Agreement or in any of the other Transaction Documents, expressed or
implied, is intended to confer upon any party, other than the parties hereto
and thereto, and their respective successors, any rights, remedies,
obligations or liabilities.
Section 8.03 No Third Party Beneficiaries
Nothing in this Agreement is intended to confer, expressly or by
implication, upon any other person any rights or remedies under or by reason
of this Agreement except as reflected in Section 4.10 and 4.11.
Section 8.04 No Assignment
No party hereto may assign any of its rights or obligations under this
Agreement to any other person.
Section 8.05 Notices
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent
by facsimile transmission or overnight express or by registered or certified
mail, postage prepaid, addressed as follows:
If to UBI:
Mr. Kenneth D. Gibbons, President
The Union Bank
20 Main St., P.O. Box 667
Morrisville, VT 05661-0667
Facsimile No.: (802) 888-7697
With a required copy to:
Primmer & Piper, P.C.
52 Summer St., PO Box 159
St. Johnsbury, VT 05819
Attention: Denise J. Deschenes, Esq.
Facsimile No.: (802) 748-3976
<PAGE> A-59
If to CSBT:
Jerry S. Rowe, President
Citizens Savings Bank & Trust Company
61 Railroad Street, PO Box 219
St. Johnsbury, Vermont 05819
Facsimile No.: (802) 748-1183
With a required copy to:
Edward R. Zuccaro, Esq.
Zuccaro, Willis & Bent
P.O. Box 97, 87 Main Street
St. Johnsbury, VT 05819
Facsimile No.: (802) 748-1118
Section 8.06 No Employment Solicitation
If this Agreement is terminated, the parties hereto agree that, for a
period of one year subsequent to such termination (i) neither of the parties
shall, without first obtaining the prior written consent of the other,
directly or indirectly, actively solicit the employment of any current
director, officer or employee of the other party and (ii) neither party will
actively solicit business relationships with clients of the other party solely
as a result of review of the information contemplated in Section 4.05 or
otherwise.
Section 8.07 Captions
The captions contained in this Agreement are for reference purposes only
and are not part of this Agreement.
Section 8.08 Counterparts
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 8.09 Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Vermont.
<PAGE> A-60
Section 8.10 Construction and Interpretation
This Agreement shall be deemed to have been prepared jointly by the
parties hereto and any uncertainty or ambiguity existing herein shall not be
interpreted against any party by reason of its drafting of this Agreement, but
shall be interpreted according to the application of rules of interpretation
for arms' length agreements.
Section 8.11 Effect of Investigations
No investigation by the parties hereto made heretofore or hereafter,
whether pursuant to this Agreement or otherwise shall affect the
representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation,
subject, however, to Section 6.03 hereof.
Section 8.12 Severability
Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, then such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or other remaining provisions of the Agreement.
Section 8.13 Amendment or Supplement
Subject to the last sentence of this Section 8.12, this Agreement, the
Plan of Merger and other Transaction Documents may be amended or supplemented
at any time by mutual agreement of the parties hereto or thereto, as the case
may be. Any such amendment or supplement must be in writing and approved by
the respective Boards of Directors and/or officers authorized thereby.
Notwithstanding the foregoing, after approval of this Agreement and the Merger
by the shareholders of CSBT, no amendment shall be made to this Agreement or
the Plan of Merger which reduces or modifies in any material respect the
consideration to be received by the holders of CST Common Stock without the
further approval of such shareholders.
<PAGE> A-61
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed in counterparts by their
duly authorized officers and their corporate seal to be hereunto affixed and
attested by their officers thereunto duly authorized, all as of the day and
year first above written.
Attest: UNION BANKSHARES, INC.
/s/ Peter M. Haslam, Secretary By: /s/ Kenneth D. Gibbons
- -------------------------------- -------------------------
Kenneth D. Gibbons,
(SEAL) President and Chief Executive Officer
Attest: CITIZENS SAVINGS BANK AND TRUST COMPANY
/s/ Dennis J. Lamothe, Treasurer By: /s/ Jerry S. Rowe
- -------------------------------- -----------------------
Jerry S. Rowe
(SEAL) President and Chief Executive Officer
<PAGE> A-62
APPENDIX B
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, (the "Plan of Merger") by and among Citizens
Savings Bank and Trust Company, a Vermont-chartered commercial bank with
principal offices in St. Johnsbury, Vermont ("CSBT") and Union Interim Bank,
a newly-organized Vermont-chartered commercial bank ("Interim Bank"), and
joined in by Union Bankshares, Inc., a Vermont corporation with principal
offices in Morrisville, Vermont ("UBI").
This Plan of Merger is being entered into pursuant to an Affiliation Agreement
by and between CSBT and UBI, dated as of February 16, 1999 (as amended and in
effect from time to time, the "Agreement"). The Agreement provides for the
affiliation of CSBT and UBI to be accomplished through the merger of Interim
Bank, which is a wholly-owned subsidiary of UBI, with and into CSBT on the
terms set forth below.
All capitalized terms (in their singular or plural forms, as applicable) used
herein without definition are used with the meanings ascribed thereto in the
Agreement.
In consideration of the premises, and the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.01 Merger of Interim Bank into CSBT
In accordance with the provisions of this Plan of Merger and the Vermont
banking laws codified at Title 8 of the Vermont Statutes Annotated, [SECTION]
[SECTION] 1 et seq. ("VBL"), at the Effective Time (as hereinafter defined),
(i) Interim Bank shall be merged with and into CSBT (the "Merger") under the
Articles of Association (as amended and restated herein) and By-Laws of CSBT
and (ii) the separate corporate existence of Interim Bank shall thereupon
cease. In accordance with the provisions of Chapter 55, subchapter 5 of the
VBL, CSBT shall be the surviving corporation in the Merger (hereinafter
sometimes referred to as the
<PAGE> B-1
"Continuing Bank") and shall continue its corporate existence and banking
business at its main office, branch offices and other authorized business
locations.
1.02 Effective Time; Conditions to the Merger
If all of the conditions precedent set forth in Article V of the
Agreement have been satisfied or waived, and this Plan of Merger has not
heretofore been terminated under Section 3.01 hereof, a Certificate of Merger
with respect to the Merger shall be prepared by Interim Bank and CSBT and
filed by CSBT and recorded pursuant to [SECTION][SECTION] 1009 and 1010 of the
VBL (the "Certificate of Merger"). The Merger shall become effective at, and
the Effective Time shall be, the date and time specified in the Certificate of
Merger (such date and time are referred to herein as the "Effective Time").
1.03 Authorized Capital Stock of Continuing Bank
As of the Effective Time, the Continuing Bank shall be authorized to
issue that number of shares of $1.00 par value voting common stock, which
Interim Bank is authorized to issue immediately prior to the Effective Time.
1.04 Purposes and Powers of Continuing Bank
As of the Effective Time, the purposes and powers of the Continuing Bank
shall be as stated in the Articles of Association of the Continuing Bank
attached hereto as Appendix A, and as otherwise provided by law from time to
time for Vermont chartered commercial banks exercising full trust powers.
1.05 Effect of the Merger
(a) Continuation of Rights, Franchises, etc. In accordance with Chapter
55, subchapter 5 of the VBL, at the Effective Time, the corporate existence of
Interim Bank shall be merged into and continued in CSBT as the Continuing
Bank. The business of the Continuing Bank shall be that of a commercial bank
with full trust powers chartered under the laws of the State of Vermont and
shall be conducted by the Continuing Bank at the main office of CSBT, located
at 61 Railroad Street, St. Johnsbury, Vermont, and at CSBT's legally
established branches, in St. Johnsbury and Lyndonville, and at other
authorized locations. Such business shall be conducted by the Continuing Bank
under the name "Citizens Savings Bank and Trust Company." All rights, assets,
franchises, powers, privileges and interests of CSBT and Interim Bank in and
to every type of tangible and intangible property (real, personal and mixed)
and choses in action shall be deemed to be vested in the Continuing
<PAGE> B-2
Bank by virtue of the Merger without any deed or other instrument of transfer,
and the Continuing Bank without any order or other action on the part of any
court or otherwise, shall hold and enjoy all such rights, assets, franchises,
powers, privileges, and property interests, including appointments,
designations, nominations, and all other rights, interests and legal
capacities, as principal, agent, trustee, executor, administrator, registrar
of stocks and bonds, guardian of estates, custodian, depositary, assignee, and
every other fiduciary or other legal capacity, in the same manner and to the
same extent as such rights, assets, franchises, powers, privileges and
property interests were held or enjoyed by CSBT and Interim Bank immediately
prior to the Effective Time.
(b) Assumption of Liabilities. At the Effective Time, the Continuing
Bank shall be deemed to have assumed and be liable for all liabilities and
obligations of CSBT and Interim Bank. Without limiting the generality of the
foregoing, all deposits, debts, liabilities, obligations, commitments,
guarantees and contracts of CSBT and Interim Bank, matured or unmatured
whether accrued, absolute, contingent or otherwise, and whether or not
reflected or reserved against on the balance sheets, books of account or
records of CSBT, shall become those of the Continuing Bank and shall not be
released or impaired by the Merger, and all rights of creditors or obligees,
and all liens on property, of CSBT and Interim Bank shall be preserved
unimpaired.
(c) Pending Actions or Proceedings. At the Effective Time, any action
or proceeding, whether civil, criminal or administrative, pending by or
against Interim Bank or CSBT shall be prosecuted as if the Merger had not
taken place, and the Continuing Bank shall be deemed substituted for CSBT or
Interim Bank, as the case may be, in such action or proceeding.
1.06 Further Assurances
If, at any time after the Effective Time, the Continuing Bank shall
consider or be advised that any deeds, bills of sale, assignments, assurances
or any other actions or things are necessary or desirable to vest, perfect or
confirm of record or otherwise in the Continuing Bank its right, title or
interest in, to or under any of the rights, franchises, properties or assets
of CSBT or Interim Bank to which the Continuing Bank has succeeded as a result
of, or in connection with, the Merger or otherwise to carry out this Plan of
Merger, the officers and directors of the Continuing Bank shall, and are
hereby authorized to, execute and deliver, in the name and on behalf of CSBT
and the Interim Bank or otherwise, all such deeds, bills of sale, assignments
and assurances and to take and do, in the name and on behalf of CSBT or the
Interim Bank or otherwise, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such
<PAGE> B-3
rights, franchises, properties or assets in the Continuing Bank, or otherwise
carry out the purposes and intent of this Plan of Merger.
1.07 Articles of Association and By-Laws
At the Effective Time, (i) the Articles of Association of the Continuing
Bank shall be those of CSBT, but shall be deemed amended and restated by
virtue of the Merger to read in full as set forth in Appendix A attached
hereto, and (ii) the By-Laws of Interim Bank, as then in effect, shall
become, without further action or writing, the By-Laws of the Continuing Bank,
until thereafter amended as provided therein or by law.
1.08 Directors and Officers
At the Effective Time, (i) the Board of Directors of the Continuing Bank
shall consist of those persons comprising the Board of Directors of CSBT
immediately prior to the Effective Time and, in addition, two individuals
designated by UBI pursuant to Section 4.11of the Agreement and (ii) the
officers of the Continuing Bank shall consist of those persons who were
officers of CSBT immediately prior to the Effective Time, each to hold office
in accordance with applicable law and the Articles of Association and By-Laws
of the Continuing Bank.
ARTICLE II
CONVERSION OF SHARES
2.01 Effect on Outstanding Shares.
(a) CSBT Common Stock. (i) By virtue of the Merger, automatically and
without any action on the part of the holder thereof, at the Effective Time,
each share of common stock of CSBT, par value $1.00 per share ("CSBT Common
Stock"), issued and outstanding immediately prior to the Effective Time (other
than (A) shares of Dissenting CSBT Shareholders, as defined in Section 2.05 of
this Plan of Merger, (B) any shares held directly or indirectly by UBI, except
in a fiduciary capacity or in satisfaction of a debt previously contracted,
and (C) any shares held as treasury stock) shall become and be converted into
and exchanged for 6.5217 shares of the common stock of UBI, par value $2.00
per share ("UBI Common Stock"); provided, however, that UBI shall not be
required to issue any fractional shares of UBI Common Stock, and in lieu
thereof, shall make the cash payment specified in Section 2.03(c) of this Plan
of Merger. The number of shares of UBI Common Stock into
<PAGE> B-4
which each share of CSBT Common Stock shall be converted is sometimes referred
to herein as the "Exchange Ratio."
(ii) As of the Effective Time, each share of CSBT Common Stock (if any)
(A) held either directly or indirectly by UBI or by Interim Bank (other than
in a fiduciary capacity or in satisfaction of a debt previously contracted),
or (B) held by CSBT as treasury stock, shall be cancelled, retired and cease
to exist, and no payment shall be made with respect thereto.
(b) Continuing Bank Common Stock. At the Effective Time, each share of
the $1.00 par value Common Stock of the Interim Bank issued and outstanding
immediately prior to the Effective Time shall become and be converted into
152,000 shares of the $1.00 par value Common Stock of the Continuing Bank.
(c) UBI Common Stock. All shares of UBI Common Stock issued and
outstanding immediately prior to the Effective Time (other than such shares
(if any) held directly or indirectly by CSBT, except in fiduciary capacity or
in satisfaction of a debt previously contracted) shall remain issued and
outstanding upon consummation of the Merger.
2.02 Anti-Dilution
In the event that, subsequent to the date of the Agreement but prior to
the Effective Time, the outstanding shares of UBI Common Stock or CSBT Common
Stock shall have been increased, decreased, changed into or exchanged for a
different number or kind of shares or securities through reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other like changes in UBI's or CSBT's capitalization, as the case
may be (a "Recapitalization"), then an appropriate and proportionate
adjustment shall be made to the Exchange Ratio so that each holder of CSBT
Common Stock shall receive under Section 2.01 hereof the number of shares of
UBI Common Stock (except for fractional shares) that such holder would have
held immediately following the Recapitalization if the Merger had occurred
immediately prior to the Recapitalization or the record date therefor, as
applicable. For purposes of this Section 2.02, the issuance of shares or
securities by UBI in connection with (i) UBI acquiring for fair value directly
or indirectly the stock or assets of any corporation, bank or other entity,
and (ii) the exercise of employee stock options outstanding on the date
hereof, shall not be deemed to be a "Recapitalization."
2.03 Exchange Procedures
<PAGE> B-5
(a) Surrender of CSBT Stock Certificates. Certificates which immediately
prior to the Effective Time represented outstanding shares of CSBT Common
Stock ("CSBT Certificates") shall on and after the Effective Time be deemed
for all purposes to represent the number of whole shares of UBI Common Stock
and right to fractional share payment into which the shares of CSBT Common
Stock represented by such certificate shall have been converted pursuant to
this Section 2.01, or in the case of Dissenting CSBT Shareholders, the right
to payment under [SECTION] 1006 of the VBL. CSBT Certificates shall be
exchangeable by the holders thereof in the manner provided in the transmittal
materials described below for new certificates representing the shares of UBI
Common Stock for which such shares have been exchanged ("UBI Certificates"),
together with a cash payment, without interest, for any fractional share.
(b) Issuance of UBI Stock Certificates. As promptly as practicable
after the Effective Time, the Exchange Agent shall send to each holder of
record of shares of CSBT Common Stock outstanding at the Effective Time
transmittal materials for use in exchanging the CSBT Certificates for UBI
Certificates. Upon surrender of a CSBT Certificate, together with a duly
executed letter of transmittal and any other required documents, the holder of
such CSBT Certificate shall be entitled to receive, in exchange therefor, a
UBI Certificate representing the number of whole shares of UBI Common Stock to
which such holder is entitled pursuant to Section 2.01(a) hereof, together
with the fractional share payment referred to in Section 2.03(c) below, and
such CSBT Certificate shall forthwith be cancelled. No dividend or other
distribution payable after the Effective Time with respect to UBI Common Stock
shall be paid to the holder of any unsurrendered CSBT Certificate until the
holder thereof surrenders such CSBT Certificate, at which time such holder
shall receive all dividends and distributions, without interest thereon,
previously payable with respect to UBI Common Stock but withheld from such
holder pursuant hereto. After the Effective Time, there shall be no transfers
on the stock transfer books (i) of CSBT of shares of CSBT Common Stock which
were issued and outstanding at the Effective Time and converted pursuant to
the provisions of this Article II, or (ii) of UBI as to shares of UBI Common
Stock issuable in the Merger but for which UBI Certificates have not been
issued due to the shareholder's failure to tender his or her CSBT Certificates
for exchange in the Merger. If, after the Effective Time, CSBT Certificates
are presented for transfer to the Continuing Bank, they shall be cancelled and
exchanged for the whole shares of UBI Common Stock deliverable in respect
thereof, and the fractional share payment, as determined in accordance with
the provisions and procedures set forth in this Article II.
(c) Cancellation of Fractional Shares. In lieu of the issuance of
fractional shares of UBI Common Stock pursuant to Section 2.01 of this Plan of
Merger, a cash payment, without interest, will be paid to the holders of CSBT
Common Stock in respect of any
<PAGE> B-6
fractional share of UBI Common Stock that would otherwise be issuable, and the
amount of such cash adjustment shall be equal to an amount in cash determined
by multiplying such holder's fractional interest by $23.00. For purposes of
determining whether, and in what amounts, a particular holder of CSBT Common
Stock would be entitled to receive cash adjustments under this Section
2.03(c), shares of record held by such holder and represented by two or more
CSBT Certificates shall be aggregated.
(d) CSBT Certificates after the Merger. After the Effective Time,
holders of CSBT Certificates shall cease to be, and shall have no rights as,
shareholders of CSBT, other than to receive whole shares of UBI Common Stock
into which such shares have been converted in the Merger and any fractional
share payment pursuant to the provisions hereof. Notwithstanding the
foregoing, neither UBI nor CSBT nor any other person shall be liable to any
former holder of shares of CSBT Common Stock who fails to tender his or her
CSBT Certificates for exchange, for any shares of UBI Common Stock or any
dividends or distributions with respect thereto properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(e) Lost, Stolen or Destroyed CSBT Certificates. In the event any CSBT
Certificate shall have been lost, stolen or destroyed, upon receipt of
appropriate evidence as to such loss, theft or destruction and as to the
ownership of such CSBT Certificate by the person claiming such Certificate to
be lost, stolen or destroyed, and the receipt by UBI of appropriate and
customary indemnification, UBI will issue in exchange for such lost, stolen or
destroyed CSBT Certificate a UBI Certificate representing whole shares of UBI
Common Stock and shall tender the fractional share payment, if any,
deliverable in respect thereof as determined in accordance with this Article
II.
(f) Certificates Issued in Different Names. If any UBI Certificate is
to be issued in a name other than that in which the CSBT Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the CSBT Certificate so surrendered shall be properly
endorsed (or accompanied by an appropriate instrument of transfer) and
otherwise in proper form for transfer (including, but not limited to, that the
signature of the transferor shall be properly guaranteed by a commercial bank,
trust company, member firm of the NASD or other eligible guarantor
institution), and that the person requesting such exchange shall pay to the
Exchange Agent (as such term is defined in Section 2.04 hereof) in advance any
transfer or other taxes required by reason of the issuance of a UBI
Certificate in any name other than that of the registered holder of the CSBT
Certificate surrendered, or required for any other reason, or shall establish
to the satisfaction of the Exchange Agent that such tax has been paid or that
no such tax is payable.
<PAGE> B-7
2.04 Exchange Agent
Prior to the Effective Time, UBI shall appoint an agent (which may be
its wholly-owned subsidiary, Union Bank) for the purpose of exchanging UBI
Certificates for CSBT Certificates and remitting the cash payment in lieu of
fractional shares as provided herein (the "Exchange Agent"). Promptly
following consummation of the Merger, UBI shall issue and deliver to the
Exchange Agent appropriate UBI Certificates representing the whole shares of
UBI Common Stock issuable in the Merger and shall pay to the Exchange Agent
such amount of cash as shall be required to be delivered to holders of shares
of CSBT Common Stock in lieu of fractional shares of UBI Common Stock, as
provided in this Article II.
2.05 Dissenters' Rights
Any holder of CSBT Common Stock who (i) has voted against the Merger at
the meeting of shareholders of CSBT called for the purpose of approving the
Merger, and (ii) has given notice in writing to CSBT within five (5) days
after such meeting that he or she dissents from the Merger, and that he or she
wishes to exercise his or her rights of appraisal (a "Dissenting CSBT
Shareholder"), shall be entitled to receive the value of his or her stock in
cash, in accordance with the provisions of [SECTION] 1006 of the VBL.
ARTICLE III
AMENDMENT AND TERMINATION
3.01 Termination
Notwithstanding the approval and adoption of this Plan of Merger by the
directors and shareholders of CSBT and UBI, this Plan of Merger shall
terminate forthwith in the event that the Agreement shall have been terminated
as therein provided. In the event of the termination of this Plan of Merger as
provided above, this Plan of Merger shall forthwith become null and void and
there shall be no liability on the part of any of the parties hereto, except
as otherwise provided in the Agreement.
3.02 Amendment
Subject to the last sentence of this Section 3.02, this Plan of Merger
may be amended or supplemented at any time by mutual agreement of the parties
hereto. Any such amendment must be in writing and approved by the parties'
respective Boards of Directors
<PAGE> B-8
and/or officers authorized thereby. Notwithstanding the foregoing, after
approval of this Plan of Merger by the shareholders of CSBT, no amendment
shall be made to the Plan of Merger which reduces or modifies in any material
respect the consideration to be received by the holders of the CSBT Common
Stock without the further approval of such shareholders.
ARTICLE IV
MISCELLANEOUS
4.01 Construction and Interpretation
In the event of any interpretational ambiguity, this Plan of Merger (i)
shall be construed to the extent possible in a manner which effects fully the
purposes and intent of the Agreement and (ii) shall be deemed to have been
prepared jointly by the parties hereto and any uncertainty of ambiguity
existing herein shall not be interpreted against any party by reason of its
drafting of this Plan of Merger, but shall be interpreted according to the
application of rules of interpretation for arms' length agreements.
4.02 Counterparts
This Plan of Merger may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by both of the
parties and delivered to each other.
4.03 Governing Law
This Plan of Merger shall be governed by and construed in accordance
with the laws of the State of Vermont.
<PAGE> B-9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of
Merger to be duly executed and delivered as a sealed instrument as of this
____ day of ___________, 1999.
Attest: UNION BANKSHARES, INC.
By:
- ------------------------ ------------------------------------
Secretary Kenneth D. Gibbons,
(SEAL) President and Chief Executive Officer
Attest: CITIZENS SAVINGS BANK AND TRUST COMPANY
By:
- ------------------------ ------------------------------------
Secretary Jerry S. Rowe
(SEAL) President and Chief Executive Officer
Attest: UNION INTERIM BANK (In Organization)
By:
- ------------------------ ------------------------------------
Secretary Kenneth D. Gibbons, President
(SEAL)
<PAGE> B-10
Appendix A
---------
AMENDED AND RESTATED
ARTICLES OF ASSOCIATION
OF
CITIZENS SAVINGS BANK AND TRUST COMPANY
ARTICLE I
Name
----
The name of the corporation is Citizens Savings Bank and Trust Company
(hereinafter called the "Bank").
ARTICLE II
Initial Registered Office and Agent
-----------------------------------
The initial registered office of the Bank is located at 61 Railroad Street,
Town of St. Johnsbury, County of Caledonia, State of Vermont, and its initial
registered agent at such address is Jerry S. Rowe.
ARTICLE III
Operating Year; Duration
------------------------
The operating year shall be the calendar year and the period of duration shall
be perpetual.
ARTICLE IV
Purposes
--------
The purposes of the Bank are to carry on and conduct any lawful business or
activity for which commercial banks and trust companies may be organized under
the laws of the State of Vermont, as in effect from time to time. Without
limiting the generality of the foregoing, such purposes shall include the
following:
1. To receive money on deposit or in trust, at such rate of interest
and on such terms as may be agreed upon and as otherwise permitted
by law, and to transact a general banking business;
2. To act as executor of a will, codicil or writing testamentary, as
administrator with will annexed, as administrator of a person
deceased, as receiver, as assignee,
<PAGE> B-11
as custodian, trustee or as guardian, and to accept and execute all
trusts of every description, not inconsistent with the laws of this
state, which may be committed to it by any person or corporation,
or by orders of any court of competent jurisdiction; and, for these
purposes, to take and accept any grant, assignment, transfer,
deposit, devise or bequest, of real or personal estate, and hold
the same on such terms as may be declared, established, agreed
upon, or imposed by law; and to act in any and all capacities, and
to exercise any and all powers, as may be vested in corporate
fiduciaries under applicable provisions of law;
3. To act as agent for the management of any property, real or
personal, and for the collection of rents, interest and other
income;
4. To accept deposits where public officers or municipal or private
corporations are permitted by law to deposit money in a bank; and
such deposits may be made by such officers or corporations;
5. To extend secured and unsecured credit on such terms and conditions
as the Bank deems advisable and as may be permitted by law, and to
issue letters of credit and guarantees and other contingent credit
obligations;
6. To act as agent for the purpose of registering or transferring the
certificates of stock, bonds or other evidences of indebtedness of
any corporation, municipality, state, or public authority; and for
collection of dividends or interest on the same; and
7. To carry on the business of a safe-deposit company with all powers
necessary or proper for that purpose.
ARTICLE V
Capital Stock
-------------
The Bank shall have authority to issue 304,000 shares of nonassessable common
stock, $1.00 par value per share. Each holder of common stock of the Bank
shall be entitled to one vote per share held on all matters to come before the
shareholders.
ARTICLE VI
Board of Directors
------------------
The Board of Directors of the Bank shall consist of not less than seven nor
more than eleven individuals, the exact number to be fixed from time to time
by vote of the shareholders or by resolution of the Board of Directors.
Directors of the Bank shall be elected annually by the shareholders.
<PAGE> B-12
APPENDIX C
__________, 1999
The Board of Directors
Union Bankshares Inc.
Main Street
Morrisville, Vermont 05661
SUBJECT: Financial Evaluation Regarding the Fairness, From a Financial
Point of View, of the Conversion of Stock Pursuant to a Proposed
Merger Between Union Interim Bank (a to be created subsidiary of
Union Bankshares, Inc.) and Citizens Savings Bank & Trust
Company
To the Members of the Board of Directors:
You have retained Bank Analysis Center, Inc. ("Bank Analysis") for the
purpose of rendering a financial evaluation concerning the fairness, from a
financial point of view, to the shareholders of Union Bankshares, Inc.
("Union"), of the financial terms of a plan of merger (the "Merger"),
between Union Interim Bank, a newly-created merger subsidiary of Union,
and Citizens Savings Bank and Trust Company ("Citizens"). The Merger
proposes the conversion of Citizens common stock ($1.00 par value) into
shares of Union common stock ($2.00 par value) at a conversion ratio of
6.5217 shares of Union common stock for each share of the common stock of
Citizens.
In connection with providing Union with an opinion of fairness with respect
to the Merger consideration, from a financial point of view, Bank Analysis
has examined and relied upon, among other things: (1) certain financial
reports filed with the Federal Deposit Insurance Corporation by Union and
Citizens for the quarter ended March 31, 1999 and for the three calendar
years ended December 31, 1998 and (2) annual reports to shareholders for
the two calendar years ended December 31, 1998. In addition, Bank Analysis
has relied upon and examined (3) recent merger or comparable transactions
between other banking institutions, (4) stock market trends of the banking
industry on a state-wide and national basis, (5) various financial and
other information developed by Bank Analysis or supplied to Bank Analysis
by senior management of both Union and Citizens, including (5a) the 1999
operating budgets and future year financial projections of Union and
Citizens, and (5b) various schedules of non-performing assets and (5c)
certain policies and procedures including asset/liability management and
loan policies, and (6) the results of discussions and information provided
to Bank Analysis by senior management and members of the Board of
<PAGE> C-1
Union Bankshares Inc.
Fairness Opinion
_________________, 1999
Directors of Union relating to the respective management, operating
history, and current and future business prospects of both Union and
Citizens. Bank Analysis (7) has also considered the current financial
condition and operating performance of Union and Citizens and the projected
financial condition and operating performance of Union and Citizens and
(8) has reviewed the Affiliation Agreement and its Exhibits (together, the
"Agreement").
In determining the fairness of the proposed conversion ratio, from a
financial point of view, to the shareholders of Union, Bank Analysis has
based its evaluation on certain generally accepted principles of investment
analysis customary in the investment banking and consulting professions as
applied to the banking industry.
In conducting its review and arriving at its opinion, Bank Analysis has a
relied upon the accuracy and completeness of the financial and other
information provided to it. Bank Analysis has not attempted to verify such
information beyond reviewing the information mentioned above. Further Bank
Analysis has not verified, appraised, or otherwise evaluated the assets and
liabilities of Union or Citizens. Bank Analysis assumes no responsibility
for the accuracy and completeness of the financial information and other
information it has relied upon.
In reliance upon and subject to the foregoing, Bank Analysis is of the
opinion that, as of the date hereof and based upon the terms of the
Agreement, the conversion ratio is fair, from a financial point of view, to
the current shareholders of Union. In rendering this fairness opinion,
Bank Analysis has evaluated, (1) the relative nominal and tangible capital
contributions of both Union and Citizens to the proposed Merger, (2) the
relative contributions of current and projected net earnings of Union and
Citizens, (3) the price paid per share of common stock by Union to Citizens
and (4) the probable future market performance of the common stock of both
Union and Citizens.
This opinion does not represent investment advice or a recommendation to
the current shareholders of Union or any other party regarding the
valuation of the common shares of Union or Citizens for potential purchase
as an investment.
We hereby consent to the inclusion of this opinion letter as Appendix C to
the Joint Proxy Statement/ Prospectus of Union and Citizens included in
Union's Registration Statement on Form S-4 and to all references to our
firm and such opinion in the Joint Proxy Statement/ Prospectus.
Sincerely yours,
Bank Analysis Center Inc.
<PAGE> C-2
APPENDIX D
____________, 1999
Board of Directors
Citizens Savings Bank & Trust Company
364 Railroad Street
St. Johnsbury, VT 05819-1610
Members of the Board:
You have requested our opinion as to the fairness to the stockholders of
Citizens Savings Bank & Trust Company, St. Johnsbury, Vermont ("Citizens"),
from a financial point of view, of the terms of the Proposed Merger Plan (the
"Merger") of Citizens with Union Interim Bank, a newly-created merger
subsidiary of Union Bankshares, Inc. ("Union"), a Vermont corporation.
Shareholders of Citizens who do not exercise their right to dissent will
receive the per share merger consideration which will be payable in common
stock of Union. The conversion ratio will be 6.5217 shares of Union common
stock for each share of Citizens common stock.
In connection with its opinion, HAS, among other things: (1) reviewed
Citizens' Annual Reports and related audited financial information for the
three fiscal years ended December 31, 1998; (2) reviewed Union's Annual
Reports and related audited financial information for the three fiscal years
ended December 31, 1998; (3) reviewed certain limited financial information
relating to the respective businesses, earnings, assets and prospects of
Citizens and Union furnished to HAS by senior management of Citizens and Union
as well as projected cost savings and related expenses expected to result from
the Merger furnished to it by senior management of Citizens and Union; (4)
conducted certain limited discussions with members of senior management of
Citizens and Union concerning the respective businesses, financial condition,
earnings, assets, liabilities, operations, regulatory condition, contingencies
and prospects of Citizens and Union and their respective views as to the
future financial performance of Citizens, Union and the Combined Company, as
the case may be, following the Merger; (5) reviewed the historical market
prices and trading activity for Citizens and Union Common Stock and compared
them with that of certain publicly traded companies which HAS deemed to be
relevant; (6) compared the respective results of operations of Citizens and
Union with those of certain companies which HAS deemed to be relevant; (7)
compared the proposed financial terms of the Merger contemplated by the
Agreement with the financial terms of certain other mergers and acquisitions
which HAS deemed to be relevant; (8) reviewed the
<PAGE> D-1
Board of Directors
Citizens Savings Bank & Trust Company -2- _______, 1999
amount and timing of the expected savings following the Merger as prepared,
and discussed with it; (9) considered, based upon information provided by
Union's senior management, the pro forma impact of the Merger on the earnings
and book value per share, consolidated capitalization and certain balance
sheet and profitability ratios of Union; (10) reviewed the Agreement; and (11)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as HAS deemed
necessary.
In conducting its review and arriving at its opinion, HAS relied upon
and assumed the accuracy and completeness of all of the financial and other
information provided to it or publicly available, and HAS did not attempt to
verify such information independently or undertake an independent appraisal of
the assets and liabilities of Citizens. HAS relied upon the accuracy and
opinion of the audit reports prepared by the independent accountants of
Citizens and Union. HAS assumes no responsibility for the accuracy and
completeness of the financial and other information relied upon.
We have acted as financial advisor to the Board of Citizens in
connection with the Merger and will receive a fee for this service.
In reliance upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the per share merger consideration to be received by
the shareholders of Citizens and the financial terms of the Merger are fair,
from a financial point of view, to the current shareholders of Citizens.
This letter is furnished to you in connection with the Merger and we
consent to its inclusion in Union's Registration Statement on Form S-4 and in
the Joint Proxy Statement/ Prospectus contained therein, and to all references
to our firm or this opinion contained in such Joint Proxy
Statement/Prospectus.
Sincerely,
HAS Associates, Inc.
<PAGE> D-2
APPENDIX E
DISSENTERS' RIGHTS OF APPRAISAL
TEXT OF 8 V.S.A. SECTION 1006
1006. Issue of stock after merger; dissenting stockholders
(a) Whenever any bank having capital stock enters into any merger, the
amendment to the articles by contract of merger may provide for the issuance
of new stock of the surviving bank, or of any other corporation, in exchange
for outstanding stock of any or all classes of any bank which is a party to
the merger. That stock may be either common or preferred, and with or without
par value.
(b) No dissenting stockholder may be compelled to accept new stock in
exchange for the stock owned by him but shall be entitled to receive the value
of his stock in cash, if demanded within five days of the stockholders' vote
authorizing the merger. That value may be fixed by agreement approved by the
commissioner. In case of disagreement, or the failure of the commissioner to
approve, any such dissenting stockholder may have the value of his stock fixed
upon application to the superior court within and for the county where the
bank issuing the stock has its principal place of business. For this and
other purposes of this section, the examination last previously made under the
direction of the commissioner shall be prima facie evidence of the value of
the assets, the amount of liabilities and the value of the stock, but this
presumption shall not prevent any other valuation by agreement or upon
evidence presented in court.
(c) A stockholder who has received value for his stock, as hereinbefore
provided, shall surrender the stock to the corporation. Thereupon, the board
of directors or trustees shall provide either for the cancellation of the
stock or for the issuance of a certificate in exchange and the sale of the new
stock at an amount not less than that paid to the dissenting stockholder on
account of the stock so exchanged.
<PAGE> E-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Statutory Provisions. The Vermont Business Corporation Act, codified at
Title 11A of the Vermont Statutes Annotated ("VBCA"), permits a corporation
to indemnify a director, officer, employee or agent of the corporation
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they
may be made a party by reason of their service in that capacity if: (1) the
indemnitee conducted himself or herself in good faith, (2) the indemnitee
reasonably believed that his or her conduct, in an official capacity with
the corporation, was in the best interests of the corporation and, in all
other cases, the conduct was at least not opposed to its best interests,
and (3) in a proceeding brought by a governmental entity, the indemnitee
had no reasonable cause to believe his or her conduct was unlawful, and the
indemnitee is not finally found to have engaged in a reckless or
intentional unlawful act. The termination of a proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendre is not, of
itself, determinative that the indemnitee did not meet the standard of
conduct necessary for indemnification.
Notwithstanding the foregoing, a corporation may not indemnify a person if
he or she was adjudged liable: (a) to the corporation in a proceeding by or
in the right of a corporation, or (b) on the basis that a personal benefit
was improperly received by the individual in a proceeding charging improper
personal benefit to the individual. In addition, the VBCA provides that,
unless limited in a corporation's charter, a corporation shall indemnify
its directors and officers who are wholly successful, on the merits or
otherwise, in the defense of any proceeding to which they are parties by
reason of their service in those capacities, against reasonable expenses
incurred in connection with the proceeding. The Amended and Restated
Articles of Association of Union Bankshares, Inc. do not contain any such
limitation on the statutory right to indemnification.
Charter Provisions. The VBCA permits the charter of a Vermont corporation to
include a provision eliminating or limiting the liability of a director to
the corporation or its shareholders for money damages for any action taken,
or any failure to take any action, solely as a director, based on a failure
to discharge his or her duties, except for (i) the amount of a financial
benefit received by a director to which the director is not entitled; (ii)
an intentional or reckless infliction of harm on the corporation or the
shareholders; (iii) voting for or assenting to an unlawful distribution or
(iv) an intentional or reckless criminal act. The Amended and Restated
Articles of Association of Union Bankshares, Inc. do contain such a
liability limitation.
By-Law Provisions. The By-Laws of Union Bankshares, Inc. contain the
following provisions regarding indemnification of directors, officers,
employees and agents:
<PAGE> II-1
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 1. Indemnification Policy. The Corporation shall
indemnify its directors, and, by affirmative vote of a majority of
its directors, may indemnify its officers, employees and agents,
against any liability incurred by any of them in their capacity as
such, to the full extent permitted by the laws of Vermont, in
accordance with the following provisions.
Section 2. Third Party Suits. The Corporation shall indemnify
any director and may indemnify any other person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative (other than by action by or in the
right of the Corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a pleas of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
Section 3. Derivative Actions. The Corporation shall
indemnify any director and may indemnify any other person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent of the
Corporation, or is serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against
expenses (including attorney's fees) judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation; provided,
however, that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
adjudged to
<PAGE> II-2
be liable for gross negligence or willful misconduct in the
performance of his duty to the Corporation unless and only to the
extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
Section 4. Payment in Advance. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit
or proceeding as authorized by the Board of Directors in the specific
case upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 5. Non-exclusivity. The indemnification provided by
this Article VIII shall not be deemed exclusive of any other rights
to which those seeking indemnification may be entitled under any
agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer,
employee or agent and shall insure to the benefit of the heirs,
executors and administrators of such person.
Section 6. Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was
a director, officer, employee or agent of the corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such
liability under the provisions of this Article VIII.
Directors' and Officers' Liability Insurance. As permitted by the VBCA,
Union Bankshares, Inc. maintains directors' and officers' liability
insurance in amounts and on terms which the Board of Directors deems
reasonable. In the ordinary course of business, the Union Bankshares Board
of Directors regularly reviews the scope and adequacy of such insurance
coverage.
Item 21. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith:
<PAGE> II-3
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Affiliation Agreement, dated as of February 16, 1999, by and
between Union Bankshares, Inc. and Citizens Savings Bank and
Trust Company, attached as Appendix A to the Joint Proxy
Statement/Prospectus included in Part I of this Registration
Statement.
2.2 -- Form of Agreement and Plan of Merger by and between Union
Interim Bank and Citizens Savings Bank and Trust Company, and
joined in by Union Bankshares, Inc., attached as Appendix B to
the Joint Proxy Statement/Prospectus included in Part I of this
Registration Statement.
3.1 -- Amended and Restated Articles of Association of Union
Bankshares, Inc. (as of May 7, 1997).
3.2 -- Amendment filed May 19, 1998 to Amended and Restated Articles
of Association of Union Bankshares, Inc., adding new sections 8
and 9.
3.3 -- By-laws of Union Bankshares, Inc., as amended.
5.1 -- Opinion of Primmer & Piper, P.C. (with respect to the validity
of the Common Stock to be issued hereunder).
8.1 -- Opinion of A.M. Peisch & Co. addressed to Union (with respect
to certain tax matters).
8.2 -- Opinion of A.M. Peisch & Co. addressed to Citizens (with
respect to certain tax matters)
10.1 -- Union Bankshares, Inc. Shareholder Agreement, dated as of
February 16, 1999, among Union Bankshares, Inc., Citizens
Savings Bank and Trust Company, and certain shareholders of
Citizens Savings Bank and Trust Company named therein.
10.2 -- Citizens Savings Bank and Trust Company Shareholder Agreement,
dated as of February 16, 1999, among Citizens Savings Bank and
Trust Company, Union Bankshares, Inc., and certain shareholders
of Union Bankshares, Inc. named therein.
10.3 -- Stock Registration Agreement, dated as of February 16, 1999,
among Union Bankshares, Inc., Genevieve L. Hovey, individually
and as
<PAGE> II-4
Trustee of the Genevieve L. Hovey Trust (U.A. dated 8/22/89),
and Franklin G. Hovey, II, individually.
10.4 -- 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary.
10.5 -- Form of Union Bankshares, Inc. Deferred Compensation Plan and
Agreement.
23.1 -- Consent of HAS Associates, Inc. (included in Appendix D to the
Joint Proxy Statement/Prospectus included in Part I of this
Registration Statement)
23.2 -- Consent of Bank Analysis Center, Inc. (included in Appendix C to
the Joint Proxy Statement/Prospectus included in Part I of this
Registration Statement)
23.3 -- Consent of Primmer & Piper, P.C. (included in Exhibit 5.1 to
this Registration Statement).
23.4 -- Consent of A.M. Peisch & Co. (included in Exhibit 8.1 to this
Registration Statement).
23.5 -- Consent of A.M. Peisch & Co. (with respect to Union Bankshares,
Inc.)
23.6 -- Consent of A.M. Peisch & Co. (with respect to Citizens Savings
Bank and Trust Company)
23.7 -- Consent of William T. Costa, designee for appointment to the
Board of Directors of Union Bankshares, Inc.
23.8 -- Consent of Franklin G. Hovey, II, designee for appointment to
the Board of Directors of Union Bankshares, Inc.
23.9 -- Consent of Jerry S. Rowe, designee for appointment to the Board
of Directors of Union Bankshares, Inc.
24.1 -- Power of Attorney.
99.1 -- Form of Proxy for Special Meeting of Shareholders of Union
Bankshares, Inc.
99.2 -- Form of Proxy for Special Meeting of Shareholders of Citizens
Savings Bank and Trust Company.
(b) No separate financial statement schedules are filed as exhibits to
this Registration Statement. All information required in such schedules is
contained in the financial
<PAGE> II-5
statements and related notes attached to the Joint Proxy
Statement/Prospectus included in Part I of this Registration Statement.
(c) No separate fairness opinions are filed as exhibits to this
Registration Statement. Both such opinions are attached as annexes to the
Joint Proxy Statement/Prospectus included in Part I of this Registration
Statement.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change in such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE> II-6
(c) The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(d) The undersigned registrant hereby undertakes that every prospectus
(i) that is filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of Sections 10(a)(3) of the
Securities Act and is used in connection with the offering of securities
subject to Rule 415, will be filed as part of an amendment to the
registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE> II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the Town of Morrisville,
State of Vermont, on July 9th, 1999.
UNION BANKSHARES, INC.
By: /s/ Kenneth D. Gibbons
----------------------
Kenneth D. Gibbons, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 9th day of July, 1999.
Signature Title
- --------- -----
/s/ Kenneth D. Gibbons President,
- ------------------------- Chief Executive Officer
Kenneth D. Gibbons and Director
/s/ Cynthia D. Borck* Vice President and Director
- -------------------------
Cynthia D. Borck
/s/ Marsha A. Mongeon* Vice President, Chief Financial Officer and
- ------------------------- Treasurer (Principal Financial and Accounting
Marsha A. Mongeon Officer)
/s/ Oscar E. Churchill* Director
- -------------------------
Oscar E. Churchill
/s/ Peter M. Haslam* Director
- -------------------------
Peter M. Haslam
/s/ William F. Kinney* Director
- -------------------------
William F. Kinney
<PAGE> II-8
Signature Title
- --------- -----
/s/ Richard C. Marron* Director
- -------------------------
Richard C. Marron
/s/ Robert P. Rollins* Director
- -------------------------
Robert P. Rollins
/s/ Richard C. Sargent* Director
- -------------------------
Richard C. Sargent
/s/ Walter M. Sargent* Director
- -------------------------
Walter M. Sargent
W. Arlen Smith * Director
- -------------------------
W. Arlen Smith
[FN]
- --------------------
* By Kenneth D. Gibbons, attorney-in-fact, pursuant to Power of
Attorney dated as of June 16, 1999 (Exhibit 24.1 to this Registration
Statement).
</FN>
<PAGE> II-9
EXHIBIT 3.1
-----------
AMENDED AND RESTATED ARTICLES OF ASSOCIATION
(as of May 7, 1997)
1. Name. The name of the Corporation shall be Union Bankshares, Inc.
2. Registered Agent and Office. The registered agent of the Corporation
shall be W. Arlen Smith, with a registered office at the Union Bank,
Morrisville, Vermont.
3. Principal Office. The principal office of the Corporation shall be
located at Morrisville, Vermont.
4. Operating Method. The operating period of the Corporation shall be
the calendar year ending December 31.
5. Duration. The period duration of the Corporation is perpetual.
6. Purposes. The Corporation is established for the following purposes:
to serve as a holding company, including the ownership, management,
and control of bank stock; to engage in, directly or indirectly,
activities related to banking; and to carry on and conduct any other
lawful business or activity for which corporations may be organized
under the Vermont Business Corporation Act.
7. Capital Stock. The aggregate number of shares the Corporation shall
have the authority to issue shall be two million four hundred
thousand shares (2,400,000) having a par value of two dollars ($2.00)
per share.
Dated at Morrisville, in the county of Lamoille, this 7th day of May, 1997.
UNION BANKSHARES, INC.
BY: /s/ Kenneth D. Gibbons
---------------------------
President
BY: /s/ Peter M. Haslam
---------------------------
Secretary
<PAGE>
EXHIBIT 3.2
-----------
Amendments to Amended and Restated Articles of Association
of Union Bankshares, Inc.
(filed May 19, 1998)
Effective May 19, 1998, the Amended and Restated Articles of Association of
Union Bankshares, Inc. were further amended to add the following two new
sections:
8. Liability of Directors. A Director of the Corporation shall have no
personal liability to the Corporation or to its shareholders for money
damages for any action taken, or any failure to take any action, solely as
a director, based on a failure to discharge his or her own duties in
accordance with Section 8.30 of Title 11A of the Vermont Statutes
Annotated, except for (a) the amount of a financial benefit received by the
Director to which the Director is not entitled; (b) an intentional reckless
infliction of harm on the Corporation or its shareholders; (c) a violation
of Section 8.33 of Title 11A of the Vermont Statutes Annotated or (d) an
intentional or reckless criminal act. This Section 8 shall not be deemed
to eliminate or limit the liability of a Director for any act or omission
occurring prior to the date this Section becomes effective. No amendment
or repeal of this Section 8 shall apply to or have any effect on the
liability or alleged liability of any Director of the Corporation for or
with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
9. Greater Voting Requirements. (i) Except as set forth in part (ii) of
this Section 9, the affirmative vote or consent of the holders of 67% of
the outstanding shares of all classes of stock of the Corporation entitled
to vote for the election of directors, considered for the purposes of this
Section as one class, shall be required (a) for the adoption of any
agreement for the merger, consolidation or plan of share exchange of the
Corporation or any Subsidiary (as defined below) with or into any Other
Corporation (as defined below), (b) to authorize any sale, lease, exchange,
mortgage, pledge or other disposition of all, or substantially all of the
assets of the Corporation or any Subsidiary to any Other Corporation, (c)
to authorize the issuance or transfer by the Corporation of any Substantial
Amount (as defined below) of securities of the Corporation in exchange for
the securities or assets of any Other Corporation, or (d) to engage in any
other transaction the effect of which is to combine the assets and business
of the Corporation or any Subsidiary with any Other Corporation. Such
affirmative vote or consent shall be in addition to the vote or consent of
the holders of the stock of the Corporation otherwise required by law, the
Articles of Association of the Corporation or any agreement or contract to
which the Corporation is a party.
(ii) The provisions of part (i) of this Section 9 shall not be
applicable to any transaction described therein if such transaction is
approved by a resolution of the Board of Directors of the Corporation,
provided that the directors voting in favor of such resolution include a
majority of the persons who are not affiliated with the Other Corporation
involved in such transaction or who were duly elected and acting members of
the Board of Directors prior to the time such Other Corporation became a
Beneficial Owner (determined as provided below) of 5% or more of the shares
of stock of the Corporation entitled to vote for the election of directors.
<PAGE>
(iii) The Board of Directors shall have the power and duty to
determine for the purposes of this Section 9, on the basis of information
known to such Board, if and when any Other Corporation is the Beneficial
Owner of 5% or more of the outstanding shares of stock of the Corporation
entitled to vote for the election of directors. Any such determination, if
made in good faith, shall be conclusive and binding for all purposes of
this Section 9. An Other Corporation (as defined below) shall be deemed to
be the "Beneficial Owner" of any stock beneficially owned by any
"affiliate" or "associate" of such Other Corporation, in accordance with
the rules of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934.
(iv) As used in this Section 9, the following terms shall have the
meanings indicated:
"Other Corporation" means any person, firm, corporation or
other entity, other than a Subsidiary of the Corporation, which is
the Beneficial Owner of 5% or more of the shares of stock of the
Corporation entitled to vote in the election of directors.
"Subsidiary" means any corporation in which the Corporation
owns, directly or indirectly, more than 50% of the voting securities.
"Substantial Amount" means any securities of the Corporation
having a then fair market value of more than 5% of the Corporation's
consolidated capital accounts as of the end of the then preceding
fiscal year.
(v) The provisions of this Section 9 may not be repealed or amended
in any respect, and no provision inconsistent herewith may be adopted,
unless such repeal, amendment or adoption is approved by the affirmative
vote of the holders of not less than 67% of the total voting power of all
outstanding shares of stock of this Corporation entitled to vote for the
election of directors, voting as a single class.
<PAGE>
EXHIBIT 3.3
-----------
BY-LAWS
OF
UNION BANKSHARES, INC.
(as amended)
ARTICLE I
ARTICLES OF ASSOCIATION
The name, location of the registered office, the registered agent,
and the purposes and powers of the Corporation shall be as set forth in the
Articles of Association, and these By-laws; the purposes and powers of the
Corporation and of its directors and shareholders, and all matters
concerning the conduct and regulation of the business of the Corporation
shall be subject to such provisions in regard thereto, if any, as are set
forth in the Articles of Association; and the Articles of Association are
hereby made a part of these By-laws.
All reference in these By-laws to the Articles of Association shall
be construed to mean the Articles of Association of the Corporation as from
time to time amended.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of shareholders
commencing with the year 1982 shall be held no sooner than 30 nor more than
90 days after the end of the Corporation's fiscal year, on such date as may
be set by the Board of Directors. The annual meeting of shareholders shall
be held at the registered office of the corporation in Vermont,
<PAGE> 1
or at such other place either within or without the State of Vermont, as
shall be stated in the notice of the meetings or in a duly executed waiver
thereof. The hour of the meeting shall be such hour as shall be stated in
the notice of the meeting, or in a duly executed waiver thereof. The
purpose of the annual meeting shall be to elect a Board of Directors and to
transact such other business as may properly be brought before the meeting.
Election of directors and of the Secretary need not be by written ballot.
Purposes for which an annual meeting is to be held, additional to those
prescribed by law, by the Articles of Association and by these By-laws, may
be specified by the President, the Board of Directors, the Secretary, or
the Secretary upon the written request of the holders of not less than one-
tenth of all of the shares entitled to vote at the meeting on such
additional purposes. Failure to hold the annual meeting at the designated
time shall not work a forfeiture or dissolution of the Corporation. If
such annual meeting is omitted on the day herein provided therefore, a
special meeting may be held in place thereof, and any business transacted
or elections held at such meeting shall have the same effect as if
transacted or held at the annual meeting. Such special meeting shall be
called in the same manner and as provided for in Article II, Section 2
hereof, relating to special meetings of shareholders.
Section 2. Special Meetings. Special meetings of the shareholders
may be called by the President, the Board of Directors, the Secretary, or
the Secretary upon the written request of the holders of not less than one-
tenth of all the shares entitled to vote at the meeting, for any purpose.
Special meetings shall be held at the registered office of the
<PAGE> 2
Corporation in Vermont, or at such other place either within or without the
State of Vermont, and on such date and hour as shall be fixed by the
President, the Board of Directors, the Secretary, or the Secretary upon
written request of the holders of not less than one-tenth of all the shares
entitled to vote at the meeting and stated in the notice of the meeting, or
in a duly executed waiver thereof.
Section 3. Notice of Meeting; Waiver. Written notice of the place,
date and hour at which an annual or special meeting is to be held shall be
given personally or put in the regular mails to each shareholder entitled
to vote thereat, not less than ten (10) nor more than fifty (50) days prior
to the meeting by or at the direction of the President, the Secretary, or
the other persons calling the meeting. Notice of a special meeting shall
state, in addition to the foregoing information, the purpose for which it
is called. A written Waiver of Notice of a meeting, signed before or after
the meeting by the person or persons entitled to notice, shall be deemed
equivalent to notice, provided that such Waiver of Notice is inserted in
the corporate minute book. Such a writing need not state the purpose of
the meeting for which it waives notice.
Section 4. Quorum. A majority of the shares entitled to vote
thereat, present in person or represented by proxy, shall be necessary to
and shall constitute a quorum for the transaction of business at all
meetings of the shareholders. When a quorum is once present, it shall not
be broken by the subsequent withdrawal of any shareholders. If the
required quorum shall not be present or represented at any meeting of the
shareholders, the
<PAGE> 3
shareholders present in person or represented by proxy and entitled to vote
thereat shall have power to adjourn the meeting from time to time, until a
quorum shall be present or represented. At any such adjourned meeting at
which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section 5. Voting and Proxies. At any meeting of the shareholders
every shareholder having the right to vote shall be entitled to vote in
person, or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Proxies shall be filed with the Secretary of
the meeting, or any adjournment thereof, before being voted. Unless
otherwise provided therein, no proxy shall be valid after eleven months
from the date of its execution. A proxy with respect to shares held in the
name of two or more persons shall be valid if executed by one of them
unless at or prior to exercise of the proxy the Corporation receives a
specific written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a shareholder shall be deemed
valid unless challenged at or prior to its exercise. Except as otherwise
provided by law, or by the Articles of Association, each shareholder of
record on the record date for the meeting shall be entitled to one vote for
every share standing in his name on the books of the Corporation. All
elections of directors shall be determined by a plurality vote, and, except
as otherwise provided by the laws of Vermont, the Articles of Association,
or by the By-laws, all other
<PAGE> 4
matters shall be determined by vote of a majority of the shares present or
represented at such meeting and voting on such questions.
Section 6. Notice and Record Date of Adjourned Meetings. When a
meeting is adjourned to another time or place, notice need not be given of
the adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken, except that if the adjournment
is for more than 30 days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice in the standard form shall be
given to each shareholder of record entitled to vote at the adjourned
meeting. A determination of shareholders of record entitled to notice of
or to vote at a meeting of shareholders shall apply to any adjournment of
the meeting, unless the Board of Directors fixes a new record date for the
adjourned meeting.
Section 7. Record of Shareholders; Lists. In order that the
Corporation may determine the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may fix a
record date, which shall be not more than fifty (50) nor less than ten (10)
days before the date of such meeting. If no record date is fixed for such
purposes, the record date shall be the date on which notice of the meeting
is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, or, if notice of a
meeting is waived, at the close of business on the day next preceding the
day on which the
<PAGE> 5
meeting is held. The Secretary of the Corporation, or his delegate, shall
prepare and make, at least ten (10) days before every meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
shareholder and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any shareholder
at the registered office of the Corporation, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any shareholder who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall
be the only evidence as to who are the shareholders entitled to examine the
stock ledger, the list required by Section 7 of Article II of these By-
laws, the books of the Corporation, or to vote in person or by proxy at any
meeting of shareholders.
Section 9. Shareholders' Right of Inspection. Any shareholder, in
person or by attorney or other agent, shall upon written demand under oath
stating the purposes thereof, have the right during the usual hours of
business to inspect for any proper purpose the Corporation's stock ledger,
a list of its shareholders and its other books and records, and to make
extracts therefrom. A proper purpose shall mean a purpose reasonably
related to such person's interest as shareholder. In every instance where
an attorney or other agent shall be the person who seeks the right to
inspection, the demand under oath shall be accompanied
<PAGE> 6
by a power of attorney or such other writing which authorized the attorney
or other agent to so act on behalf of the shareholder. The demand under
oath shall be directed to the Corporation at its registered office. As
used in this Section, "Shareholder" means a shareholder of record.
Section 10. Action Without a Meeting. Any action required to be
taken at a meeting of the shareholders of the Corporation, or any action
that may be taken at a meeting of the shareholders may be taken without a
meeting, if a consent in writing setting forth the action so taken shall be
signed by all of the shareholders entitled to vote with respect to the
subject matter thereof, provided that such waiver of notice is inserted in
the Corporate minute book. Such consent shall have the same force and
effect as an unanimous vote of shareholders and may be stated as such in
any articles or documents filed with the Secretary of State.
ARTICLE III
DIRECTORS
Section 1. Board of Directors; Number, Terms and Quorum. The number
of directors which shall constitute the Board of Directors shall be no less
than three, the exact number to be determined by the shareholders at each
annual meeting prior to the election of Directors. Directors need not be
residents of the State of Vermont or shareholders. The Board of Directors
shall be elected annually by the shareholders at the annual meeting
thereof. Each Director shall hold office until his successor is elected
and qualified or until his earlier resignation or removal.
<PAGE> 7
Section 2. Quorum and Voting. A majority of the total number of
directors shall constitute a quorum for the transaction of business. The
vote of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors except as
these By-laws shall otherwise require.
Section 3. Resignation. Any director may resign at any time upon
delivery of his resignation in writing to the President, the Treasurer or
the Secretary or to the Board of Directors. Such resignation shall be
effective at the date set forth in the notice, and if there is none, then
upon receipt.
Section 4. Committees. The Board of Directors may by resolution
passed by majority of the whole board, designate one or more committees,
including an executive committee from among the members of the whole board.
The board may designate one or more directors as alternate members of any
such committee who may replace any absent or disqualified member at any
meeting of the committee. If no such alternate members have been
designated for such a committee, the members thereof present at any meeting
and not disqualified from voting whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any absent or disqualified member. Any
such committee, to the extent provided in the resolution of the whole board
which establishes it and permitted by Vermont law, shall have and may
exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to any papers
<PAGE> 8
which may require it. Any director may be a member of more than one
committee. The procedures to be followed by such committees with respect
to quorum, voting and other such matters shall be the same as those
specified for meetings of directors.
Section 5. Telephone Meetings and Written Consents. Any action
required or permitted to be taken at any meeting of the Board of Directors
or committees thereof may be taken by telephone conference call, between at
least a majority of the directors, or may also be taken without a meeting
if all members of the board or committee, as the case may be, consent to
such action in writing and the writing or writings are filed in the minute
book of the board or committee.
Section 6. Vacancies and Newly-Created Directorships. If any
vacancies occur on the Board of Directors by reason of the death,
immediately effective resignation, retirement or removal from office of any
director, or increase in the number of directors, all the directors then in
office, although less than a quorum, may by a majority vote choose a
successor or successors. Unless sooner displaced, the directors so chosen
shall hold office until the election of their successors at the next annual
meeting of shareholders. If the directors remaining in office after the
occurrence of a vacancy shall be unable by majority vote to fill such
vacancy within thirty (30) days of the occurrence thereof, the President or
Secretary of the Corporation may call a special meeting of the shareholders
at which such vacancy shall be filled. In the event that one or more
directors tenders a resignation from the board effective at a future date,
the prospective vacancy or vacancies shall be filled by vote of a
<PAGE> 9
majority of the directors then in office, although less than a quorum,
including those who have so resigned. Such vote shall take effect when
such resignation or resignations shall become effective and each director
so chosen shall, unless sooner displaced, hold office until the due
election and qualification of his successor.
Section 7. Place, Time and Notice of Meetings. The directors may
hold their meeting in such place or places, within and without the State of
Vermont, as the Board of Directors may determine from time to time. The
Board of Directors shall meet each year immediately after the annual
meeting of shareholders, for the purpose of organization, election of
officers, and consideration of any other business that may properly come
before the meeting. No notice of any kind to either old or new members of
the Board of Directors for this annual meeting shall be necessary. Other
meetings of the directors shall be held at the call of the President or of
the Secretary or of any one director. Notice of the date, time and place
of directors' meetings except the annual organization meeting shall be
given to each director entitled thereto by letter, telegram, cable or
radiogram, delivered for transmission not later than during the third day
immediately preceding the day of the meeting, or by word of mouth,
telephone or radiophone received not later than during the second day
immediately preceding the day of the meeting. Such notice may be waived by
a director in a writing signed either before or after the meeting for which
such notice was required to be given, provided that such waiver of notice
is inserted in the minute book, and shall be deemed waived by any director
who attends the meeting for which such notice was
<PAGE> 10
required to be given, unless such attendance is for the express purpose of
objecting to the holding of the meeting. Notice of a later meeting need
not be given to any director who attended a prior meeting at which such
latter meeting was duly called and the time, date and place thereof
noticed.
Section 8. Chairman of the Meeting. The President of the
Corporation, if present and acting, shall preside at all meetings;
otherwise, a director chosen by a majority of the board at the meeting
shall preside.
Section 9. Removal of Directors. Any and all directors may be
removed with cause by a vote of a majority of the shares issued and
outstanding and entitled to vote at any annual meeting or special meeting
called for such purposes. Notice of such meeting shall state the name or
names of the director or directors whose removal is proposed and the cause
or causes assigned for his removal and a concise statement in defense of
the director or directors prepared by or on behalf of him or them shall
accompany or precede any solicitation of proxies seeking authority to vote
for or against the removal of such director or directors; otherwise, such
proxies may not be voted. The director or directors to be removed must, in
addition to being given sufficient notice to prepare his or their concise
statement of defense as aforementioned, be given an opportunity to present
evidence and arguments on his or their own behalf at the meeting at which
his or their removal is considered.
<PAGE> 11
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall consist
of a President, a Treasurer, a Vice-President and a Secretary and such
other officers, including, without limitation, a Chairman of the Board of
Directors, one or more Vice-Presidents, Assistant Treasurers and Assistant
Secretaries as the directors at their annual meeting or thereafter from
time to time may elect or appoint. The President, Vice-President,
Secretary and Treasurer shall be elected annually by the directors at their
annual meeting following the annual meeting of the shareholders. Other
officers may be chosen by the directors at such meeting or at any other
time. Each officer shall hold his office until his successor is elected
and qualified or until his earlier death, resignation or removal. Any
officer may resign at any time upon delivering his resignation in writing
to the President, the Treasurer or the Secretary or to a meeting of the
directors. Such resignation shall be effective upon receipt unless
specified to be effective at some other time. Any officer elected by the
Board of Directors may be removed at any time for cause or without cause by
majority vote of the whole Board of Directors taken at a meeting duly
called and held. Neither notice nor a hearing need be given to any officer
proposed to be so removed. Any vacancy occurring in any office of the
Corporation by reason of death, resignation, removal of an officer or
otherwise, shall be filled by the Board of Directors in the same manner as
provided for ordinary elections of officers by directors, and an officer so
chosen shall hold office until the next regular election
<PAGE> 12
for that office, or until earlier death, resignation or removal. The
salaries of all officers shall be fixed from time to time by the Board of
Directors.
Section 2. President. It shall be the duty of the President to
preside at all meetings of the shareholders and all meetings of the Board
of Directors and to have general authority over the ordinary course of the
business of the Corporation.
Section 3. Vice-President. The Vice-President, or Vice-Presidents,
shall have such powers and duties as shall be assigned to them by the Board
of Directors or the President.
Section 4. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction and under the supervision of the directors, have
general charge of the financial concerns of the Corporation; care and
custody of the funds and valuable papers of the Corporation, except his own
bond; authority to endorse for deposit or collection all notes, checks,
drafts and other obligations for the payment of money payable to the
Corporation or its orders, and to accept drafts on behalf of the
Corporation; authority to pay or cause to be paid all dividends voted by
the Board of Directors; and shall keep, or cause to be kept, accurate books
of account, which shall be the property of the Corporation. If required by
the Board of Directors, he shall give bond for the faithful performance of
his duty in such form, in such sum, and with such sureties as the directors
shall require. Any Assistant Treasurer shall have such powers and duties
as the directors or the President may delegate to him.
Section 5. Secretary. The Secretary shall, in addition to any
duties imposed upon him by virtue of his office pursuant to Vermont law,
the Articles of Association or these By-
<PAGE> 13
laws, keep an attested copy of the Articles of Association and amendments
thereto, and of these By-laws with a reference on the margin of said By-
laws to all amendments thereof, all of which documents and books shall be
kept at the registered office of the Corporation or at the office of the
Secretary. Unless a transfer agent is appointed, the Secretary shall keep
or cause to be kept, at the registered office of the Corporation or at his
office, the stock and transfer records of the Corporation, in which shall
be contained the names of all shareholders, their record addresses, the
number of shares held by each, the time when they respectively acquired the
shares and the time of any transfers thereof. The Secretary shall also
keep a record of the meetings of the directors. The Secretary shall give
or cause to be given such notice as may be required of all meetings of
shareholders and all meetings of the Board of Directors, and shall keep the
seal of the Corporation in safe custody and affix it to any instrument when
such action is incident to his office or is authorized by the Board of
Directors. Any Assistant Secretary shall have such powers and duties as
the directors or the President shall delegate to him.
Section 6. Other Powers and Duties. Subject to these By-laws, each
officer shall have in addition to the duties and powers specifically set
forth in these By-laws, such duties and powers as the directors or the
President may from time to time delegate to him.
<PAGE> 14
ARTICLE V
SHARES OF STOCK
Section 1. Amount Authorized. The amount of the authorized capital
stock and the par value, if any, of the shares authorized shall be fixed in
the Articles of Association, as amended from time to time.
Section 2. Stock Certificates. Each shareholder shall be entitled
to a certificate representing the shares of the Corporation owned by him,
under the corporate seal or a facsimile thereof, in such form as may be
prescribed from time to time by the directors. The certificates shall be
signed by the President or a Vice-President, and by the Treasurer or the
Secretary but when a certificate is countersigned by a transfer agent or a
registrar, other than the Corporation itself or an employee thereof, such
signature may be facsimiles, engraved or printed. In case any officer who
has signed or whose facsimile signature has been placed on such certificate
shall have ceased to be such officer before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer at the time of its issue.
Every certificate representing the Corporation's shares which are
subject to any restriction on transfer pursuant to the Articles of
Association, the By-laws or any agreement to which the Corporation is a
party, shall have the restriction noted conspicuously on the certificate
and shall also set forth on the face or back thereof either the full text
of the restriction or a statement of the existence of such restriction and
a statement that the
<PAGE> 15
Corporation will furnish a copy thereof to the holder of such certificate
upon written request and without charge. Every certificate representing
the Corporation's shares issued when the Corporation is authorized to issue
more than one class or series of shares shall set forth on its face or back
either the full text of the preferences, voting powers, qualifications and
special and relative rights of the shares of each class and series
authorized to be issued or a statement of the existence of such
preferences, powers, qualifications, and rights, and a statement that the
Corporation will furnish a copy thereof to the holder of such certificate
upon written request and without charge.
Section 3. Transfer. Subject to the restrictions, if any, stated or
noted on the certificates, shares may be transferred on the books of the
Corporation by the surrender to the Corporation or its transfer agent of
the certificate therefor properly endorsed by the registered holder or by
his duly authorized attorney pursuant to a written power of attorney
properly executed, and with such proof of the authenticity of signature as
the Secretary of the Corporation or its transfer agent may reasonably
require, if the Corporation has no notice of any adverse claim. Except as
may be otherwise required by law, by the Articles of Association or by
these By-laws, the Corporation shall be entitled to treat the record holder
of shares as shown on its books as the owner of such shares for all
purposes, including the payment of dividends and the right to vote with
respect thereto, regardless of any transfer, pledge, or other disposition
of such shares, until the shares have been transferred on the
<PAGE> 16
books of the Corporation in accordance with the requirements of these By-
laws. It shall be the duty of each shareholder to notify the Corporation
of his mailing address.
Section 4. Lost or Destroyed Certificates. The Corporation shall
issue a new certificate in the place of any certificate theretofore issued
where the holder of record of the certificate satisfies the following
requirements:
* Claim. Makes proof in affidavit form that it has been lost,
destroyed, or wrongfully taken;
* Timely Request. Requests the issue of a new certificate before
the Corporation has notice that the certificate has been acquired
by a purchaser for value in good faith and without notice of any
adverse claims;
* Bond. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the Corporation may
direct, to indemnify the Corporation against any claims that may
be made on account of the alleged loss, destruction or theft of
the certificates;
* Other Requirements. Satisfies any other reasonable requirements
imposed by the Corporation.
When a certificate has been lost, apparently destroyed, or wrongfully taken
and the holder of record fails to notify the Corporation within a
reasonable time after he has notice of it, and the Corporation registers a
transfer of the shares represented by this certificate before receiving
such notification, the holder of record is precluded from making any claim
against the Corporation for the transfer or for a new certificate.
Section 5. Fractional Shares. Certificates representing fractional
shares may be issued by the Corporation. No holder of any fractional share
shall be entitled to any vote
<PAGE> 17
with respect thereto unless, and to the extent that, the holder or holders
of fractional shares aggregating one or more full shares unite for the
purpose of voting at any such meeting, in which case such holder or holders
shall be entitled to one vote at such meeting for each full shares
represented by the aggregate of such fractional shares held by such holder
or holders.
Section 6. Payment for Shares. The consideration for the issuance
of shares may be paid, in whole or in part, in money, in other property,
tangible or intangible, or in labor or services actually performed for the
Corporation. When payment of the consideration for which shares are to be
issued shall have been received by the Corporation such shares shall be
deemed to be fully paid and nonassessable. Neither promissory notes nor
future services shall constitute payment or part payment for the issuance
of shares of the Corporation. In the absence of fraud in the transaction,
the judgment of the Board of Directors as to the value of the consideration
received for shares shall be conclusive. No certificate shall be issued
for any shares until the share is fully paid.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. Except as from time to time determined by
the directors, the fiscal year of the Corporation shall end on the last day
of December in each year.
Section 2. Seal. The seal of the Corporation shall, subject to
alteration by the directors, consist of a flathead, circular die with the
words "Vermont", "Union Bankshares, Inc." and "1982" cut or engraved
thereon.
<PAGE> 18
Section 3. Registered Office and Registered Agent. The address of
the registered agent shall be as set forth in the Articles of Association.
The books of the Corporation including its stock ledger, books of account,
and minute books, shall be kept at the registered office of the Corporation
or its Secretary.
Section 4. Agents. The Board of Directors may appoint agents of the
Corporation possessing authority as broad as is not inconsistent with these
By-laws or applicable law.
Section 5. Voting of Shares in Other Corporations. Except as the
directors may otherwise designate, the President or Treasurer may waive
notice of, and appoint any person or persons to act as proxy or attorney in
fact for this Corporation (with or without power of substitution), at any
meeting of shareholders of any other corporation or organization, the
securities of which may be held by this Corporation.
Section 6. Amendments. These By-laws may at any time be repealed,
altered or amended by vote of the directors.
ARTICLE VII
NOTES, CHECKS, DRAFTS AND CONTRACTS
Section 1. The Notes, Checks and Drafts. The notes, checks and
drafts of the corporation shall be signed by such person or persons as the
Board of Directors may from time to time designate and in the absence of
such designation by the Treasurer. Manual signature or signatures shall be
required on all notes and drafts of the Corporation. In the
<PAGE> 19
case of checks of the Corporation, either manual or facsimile signature or
signatures may be used.
Section 2. Contracts. Contracts of the Corporation shall be
executed by such person or persons as may be generally designated by the
Board of Directors and, in the absence of such designation, by the
President, a Vice-President or the Treasurer.
ARTICLE VIII
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification Policy. The Corporation shall indemnify
its directors, and, by affirmative vote of a majority of its directors, may
indemnify its officers, employees and agents, against any liability
incurred by any of them in their capacity as such, to the full extent
permitted by the laws of Vermont, in accordance with the following
provisions.
Section 2. Third Party Suits. The Corporation shall indemnify any
director and may indemnify any other person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative (other than by action by or in the right of the Corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the
Corporation as director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding
<PAGE> 20
if he acted in good faith and in a manner he reasonable believed to be in
or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a pleas of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 3. Derivative Actions. The Corporation shall indemnify any
director and may indemnify any other person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorney's fees) judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation; provided, however, that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for gross negligence or
willful misconduct
<PAGE> 21
in the performance of his duty to the Corporation unless and only to the
extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper.
Section 4. Payment in Advance. Expenses incurred in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors in the specific case upon receipt of
an undertaking by or on behalf of the director, officer, employee or agent
to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as authorized in this Article
VIII.
Section 5. Non-exclusivity. The indemnification provided by this
Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall insure to the benefit of the
heirs, executors and administrators of such person.
Section 6. Insurance. The Corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, partnership, joint venture,
trust or other enterprise against any liability asserted
<PAGE> 22
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article
VIII.
<PAGE> 23
EXHIBIT 5.1
-----------
______________, 1999
The Union Bank
20 Main St., P.O. Box 667
Morrisville, VT 05661-0667
Re: Registration Statement on Form S-4
(SEC File No. 333-___________)
Ladies and Gentlemen:
Reference is made to the Registration Statement of Union Bankshares, Inc.
(the "Company") on Form S-4 (the "Registration Statement"), to be filed by
the Company with the Securities and Exchange Commission on or about
_______________, 1999, with respect to the proposed affiliation of the
Company with Citizens Savings Bank and Trust Company ("Citizens") and the
related issuance pursuant to a proposed merger between Citizens and an
interim bank subsidiary of the Company (the "Merger") of up to 991,298
shares of the Company's common stock.
In connection with this opinion, we have reviewed the Registration
Statement and its exhibits, and we have examined originals or copies,
certified or otherwise identified to our satisfaction, or such corporate
records, agreements, certificates of public officials and of officers of
the Company, and such other documents, instruments and matters of law and
fact as we have deemed necessary to render the opinion contained herein.
Based on the foregoing, it is our opinion that, upon satisfaction of all
conditions precedent to consummation of the Merger, or waiver of conditions
capable of being waived, and completion of the Merger in accordance with
Vermont banking laws, the Common Stock issued by Union in the Merger will
be duly authorized, validly issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement. We also consent to the reference to our
firm under the caption "Legal Opinion" in the Joint Proxy
Statement/Prospectus included in the Registration Statement, with respect
to the limited matters addressed in this opinion. In rendering this
opinion and in giving such consent we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Primmer & Piper, P.C.
PRIMMER & PIPER, P.C.
<PAGE>
EXHIBIT 8.1
-----------
____________, 1999
Mr. Kenneth Gibbons, President
Union Bankshares, Inc.
20 Main Street
P.O. Box 667
Morrisville, VT 05661
Dear Mr. Gibbons:
The following opinion summarizes certain Federal income tax
consequences of the proposed Merger (the "Merger") of Citizens Savings Bank
& Trust Company ("Citizens") and Union Interim Bank ("Interim"), a newly-
organized merger subsidiary of Union Bankshares, Inc. ("Union"), with
Citizens as the surviving corporation in the Merger. As provided in an
Affiliation Agreement between Union and Citizens dated as of February 16,
1999 and a related Agreement and Plan of Merger, in connection with the
Merger, each outstanding share of Citizens common stock, $1.00 par value
per share ("Citizens Common Stock") will be converted into 6.5217 shares of
Union common stock, $2.00 par value per share ("Union Common Stock"),
together with cash for any fractional share. Shareholders of Citizens who
dissent from the Merger and exercise statutory rights of appraisal will
receive the value of their Citizens Common Stock in cash.
In our opinion, as accountants to Union, the Merger will, under
current law, constitute a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and Union,
Citizens and Interim will each be a party to the reorganization within the
meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger will have the following
Federal income tax consequences:
1. No gain or loss will be recognized by holders of Citizens Common
Stock as a result of the conversion of such shares into shares of
Union Common Stock pursuant to the Merger, except that gain or loss
will be recognized on the receipt of cash, if any, received in lieu
of fractional shares. Any cash received by a shareholder of Citizens
in lieu of a fractional share will be treated as received in exchange
for such fractional share and not as a dividend, and any gain or loss
recognized as a result of
<PAGE> 1
the receipt of such cash will be capital gain or loss equal to the
difference between the cash received and the portion of the
shareholder's basis in Citizens Common Stock allocable to such
fractional share interest. Citizens' shareholders who exercise
dissenters' rights of appraisal and who receive cash in cancellation
of their Citizens Common Stock generally will recognize taxable gain
or loss, measured by the difference between the amount of cash
received and the shareholder's cost or other basis in the Citizens
Common Stock canceled in the Merger.
2. The aggregate adjusted tax basis of the shares of Union Common
Stock received by each shareholder of Citizens, all of whose Citizens
Common Stock is converted solely into Union Common Stock in the
Merger, will equal the aggregate adjusted tax basis of such
shareholder's shares of Citizens Common Stock (reduced by any amount
allocable to fractional share interests for which cash is received)
exchanged in the Merger.
3. The holding period for the shares of Union Common Stock received
by each shareholder of Citizens will include the holding period for
the shares of Citizens Common Stock of such shareholder converted in
the Merger, provided that the converted Citizens Common Stock was
held by such shareholder as a capital asset at the effective time of
the Merger.
4. Neither Union, Citizens nor Interim will recognize gain or loss
as a result of the Merger.
In rendering our opinion, we have relied upon written representations
and covenants of Union and Citizens. No ruling has been sought from the
Internal Revenue Service as to the Federal income tax consequences of the
Merger, and our opinion set forth below is not binding on the Internal
Revenue Service or any court.
Our opinion is based on laws, regulations, rulings and judicial
decisions as they now exist. These authorities are all subject to change
and such change may be made with retroactive effect. A.M. Peisch & Company
cannot give any assurance that, after any such change, its opinion would
not be different, and does not undertake any responsibility to update or
supplement its opinion.
This opinion does not address all aspects of Federal income taxation
that may be relevant to particular shareholders and may not be applicable
to shareholders who are not citizens or residents of the United States, or
who will acquire Union Common Stock pursuant to the exercise or termination
of employee stock options or otherwise as compensation, nor does the
discussion address the effect of any applicable foreign, state, local or
other tax laws.
<PAGE> 2
Moreover, some shareholders such as foreign persons, financial
institutions, tax-exempt organizations, insurance companies, persons who
acquired shares of Citizens as part of a hedge, straddle or conversion
transaction, may be subject to special rules. This discussion further
assumes that Citizens shareholders hold their Citizens Common Stock as
capital assets within the meaning of Section 1221 of the Code. Therefore,
we urge each Citizens shareholder to consult a tax advisor regarding the
federal, state, local, foreign and other tax consequences of the merger in
light of their own particular circumstances.
We hereby consent to the filing with the Securities and Exchange
Commission of this opinion as an exhibit to Union's Registration Statement
on Form S-4 and to references to our firm under the heading "THE MERGER ---
Material Federal Income Tax Consequences" in the Joint Proxy Statement/
Prospectus contained therein. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Sincerely,
Edward J. Murphy, CPA
cc: Denise Deschenes, Esq.
<PAGE> 3
EXHIBIT 8.2
-----------
____________, 1999
Jerry S. Rowe, President
Citizens Savings Bank & Trust Company
364 Railroad Street
P.O. Box 219
St. Johnsbury, Vermont 05819
Dear Mr. Rowe:
The following opinion summarizes certain Federal income tax
consequences of the proposed Merger (the "Merger") of Citizens Savings Bank
& Trust Company ("Citizens") and Union Interim Bank ("Interim"), a newly-
organized merger subsidiary of Union Bankshares, Inc. ("Union"), with
Citizens as the surviving corporation in the Merger. As provided in an
Affiliation Agreement between Union and Citizens dated as of February 16,
1999 and a related Agreement and Plan of Merger, in connection with the
Merger, each outstanding share of Citizens common stock, $1.00 par value
per share ("Citizens Common Stock") will be converted into 6.5217 shares of
Union common stock, $2.00 par value per share ("Union Common Stock"),
together with cash for any fractional share. Shareholders of Citizens who
dissent from the Merger and exercise statutory rights of appraisal will
receive the value of their Citizens Common Stock in cash.
In our opinion, as accountants to Citizens, the Merger will, under
current law, constitute a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and Union,
Citizens and Interim will each be a party to the reorganization within the
meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger will have the following
Federal income tax consequences:
1. No gain or loss will be recognized by holders of Citizens Common
Stock as a result of the conversion of such shares into shares of
Union Common Stock pursuant to the Merger, except that gain or loss
will be recognized on the receipt of cash, if any, received in lieu
of fractional shares. Any cash received by a shareholder of Citizens
in lieu of a fractional share will be treated as received in exchange
for such fractional share and not as a dividend, and any gain or loss
recognized as a result of
<PAGE> 1
the receipt of such cash will be capital gain or loss equal to the
difference between the cash received and the portion of the
shareholder's basis in Citizens Common Stock allocable to such
fractional share interest. Citizens' shareholders who exercise
dissenters' rights of appraisal and who receive cash in cancellation
of their Citizens Common Stock generally will recognize taxable gain
or loss, measured by the difference between the amount of cash
received and the shareholder's cost or other basis in the Citizens
Common Stock canceled in the Merger.
2. The aggregate adjusted tax basis of the shares of Union Common
Stock received by each shareholder of Citizens, all of whose Citizens
Common Stock is converted solely into Union Common Stock in the
Merger, will equal the aggregate adjusted tax basis of such
shareholder's shares of Citizens Common Stock (reduced by any amount
allocable to fractional share interests for which cash is received)
exchanged in the Merger.
3. The holding period for the shares of Union Common Stock received
by each shareholder of Citizens will include the holding period for
the shares of Citizens Common Stock of such shareholder converted in
the Merger, provided that the converted Citizens Common Stock was
held by such shareholder as a capital asset at the effective time of
the Merger.
4. Neither Union, Citizens nor Interim will recognize gain or loss
as a result of the Merger.
In rendering our opinion, we have relied upon written representations
and covenants of Union and Citizens. No ruling has been sought from the
Internal Revenue Service as to the Federal income tax consequences of the
Merger, and our opinion set forth below is not binding on the Internal
Revenue Service or any court.
Our opinion is based on laws, regulations, rulings and judicial
decisions as they now exist. These authorities are all subject to change
and such change may be made with retroactive effect. A.M. Peisch & Company
cannot give any assurance that, after any such change, its opinion would
not be different, and does not undertake any responsibility to update or
supplement its opinion.
This opinion does not address all aspects of Federal income taxation
that may be relevant to particular shareholders and may not be applicable
to shareholders who are not citizens or residents of the United States, or
who will acquire Union Common Stock pursuant to the exercise or termination
of employee stock options or otherwise as compensation, nor does the
discussion address the effect of any applicable foreign, state, local or
other tax laws.
<PAGE> 2
Moreover, some shareholders such as foreign persons, financial
institutions, tax-exempt organizations, insurance companies, persons who
acquired shares of Citizens as part of a hedge, straddle or conversion
transaction, may be subject to special rules. This discussion further
assumes that Citizens shareholders hold their Citizens Common Stock as
capital assets within the meaning of Section 1221 of the Code. Therefore,
we urge each Citizens shareholder to consult a tax advisor regarding the
federal, state, local, foreign and other tax consequences of the merger in
light of their own particular circumstances.
We hereby consent to the filing with the Securities and Exchange
Commission of this opinion as an exhibit to Union's Registration Statement
on Form S-4 and to references to our firm under the heading "THE MERGER ---
Material Federal Income Tax Consequences" in the Joint Proxy Statement/
Prospectus contained therein. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Sincerely,
Edward J. Murphy, CPA
cc: Denise Deschenes, Esq.
<PAGE> 3
EXHIBIT 10.1
------------
UNION BANKSHARES, INC.
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT by and among Citizens Savings Bank and Trust Company,
a Vermont-chartered commercial bank, ("CSBT") and the directors, executive
officers and 5% or more shareholders of Union Bankshares, Inc., a Vermont
corporation ("Union") , named on Schedule I hereto (collectively, the
"Shareholders"), and joined in by Union.
WITNESSETH:
WHEREAS, Union and CSBT have entered into an Affiliation Agreement,
dated as of the date hereof (the "Affiliation Agreement"), which is being
executed simultaneously with the execution of this Shareholder Agreement
and which provides for, among other things, the affiliation of Union and CSBT
through the merger of CSBT with a wholly owned subsidiary of Union to be
organized by Union for the sole purpose of effecting the affiliation, under
the corporate charter and name of CSBT (the "Merger");
WHEREAS, in connection with the Merger, each of CSBT's shareholders
will receive 6.5217 shares of Common Stock of Union, $2.00 par value per
share (the "Union Common Stock") for each outstanding share of Common Stock
of CSBT, $1.00 par value per share (the "CSBT Common Stock") held by such
CSBT shareholder at the effective time of the Merger; and
WHEREAS, in order to induce CSBT to enter into the Affiliation
Agreement, each of the undersigned Shareholders desires to provide binding
assurances to Union that the undersigned, in his or her capacity as a
Shareholder of Union, will vote his or her shares of Union Common Stock in
favor of an amendment to the Articles of Incorporation of Union to increase
the number of authorized shares of Union Common Stock for the purpose of
effectuating the transactions contemplated in the Affiliation Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements set forth herein and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
Section 1. Ownership of Union Common Stock
Each Shareholder represents and warrants that the Shareholder has
beneficial ownership of shares of Union Common Stock set forth opposite such
Shareholder's name on
<PAGE>
Schedule I to this Agreement. To the best knowledge of each of the
Shareholders and Union, the Shareholders listed on Schedule I constitute all
of the directors, executive officers and beneficial owners of 5% or more of
the outstanding Union Common Stock.
Section 2. Covenants of the Shareholders
Each Shareholder covenants and agrees that:
(a) At any meeting of Union's Shareholders called for the purpose,
such Shareholder will vote, or cause to be voted, all shares of Union
Common Stock over which such Shareholder has the right to vote
(whether owned as of the date hereof or hereafter acquired) (i) in
favor an amendment to the Articles of Incorporation of Union to
increase the number of authorized shares of Union Common Stock for the
purpose of effectuating the transactions contemplated in the
Affiliation Agreement, (ii) in favor of any related matters presented
for shareholder vote in order to effectuate the transactions
contemplated in the Affiliation Agreement, and (iii) against any
Acquisition Transaction involving Union and any Person, entity or group
(other than CSBT);
(b) Such Shareholder will not directly or indirectly encourage or
solicit or hold discussions or negotiations with, or provide any
information to, any Person, entity or group (other than CSBT)
concerning any Acquisition Transaction with respect to Union (provided
that nothing herein shall be deemed to impair the ability of any
Shareholder, in good faith and upon the advice of counsel, to fulfill
his or her duties as a director or officer of Union); and
(c) Such Shareholder will not sell, transfer, assign or otherwise
voluntarily dispose of any of the Union Common Stock beneficially
owned by such Shareholder, without the prior written consent of CSBT,
which consent may be withheld by CSBT in its sole discretion or may
be conditioned upon the transferee's written agreement to be bound by
this Agreement.
Each Shareholder agrees that appropriate stop transfer orders shall
be entered in Union's stock transfer records and that Union shall not register
any transfer or attempted transfer of shares of Union Common Stock
beneficially owned by such Shareholder during the term of this Agreement.
Each Shareholder further agrees that this Shareholder Agreement shall
constitute an irrevocable proxy, coupled with an interest, in favor of
CSBT, to vote all of the shares of Union Common Stock owned of record by such
Shareholder at any meeting of the Union Shareholders called to vote upon any
of the matters specified in Section 2(a) above.
<PAGE>
Section 3. Beneficial Ownership
For purposes of this Agreement, beneficial ownership of Union Common
Stock will be determined in accordance with Rule 13d-3 under the Exchange
Act.
Section 4. Binding Effect; Enforcement
The parties agree and intend that (i) this Shareholder Agreement will
be a valid and binding agreement, enforceable against the parties hereto
according to its terms; (ii) damages and other remedies at law for the
breach of this Agreement are inadequate; and (iii) CSBT shall be entitled
to specific performance of the obligations of the Shareholders and Union
hereunder.
Section 5. Obligations Severable; Termination
The breach of any provision of this Agreement by any Shareholder will
not relieve any other Shareholder of its obligations hereunder. This
Agreement may be terminated at any time prior to the consummation of the
Merger by mutual written consent of all of the parties hereto and shall be
automatically terminated in the event that the Affiliation Agreement is
terminated in accordance with its terms.
Section 6. Notices
Notices may be provided to CSBT and Union in the manner specified in
Section 8.05 of the Affiliation Agreement, with all notices to the
Shareholders being provided to them c/o Union at the address and in the
manner specified in such section.
Section 7. Governing Law
This Agreement shall be governed by the laws of the State of Vermont.
Section 8. Counterparts
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same and each of which shall be
deemed an original.
Section 9. Headings and Gender
The Section headings contained herein are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Shareholder Agreement. Use of the
<PAGE>
masculine gender herein shall be considered to represent the masculine,
feminine or neuter gender whenever appropriate.
Section 10. Defined Terms
Capitalized terms which are used but not defined herein shall have
the meanings ascribed to such terms in the Affiliation Agreement.
Section 11. Construction and Interpretation
This Agreement shall be deemed to have been prepared jointly by the
parties hereto and any uncertainty or ambiguity existing herein shall not
be interpreted against any party by reason of its drafting of this
Agreement, but shall be interpreted according to the application of rules
of interpretation for arms' length agreements.
<PAGE>
IN WITNESS WHEREOF, CSBT and Union, each by a duly authorized officer, and
each of the undersigned Shareholders, individually and in all
representative capacities, have executed this Shareholder Agreement as of
this 16th day of February, 1999.
CITIZENS SAVINGS BANK AND TRUST COMPANY
By: /s/ Jerry S. Rowe
---------------------------
Jerry S. Rowe
President and Chief Executive Officer
UNION BANKSHARES, INC.
By: /s/ Kenneth D. Gibbons
---------------------------
Kenneth D. Gibbons
President and Chief Executive Officer
Union SHAREHOLDERS:
/s/ Cynthia D. Borck /s/ Marsha A. Mongeon
- ------------------------------ -------------------------------
Cynthia D. Borck Marsha A. Mongeon
/s/ Oscar Churchill /s/ Robert P. Rollins
- ------------------------------ -------------------------------
Oscar Churchill Robert P. Rollins
/s/ Kenneth D. Gibbons /s/ Richard C. Sargent
- ------------------------------ -------------------------------
Kenneth D. Gibbons Richard C. Sargent
/s/ Peter M. Haslam /s/ Walter M. Sargent
- ------------------------------ -------------------------------
Peter M. Haslam Walter M. Sargent
/s/ William F. Kinney /s/ W. Arlen Smith
- ------------------------------ -------------------------------
William F. Kinney W. Arlen Smith
/s/ Richard C. Marron COPLEY FUND, INC.
- ------------------------------
Richard C. Marron
By: /s/ Richard C. Sargent
---------------------------
Richard C. Sargent, Trustee
By: /s/ Robert Parker
---------------------------
Robert Parker, Trustee
<PAGE>
SCHEDULE I
UNION BANKSHARES, INC.
5% OR MORE SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
Union Common Stock
Name of Shareholder/ Director/ Officer Beneficially Owned
- -------------------------------------- -------------------
<S> <C>
Cynthia D. Borck 520
Oscar Churchill 24,000
Kenneth D. Gibbons 19,730
Peter M. Haslam 55,000
William F. Kinney 30,020
Richard C. Marron 1,010
Marsha A. Mongeon 0
Robert P. Rollins 1,000
Richard C. Sargent 29,889
Walter M. Sargent 299,945
W. Arlen Smith 141,332
COPLEY FUND, INC. 108,000
</TABLE>
<PAGE>
EXHIBIT 10.2
------------
CITIZENS SAVINGS BANK AND TRUST COMPANY
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT by and among Union Bankshares, Inc., a Vermont
corporation ("Union") and the directors, executive officers and 5% or more
shareholders of Citizens Savings Bank and Trust Company, a Vermont-
chartered commercial bank, ("CSBT"), named on Schedule I hereto
(collectively, the "Shareholders"), and joined in by CSBT.
WITNESSETH:
WHEREAS, Union and CSBT have entered into an Affiliation Agreement,
dated as of the date hereof (the "Affiliation Agreement"), which is being
executed simultaneously with the execution of this Shareholder Agreement
and which provides for, among other things, the affiliation of Union and CSBT
through the merger of CSBT with a wholly owned subsidiary of Union to be
organized by Union for the sole purpose of effecting the affiliation, under
the corporate charter and name of CSBT (the "Merger");
WHEREAS, in connection with the Merger, each of CSBT's shareholders
will receive 6.5217 shares of Common Stock of Union, $2.00 par value per
share (the "Union Common Stock") for each outstanding share of Common Stock
of CSBT, $1.00 par value per share (the "CSBT Common Stock") held by such
CSBT shareholder at the effective time of the Merger; and
WHEREAS, in order to induce Union to enter into the Affiliation
Agreement, each of the undersigned Shareholders desires to provide binding
assurances to Union that the undersigned, in his or her capacity as a
Shareholder of CSBT, will vote his or her shares of CSBT Common Stock in
favor of the Affiliation Agreement and Merger;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements set forth herein and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
Section 1. Ownership of CSBT Common Stock
Each Shareholder represents and warrants that the Shareholder has
beneficial ownership of shares of CSBT Common Stock set forth opposite such
Shareholder's name on Schedule I to this Agreement. To the best knowledge
of each of the Shareholders and CSBT, the Shareholders listed on Schedule I
constitute all of the directors, executive officers and beneficial owners
of 5% or more of the outstanding CSBT Common Stock.
<PAGE>
Section 2. Covenants of the Shareholders
Each Shareholder covenants and agrees that:
(a) At any meeting of CSBT's Shareholders called for the purpose,
such Shareholder will vote, or cause to be voted, all shares of CSBT
Common Stock over which such Shareholder has the right to vote
(whether owned as of the date hereof or hereafter acquired) (i) in
favor of the Affiliation Agreement, (ii) in favor of any related
matters presented for shareholder vote in order to effectuate the
transactions contemplated in the Affiliation Agreement, and (iii)
against any Acquisition Transaction involving CSBT and any Person,
entity or group (other than Union or any subsidiary of Union);
(b) Such Shareholder will not directly or indirectly encourage or
solicit or hold discussions or negotiations with, or provide any
information to, any Person, entity or group (other than Union or a
subsidiary or Affiliate of Union) concerning any Acquisition
Transaction with respect to CSBT (provided that nothing herein shall
be deemed to impair the ability of any Shareholder, in good faith and
upon the advice of counsel, to fulfill his or her duties as a
director or officer of CSBT); and
(c) Such Shareholder will not sell, transfer, assign or otherwise
voluntarily dispose of any of the CSBT Common Stock beneficially
owned by such Shareholder, without the prior written consent of Union,
which consent may be withheld by Union in its sole discretion or may be
conditioned upon the transferee's written agreement to be bound by
this Agreement.
Each Shareholder agrees that appropriate stop transfer orders shall
be entered in CSBT's stock transfer records and that CSBT shall not
register any transfer or attempted transfer of shares of CSBT Common Stock
beneficially owned by such Shareholder during the term of this Agreement.
Each Shareholder further agrees that this Shareholder Agreement shall
constitute an irrevocable proxy, coupled with an interest, in favor of Union,
to vote all of the shares of CSBT Common Stock owned of record by such
Shareholder at any meeting of the CSBT Shareholders called to vote upon any
of the matters specified in Section 2(a) above.
Section 3. Beneficial Ownership
For purposes of this Agreement, beneficial ownership of CSBT Common
Stock will be determined in accordance with Rule 13d-3 under the Exchange
Act.
<PAGE>
Section 4. Binding Effect; Enforcement
The parties agree and intend that (i) this Shareholder Agreement will
be a valid and binding agreement, enforceable against the parties hereto
according to its terms; (ii) damages and other remedies at law for the
breach of this Agreement are inadequate; and (iii) Union shall be entitled to
specific performance of the obligations of the Shareholders and CSBT
hereunder.
Section 5. Obligations Severable; Termination
The breach of any provision of this Agreement by any Shareholder will
not relieve any other Shareholder of its obligations hereunder. This
Agreement may be terminated at any time prior to the consummation of the
Merger by mutual written consent of all of the parties hereto and shall be
automatically terminated in the event that the Affiliation Agreement is
terminated in accordance with its terms.
Section 6. Notices
Notices may be provided to Union and CSBT in the manner specified in
Section 8.05 of the Affiliation Agreement, with all notices to the
Shareholders being provided to them c/o CSBT at the address and in the
manner specified in such section.
Section 7. Governing Law
This Agreement shall be governed by the laws of the State of Vermont.
Section 8. Counterparts
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same and each of which shall be
deemed an original.
Section 9. Headings and Gender
The Section headings contained herein are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Shareholder Agreement. Use of the masculine gender herein shall be
considered to represent the masculine, feminine or neuter gender whenever
appropriate.
Section 10. Defined Terms
Capitalized terms which are used but not defined herein shall have
the meanings ascribed to such terms in the Affiliation Agreement.
<PAGE>
Section 11. Construction and Interpretation
This Agreement shall be deemed to have been prepared jointly by the
parties hereto and any uncertainty or ambiguity existing herein shall not
be interpreted against any party by reason of its drafting of this
Agreement, but shall be interpreted according to the application of rules
of interpretation for arms' length agreements.
<PAGE>
IN WITNESS WHEREOF, Union and CSBT, each by a duly authorized officer, and
each of the undersigned Shareholders, individually and in all
representative capacities, have executed this Shareholder Agreement as of
this 16th day of February, 1999.
UNION BANKSHARES, INC.
By: /s/ Kenneth D. Gibbons
---------------------------
Kenneth D. Gibbons
President and Chief Executive Officer
CITIZENS SAVINGS BANK AND TRUST COMPANY
By: /s/ Jerry S. Rowe
---------------------------
Jerry S. Rowe
President and Chief Executive Officer
CSBT SHAREHOLDERS:
/s/ J.R. Alexis Clouatre /s/ Dennis Lamothe
- ------------------------------ -------------------------------
J.R. Alexis Clouatre Dennis Lamothe
/s/ William T. Costa, Jr. /s/ Jerry S. Rowe
- ------------------------------ -------------------------------
William T. Costa Jerry S. Rowe
/s/ Dwight A. Davis /s/ Joseph M. Sherman
- ------------------------------ -------------------------------
Dwight A. Davis Joseph M. Sherman
/s/ Franklin G. Hovey, II /s/ Reginald Wakeham
- ------------------------------ -------------------------------
Franklin G. Hovey, II Reginald Wakeham
/s/ Genevieve L. Hovey
- ------------------------------
Genevieve L. Hovey, individually and
as trustee of the Genevieve L. Hovey Trust
U.A. dated 8/22/89
<PAGE>
SCHEDULE I
CITIZENS SAVINGS BANK AND TRUST COMPANY
5% OR MORE SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
CSBT Common Stock
Name of Shareholder/ Director/ Officer Beneficially Owned
- -------------------------------------- ------------------
<S> <C>
J.R. Alexis Clouatre 1,959
William T. Costa 490
Dwight A. Davis 32
Franklin G. Hovey, II 756
Genevieve L. Hovey 43,231
Dennis Lamothe 19
Jerry S. Rowe 275
Joseph M. Sherman 2,844
Reginald Wakeman 50
Genevieve L. Hovey Trust 35,497
</TABLE>
<PAGE>
EXHIBIT 10.3
------------
STOCK REGISTRATION AGREEMENT
STOCK REGISTRATION AGREEMENT among Union Bankshares, Inc. ("Union"),
and the undersigned shareholders of Citizens Savings Bank & Trust Company
("CSBT") (such shareholders, are collectively referred to herein as the
"Shareholders").
WHEREAS, Union and CSBT are parties to an Affiliation Agreement dated
as of the date of this Stock Registration Agreement (the " Affiliation
Agreement"), which provides, among other things, that upon the consummation
of the transaction contemplated therein (the "Merger") the shareholders of
CSBT will receive shares of Common Stock, par value $2.00 per share, of Union
("Union Common Stock") in exchange for the issued and outstanding shares of
capital stock of CSBT; and
WHEREAS, in connection with the Affiliation Agreement, Union has agreed
with the Shareholders that it will take appropriate steps to register under
the Securities Act of 1933, as amended (the "Securities Act") up to 150,000
shares of the Union Common Stock to be received by the Shareholders in
connection with the Merger upon the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and agreements
contained herein, the parties agree as follows:
Section 1. Demand Registration Rights. (a) Except as otherwise
provided in Subsection 1(b), upon written request of one or more of the
Shareholders or the duly authorized representative thereof asserting that
the sale of Common Stock is necessary in order to provide funds for the
payment of federal and/or state taxes imposed by reason of the death of
Genevieve L. Hovey, Union shall, with reasonable promptness, prepare and file
a registration statement on a form to be selected by Union to register under
the Securities Act for sale to the public the number of shares of Union
Common Stock received by such Shareholders in the Merger as shall be
specified in such request, and shall use its best efforts to cause the same
to become effective; provided, however, that Union shall not be obligated to
(i) effect more than one such registration pursuant to this Agreement, (ii)
register fewer than 50,000 nor more than 150,000 shares of Union Common Stock
pursuant to such request, or (iii) effect such registration if none of the
Shareholders is then an affiliate of Union or CSBT under Rules 144 or 145 of
the Securities and Exchange Commission (the "Commission"). Upon receipt of
Shareholders' demand for registration pursuant to this Subsection 1(a), Union
shall determine in its reasonable business judgment, giving due
consideration to the potential impact of the proposed sale upon the trading
market in the Union Common Stock, whether the shares to be sold pursuant to
the registration statement shall be sold through an underwritten public
offering, through assistance of an investment banking firm, or through a
broker-dealer.
<PAGE> 1
If the shares are to be sold in an underwritten public offering or with the
assistance of an investment banking firm, Union shall be entitled to
designate the managing underwriter or investment banking firm, as the case
may be, subject to the approval of the holders of at least a majority of
the total number of shares of Union Common Stock to be sold pursuant to the
registration statement, which approval shall not be unreasonably withheld.
(b) Union shall be entitled to postpone, for a reasonable period of
time, the filing of any registration statement otherwise required to be
prepared and filed by it pursuant to this Section 1, and may withhold
efforts to cause a registration statement to become effective, if Union
determines, in its reasonable business judgment, that such registration and
offering would materially interfere with or adversely affect negotiation or
completion of any transaction that is pending or being contemplated by Union
(whether or not a final decision has been made to undertake such
transaction) at the time the right to postpone is exercised, including,
without limitation, any equity or convertible debt financing, merger,
consolidation, acquisition, corporate reorganization or any other material
transaction or development involving Union and/or any of its subsidiaries.
In such event Union (i) shall promptly give each Shareholder owning shares of
Union Common Stock proposed to be included in such registration statement
written notice of such determination, and (ii) shall be required to file,
and to notify the Shareholders of its willingness to proceed with, such
registration statement as soon as practicable after Union shall determine, in
its reasonable business judgment, that such registration and offering will
not materially interfere with the aforesaid material transaction or
development, but in no event later than 120 days from the date of the
postponement.
Section 2. Covenants of the Shareholders. Each of the Shareholders
covenants and agrees that such Shareholder will:
(a) In any request for registration pursuant to Section 1,
specify (i) the number of shares of Union Common Stock as to which
such request relates, (ii) express such Shareholder's intention to
offer such shares for distribution and (iii) contain an undertaking
to provide all such information and materials and take all such
action and execute all such documents as may be required in order to
permit Union to comply with all applicable requirements of the
Commission and to obtain acceleration of the effective date of the
registration statement.
(b) Immediately suspend, or cause to be suspended, all offers
and sales of the Union Common Stock pursuant to any registration
statement referred to in Section 1, upon receipt of written notice
from Union that Union has determined, in its reasonable business
judgment, that the registration statement is no longer current
because of material non-public developments
<PAGE> 2
affecting Union; provided, however, that in such event Union shall use
its reasonable best efforts to amend the registration statement
promptly to permit resumption of offers and sales by the
Shareholders.
Section 3. Covenants of Union. Union covenants and agrees that it
shall:
(a) Subject to its right to withdraw a registration statement
under Subsection 1(b) of this Agreement, use its reasonable best
efforts to have any registration statement filed pursuant to this
Agreement declared effective as promptly as practicable, advise a
Shareholder who owns shares of Union Common Stock included in such
registration statement, upon request, of the progress of such filing
and of any review thereof undertaken by the Commission and promptly
notify such participating Shareholders and their underwriter, if any,
and confirm such advice in writing (i) when such registration
statement becomes effective, (ii) when any post-effective amendment
to such registration statement becomes effective, and (iii) of any
request by the Commission for any amendment or supplement to such
registration statement or any prospectus relating thereto or
additional information.
(b) Use its reasonable best efforts to qualify, not later than
the effective date of any registration statement filed pursuant to
Section 1 of this Agreement, the shares of Union Common Stock of any
Shareholder registered thereunder under the "blue sky" or other state
securities laws of the States of Vermont and New Hampshire and in
connection with an underwritten offering pursuant to this Agreement,
such other states, not to exceed three in number, as the managing
underwriter in an underwritten public offering pursuant to Section 1
may reasonably request; provided, however, that Union shall not be
obligated to qualify as a foreign corporation or as a dealer in
securities or to execute or file any general consent to service of
process under the laws of any such jurisdiction where it is not so
subject or to amend its Articles of Association or By-laws, in order
to effect such registration.
(c) From time to time (i) after a demand for registration has
been made, advise the Shareholders of any event or development,
including a material adverse change in the financial condition,
business or affairs of Union, known to Union (other than events or
developments affecting market or economic conditions generally),
which may have a material adverse impact on the proposed offering,
and (ii) within the period of effectiveness of such registration
statement, advise such participating Shareholders of any event or
development requiring amendment of the registration statement or
prospectus used in connection therewith or rendering it inadvisable
to use the prospectus until it shall have been supplemented or
amended.
<PAGE> 3
(d) Until 120 days from the effective date of any registration
statement filed pursuant to this Agreement hereof, or until
completion of the distribution of the shares of Union Common Stock
included in such registration, whichever occurs earlier, use its best
efforts to keep such registration statement in effect and current and
from time to time during such period to amend or supplement such
registration statement and the prospectus relating thereto to the
extent necessary to permit the completion within said period, in
compliance with the Securities Act, of the sale or distribution of
the shares of Union Common Stock included in such registration.
(e) Furnish to each participating Shareholder such number of
copies of any preliminary and final prospectuses and any amendments
and supplements thereto, as such Shareholder may reasonably request
in order to effect the offering and sale of the shares to be offered
and sold by such Shareholder.
(f) Furnish to any Shareholder, any underwriter participating
in any distribution pursuant to such registration statement, and any
attorney, accountant or other agent retained by such Shareholder or
underwriter, such information regarding Union as may be reasonably
requested by such person in connection with such registration
statement.
(g) For a period of two years from the date of this Agreement
or for such shorter or longer period as any Shareholder shall be
restricted with respect to the sale of shares of Union Common Stock by
virtue of applicable federal securities laws or regulations or shall
be an affiliate of Union as defined in Rule 144 under the Securities
Act or an affiliate of CSBT, as contemplated in Rule 145 under the
Act, (i) continuously have the Union Common Stock registered pursuant
to Section 12 of the Securities Exchange Act of 1934 (the "Exchange
Act"), and (ii) file with the Commission all reports required to be
filed under the Exchange Act in the manner and within the time period
required thereby so that sales of shares of Union Common Stock may be
effected in compliance with Rule 144; provided, however, that nothing
herein shall preclude or prevent Union from consummating any merger,
consolidation, liquidation disposition of substantial assets or any
comparable event, not in the ordinary course of business, or entering
into any agreement with respect to any of the above, which might or
would result in Union no longer being able to comply with this
Subsection (g).
Section 4. Costs and Expenses. The cost and expense of preparation
and filing of a registration pursuant to this Agreement and "blue sky"
qualifications related thereto pursuant to Subsection 3(b) shall be borne
by Union: provided, however, that Union shall not be liable or responsible for
(i) the fees and expenses of counsel, accountants and advisors for any
Shareholder, (ii) any transfer or sales taxes in connection with the sale
of Union Common Stock by the Shareholders, or (iii) underwriting discounts
and commissions or brokerage fees
<PAGE> 4
or commissions or similar sales charges or fees payable in connection with
any sale of Union Common Stock by the Shareholders.
Section 5. Indemnification. In connection with any registration of
Union Common Stock pursuant to this Agreement:
(a) Union shall indemnify and hold harmless each Shareholder who
sells shares of Common Stock pursuant to any such registration
statement (and any settlor, trustee, beneficiary or other person who
may be deemed to be a controlling person of such Shareholder within
the meaning of the Securities Act) against any losses, claims damages
or liabilities to which any such Shareholder, settlor, trustee,
beneficiary or other person, may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) shall arise out of or be
based upon any untrue or allegedly untrue statement of any material
fact contained in any such registration statement or upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse any legal or other
expenses reasonably incurred by such shareholder, settlor, trustee,
beneficiary or other person in connection with investigating or
defending against any such loss, claim, damage, liability or action;
provided, however, that Union shall not be liable for any losses,
claims, damages, liabilities or actions arising out of or based upon
any untrue statement or omission made in reliance upon and in
conformity with information furnished to Union by such Shareholder,
settlor, trustee, beneficiary or other person for use in any such
registration statement.
(b) Each Shareholder shall indemnify and hold harmless Union,
each of its directors, each of its officers who signs any such
registration statement, and each person, if any, who is deemed a
controlling person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities to which Union or any such
director, officer or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) shall arise out of or
be based upon any untrue or allegedly untrue statement of any
material fact contained in any such registration statement or upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, made in reliance upon and in conformity with
information furnished to Union by such Shareholder for use in any such
registration statement, and shall reimburse any legal or other
expenses reasonably incurred by Union or any such director, officer or
controlling person in connection with investigating or defending
against such loss, claim, damage, liability or action.
<PAGE> 5
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in
writing thereof, but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may have to
any indemnified party other than under this Section 5. In case any
such action shall be brought against any indemnified party and it
shall notify the indemnifying of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party
under this Section 5 for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so
selected, provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there
may be reasonable defenses available to it which are different from
or additional to those available to the indemnifying party or if the
interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel
and to assume such legal defense and otherwise to participate in the
defense of such action, with the expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
Section 6. Changes in Union Common Stock. If, and as often as, there
are any changes in the Union Common Stock by way of stock split, stock
dividend, combination or reclassification, or through merger,
consolidation, reorganization or recapitalization, appropriate adjustment
shall be made in the provisions hereof, as may be required, so that the
rights and privileges granted hereby shall continue with respect to the Union
Common Stock as so changed.
Section 7. Notices. Notices given under this Agreement shall be
deemed given when received at the addresses for the parties set forth below
opposite their signatures.
Section 8. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 9. Assignment. This Agreement, including the registration
rights created herein, (i) shall be binding upon and shall inure to the
benefit of Union, its successors and
<PAGE> 6
assigns, and (ii) may be assigned by any of the Shareholders only to such
members of the Hovey Family and their heirs and legal representatives as
shall, in the opinion of counsel to Union, be deemed to be affiliates of Union
immediately before the Merger or shall be restricted with respect to the
sale of shares of Union Common Stock by virtue of applicable federal
securities laws or regulation.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of this 16th day of February, 1999.
ADDRESS: UNION BANKSHARES, INC.
20 Main St., P.O. Box 667
Morrisville, VT 05661-0667 By: /s/ Kenneth D. Gibbons
Kenneth D. Gibbons, President
And Chief Executive Officer
SHAREHOLDERS:
6 Undercliffe Road /s/ Genevieve L. Hovey
St. Johnsbury, VT 05819 Genevieve L. Hovey, individually
GENEVIEVE L. HOVEY TRUST
U.A. dated 8/22/89
c/o Genevieve L. Hovey, Trust
6 Undercliffe Road By: /s/ Genevieve L. Hovey
St. Johnsbury, VT 05819 Genevieve L. Hovey, Trustee
7 Undercliffe Road /s/ Franklin G. Hovey, II
St. Johnsbury, VT 05819 Franklin G. Hovey, II,
Individually
<PAGE> 7
EXHIBIT 10.4
------------
1998 INCENTIVE STOCK OPTION PLAN
OF UNION BANKSHARES, INC. AND SUBSIDIARY
SECTION ONE
DEFINITIONS
-----------
As used herein:
(a) The word "Corporation" means Union Bankshares, Inc.
(b) The word "Plan" means the 1998 Incentive Stock Option Plan of
Union Bankshares, Inc. and Subsidiary, as herein set forth. The stock
options issued under this Plan are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code, as
amended.
(c) The word "Committee" means the stock option committee, as
described in Section Three hereof.
(d) The words "Eligible Employees" mean those officers and other
key employees, including division managers and department heads, employees
of the Corporation or its wholly-owned subsidiary or subsidiaries, who are
selected by the Committee to receive stock options, as provided in Section
Three hereof.
(e) The word "Optionee" means an Eligible Employee to whom a stock
option has been awarded under the Plan.
SECTION TWO
PURPOSES
--------
The purposes of the Plan are:
(a) To encourage a sense of proprietorship on the part of officers
and other key employees who will be largely responsible for the continued
growth of the Corporation and its subsidiaries;
(b) To recognize past valuable services of such key employees;
(c) To furnish such key employees with further incentive to develop
and promote the business and financial success of the Corporation and its
subsidiaries; and
(d) To induce such key employees to continue in the service of the
Corporation and its subsidiaries, by providing a means whereby such key
employees may be given an opportunity to purchase stock in the Corporation.
SECTION THREE
ADMINISTRATION
--------------
(a) The Plan shall be administered by a stock option committee
consisting of all the members of the Board of Directors of the Corporation
who are not eligible to receive options under the Plan. A majority of the
Committee shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members.
<PAGE> 1
(b) Subject to the express provisions of the Plan, the Committee
shall have full power and authority, in its discretion, to determine
initially and from time to time those Eligible Employees to whom options
are to be granted and, subject to the limitations imposed by Section Five
hereof, the times when such options shall be granted and the number of
shares to be covered by each option. Accomplishments of individuals in
furthering the interests of the Corporation and its subsidiaries shall be
the primary guide of the Committee in apportioning the number of shares to
be optioned to key employees, but the Committee may take into consideration
the position held by an employee, his compensation, and other factors that
the Committee may deem pertinent.
(c) Subject to the express provisions of the Plan, the Committee
shall also have the power and authority to construe and interpret the Plan
and the respective option agreements entered into hereunder, and to make
all other determinations necessary or advisable for administering the Plan.
The determination of the Committee on all matters referred to in this
section shall be final and conclusive.
SECTION FOUR
ELIGIBILITY
-----------
Options may be granted only to Eligible Employees who are selected in
accordance with the provisions of this Plan by the Committee. Except as
provided in Section Six, no Eligible Employee who owns in excess of ten
percent (10%) of the total combined voting power of all classes of stock of
the Corporation or any parent or subsidiary of the Corporation may be
granted a stock option pursuant to this Plan.
SECTION FIVE
SHARES SUBJECT TO PLAN
----------------------
(a) The stock to be sold pursuant to options granted under this
Plan shall be authorized but unissued shares of the Corporation's $2.00 par
value Common Stock and/or shares of such Common Stock held in treasury.
Subject to adjustment in accordance with Section Fourteen hereof, the
aggregate number of shares of Common Stock that may be optioned pursuant to
this Plan during the existence of the Plan shall not exceed fifty thousand
(50,000) shares.
(b) No option shall be granted pursuant to this Plan later than ten
(10) years following the date of the adoption of the Plan by resolution of
the Board of Directors.
SECTION SIX
OPTION PRICE
------------
(a) The purchase price of the shares under each option granted
pursuant to the Plan shall be not less than the fair market value of the
stock at the time such option is granted, as determined by the Committee.
(b) Notwithstanding any other provision of this Plan, if an option
is granted under this Plan to an employee who possesses in excess of ten
percent (10%) of the total combined voting power of all outstanding classes
of stock of the Corporation or any parent or subsidiary of the
<PAGE> 2
Corporation, the purchase price of the shares under such option shall be
not less than one hundred and ten percent (110%) of the fair market value
of such shares on the date the option is granted and the term of the option
shall be not longer than five (5) years.
SECTION SEVEN
DURATION OF OPTIONS
-------------------
Notwithstanding anything herein to the contrary, each option granted
hereunder shall continue for a period of not longer than ten (10) years
from the date of its grant or issuance, unless sooner terminated under the
provisions of Section Eight hereof.
SECTION EIGHT
TERMINATION OF OPTIONS
----------------------
(a) In the event of termination of the Optionee's employment with
the Corporation or any parent or subsidiary of the Corporation for any
cause (other than the death or disability of the Optionee or termination
for just cause) including by reason of resignation, lay off or retirement,
each outstanding option granted such Optionee hereunder shall terminate
three (3) months after the date on which such employment terminated.
(b) In the event of the death of the Optionee, or termination of
the Optionee's employment with the Corporation or any parent or subsidiary
of the Corporation by reason of disability, each outstanding option granted
such Optionee hereunder shall terminate twelve (12) months after the date
of such Optionee's death or termination of employment, as the case may be.
(c) In the event of termination of the Optionee's employment with
the Corporation or any parent or subsidiary of the Corporation for just
cause, each outstanding option granted such Optionee hereunder shall
terminate immediately upon such termination of employment.
(d) The Committee in its discretion may accelerate the
exercisability of any option granted hereunder which is subject to a
holding period pursuant to Section Nine (b), in the event of termination of
the Optionee's employment with the Corporation or any parent or subsidiary
of the Corporation for any reason, other than termination for just cause.
SECTION NINE
EXERCISE OF OPTIONS
-------------------
(a) Subject to the terms and conditions of the Plan, options may be
exercised by written notice to the Corporation at its principal office at
Morristown, Vermont, and addressed to the attention of the Secretary, as
provided in the option agreements entered into hereunder.
(b) Subject to Section Eight (b), no option may be exercised unless
and until the Optionee shall have remained in the continuous employ of the
Corporation for twelve (12) months from the date such option was granted.
(c) An option may be exercised either at one time as to the total
number of shares covered thereby, or from time to time as to any portion
thereof in units of one hundred (100) shares or multiples thereof.
<PAGE> 3
(d) The aggregate fair market value (determined at the time the
option is granted) of stock for which options become exercisable for the
first time under the terms of the Plan (or under any other plan of the
Corporation or any parent or subsidiary) during any calendar year may not
exceed $100,000.
(e) On the exercise of an option, a certificate or certificates
evidencing the shares as to which the option is exercised shall be
delivered to the person exercising the option.
(f) Subject to the limitations imposed by Sections Seven and Eight
hereof, in the event of the death of an Optionee, the option or options
theretofore granted to him may be exercised by the legal representatives of
the estate of the Optionee or by the person or persons to whom his rights
under the option or options shall pass by will or the laws of descent and
distribution.
SECTION TEN
PAYMENT
-------
Payment of the purchase price for shares purchased under options
granted under the Plan must be made in full, in cash or in other shares of
the Corporation's common stock, or in a combination of cash and common
stock, at the time of the exercise of the option in the manner provided in
Section Nine hereof. In the event that payment for the optioned shares is
made in whole or in part with other shares of the Corporation's common
stock, such shares will be valued at their fair market value on the date of
the exercise of the option, as determined by the Committee.
SECTION ELEVEN
NONTRANSFERABILITY OF OPTIONS
-----------------------------
An option granted under the Plan may not be transferred except by
will or the laws of descent and distribution and, during the lifetime of
the Optionee, may be exercised only by him.
SECTION TWELVE
AGREEMENT TO CONTINUE IN EMPLOYMENT
-----------------------------------
Each Eligible Employee to whom an option is granted shall, in
consideration of the granting of such option to him, agree that he will
remain in the continuous service of the Corporation, at the pleasure of the
Corporation, as an officer or employee for a period of at least one (1)
year from the date of the granting of the option, except as he may be
prevented from doing so by death, disability, or retirement under the
Corporation's retirement plan.
Nothing in this Plan or in any option granted hereunder shall be
deemed to confer on any individual any right to continue in the employ of
the Corporation or to interfere in any way with the right of the
Corporation to terminate his employment at any time.
<PAGE> 4
SECTION THIRTEEN
PURCHASE OF SHARES FOR INVESTMENT
---------------------------------
Each Optionee and each other person who shall exercise an option
shall represent and agree that all shares purchased pursuant to such option
will be purchased for investment and not with a view to the distribution or
resale thereof.
SECTION FOURTEEN
ADJUSTMENT OF SHARES
--------------------
In the event of a merger, consolidation, reorganization,
recapitalization, reclassification of stock, stock dividend, split-up, or
other change in the corporate structure or capitalization of the
Corporation affecting the Corporation's Common Stock as presently
constituted, appropriate adjustments shall be made by the Committee in the
aggregate number and kind of shares subject to the Plan, the maximum number
and kind of shares for which options may be granted in any calendar year,
the maximum number and kind of shares for which options may be granted to
any one employee, and the number and kind of shares and the price per share
subject to outstanding options.
SECTION FIFTEEN
REGISTRATION OR QUALIFICATION OF SHARES
---------------------------------------
Each option shall be subject to the condition that, if at any time
the Committee shall determine in its discretion that the registration or
qualification of the shares covered thereby under any state or federal law
is necessary or desirable as a condition of or in connection with the
granting of such option or the delivery of shares on the exercise thereof,
no such option may be granted, or, if granted, delivery of shares on the
exercise thereof shall be deferred, until such registration or
qualification shall have been effected. In the event the Committee
determines that registration or qualification of shares is necessary or
desirable, the Corporation shall, at its expense, take such action as may
be required to effect such registration or qualification.
SECTION SIXTEEN
FORM OF OPTION
---------------
The form of option to be granted pursuant to the Plan shall be
approved by the Committee.
SECTION SEVENTEEN
SUSPENSION, AMENDMENT, OR TERMINATION OF PLAN
Unless the Plan shall theretofore have been terminated by the Board
of Directors, the Plan shall terminate ten (10) years following the date
upon which the Plan was adopted by resolution of the Board of Directors.
The Board of Directors of the Corporation shall have the right, at any
time, to suspend, amend, or terminate the Plan; provided, however, that,
unless duly approved by vote of the holders of the Corporation's Common
Stock at any annual or special meeting, no amendment
<PAGE> 5
shall increase the total number of shares that shall be the subject of the
Plan or change the formula for determining the purchase price for the
optioned shares, and provided further that no termination of the Plan or
action by the Board of Directors in amending or suspending the Plan shall
affect or impair the rights of an Optionee under any option previously
granted under the Plan. No option may be granted under the Plan during any
suspension thereof or after the termination thereof.
SECTION EIGHTEEN
EFFECTIVE DATE OF PLAN
----------------------
This Plan shall become effective upon its adoption and approval by
the Board of Directors and ratification by the shareholders of the
Corporation. Unless this Plan shall have been approved by vote of the
shareholders of the Corporation at an annual or special meeting of such
shareholders within twelve (12) months following the date upon which this
Plan is adopted by the Board of Directors, the Plan shall be of no further
force and effect and any option granted hereunder shall be null and void.
<PAGE> 6
EXHIBIT 10.5
------------
UNION BANKSHARES, INC.
MORRISVILLE, VERMONT
DEFERRED COMPENSATION PLAN AND AGREEMENT
THIS AGREEMENT is made effective the first day of _________, 199__ by
and between Union Bankshares, Inc. (hereinafter the "Company"), and its
subsidiary Union Bank (hereinafter "Subsidiary") with a principal office in
Morrisville in the County of Lamoille and State of Vermont (together
hereinafter the "Bank") and __________________ of _____________ in the
County of ____________ and State of Vermont (hereinafter called
"Executive").
WHEREAS the Executive presently serves the Bank in the capacity of
director or officer in which capacity his services have significantly
contributed to the successful operation of the Bank, and
WHEREAS, the Bank has determined that it is in the best interests of
the Bank to provide inducements to the Executive to continue his services
with the Bank, and
WHEREAS, the parties wish to enter into an agreement relating to the
Executive's services to the Bank upon the terms and conditions set forth
herein, and
WHEREAS, by this instrument the Bank has determined to amend and
supersede its prior existing nonqualified deferred compensation plan.
NOW THEREFORE, in consideration of the mutual agreements and
undertakings hereinafter set forth and other good and valuable
consideration, IT IS AGREED:
1. The Plan. The Bank establishes the Deferred Compensation Plan
and Agreement (hereinafter the "Plan" or "Agreement") for the benefit of
(i) participating members of the board of directors of the Company and the
Subsidiary; and (ii) participating officers of the Company and the
Subsidiary. A participating Executive may elect to defer receipt of all or
part of his salary or his director's compensation and fees, as the case may
be, beginning with amounts earned in the first calendar quarter commencing
after the effective date of such election. For purposes of the Plan,
"salary" shall mean the participating Executive's base salary or
compensation, including any bonuses or other special payments, for services
rendered to the Bank as an officer; and director's compensation and fees
shall mean any compensation or fees payable to a director for services
rendered to the Bank in that capacity,
<PAGE> 1
including any compensation or fees payable for services as a member of any
committee of the board or directors. This Agreement amends and supersedes
the Bank's prior existing nonqualified deferred compensation plan.
2. Election by Participating Executive. An election to defer
receipt of salary or directors' compensation and fees shall be made in
writing and shall become effective upon filing with, and acceptance by, the
Bank. The terms of such written election shall be as set forth on Exhibit
A attached hereto. An election shall remain in effect unless the
participant terminates the election by a notice in writing filed with, and
accepted by, the Bank. Any termination of an election shall be applicable
only respectively to salary or directors' compensations and fees earned
during the calendar quarters following date of filing with, and acceptance
by, the Bank, and shall not affect amounts previously deferred.
3. Benefit Date. The Executive may elect in writing to terminate
the election to defer as set forth in Paragraph 2 hereof and to commence
receiving his deferred compensation benefit as hereinafter defined on the
first day of any calendar month following the month in which he attains age
Fifty-Five (55).
4. Deferred Compensation Benefit. Beginning with the first day of
the month in which the Executive has designated by the election as set
forth in Paragraph 3 hereof (and on that date each year thereafter) or as
soon thereafter as is reasonably practicable, the Bank will pay to the
Executive an annual benefit for the period and in the amounts set forth on
Exhibit B attached hereto. The payment of the deferred compensation
benefits under this paragraph shall not in any manner disqualify the
Executive from receiving any benefits to which the Executive may be
entitled under any other pension, retirement, profit sharing or other
similar employee benefit plans arising out of the Executive's services or
employment with the Bank, nor is it intended to disqualify the Executive
from receiving payment of any social security benefit to which the
Executive may be entitled.
5. Death after Attaining Age 55. In the event that the Executive
shall die after the commencement of the payments provided for in Paragraph
4 hereof, and before the total number of annual payments as therein
prescribed have been received (Exhibit B), the Bank shall pay the remainder
of said annual payments to the Executive's beneficiary as hereinafter
designated. In the event that the Executive shall die before the
commencement of the payments provided for in Paragraph 4 hereof, the Bank
shall pay to the Executive's beneficiary as hereinafter designated an
annual benefit for the period and in the amounts set forth in Exhibit C
attached hereto. In the event that there shall be no designated
beneficiary qualified to receive payments, the remaining computed value of
any said annual payments discounted at seven (7%) percent shall be paid in
one sum to the estate of the Executive. In
<PAGE> 2
the event that there shall be no designated beneficiary eligible to receive
monthly payments at any time after payments are commenced to a designated
beneficiary, the remaining commuted value of said payments discounted at
seven (7%) percent shall be paid in one sum to the estate of the Executive.
"Remaining commuted value of said payment discounted at 7%" as used in this
paragraph and elsewhere in this Agreement shall be defined as set forth on
Exhibit E attached hereto.
6. Death Before Attaining Age 55. In the event that the Executive
shall die before attaining age 55 as herein provided, the Bank shall make
annual payments as in the amount specified and for a period as set forth in
Exhibit C attached hereto to the Executive's beneficiary hereinafter
designated. In the event that there shall be no designated beneficiary
eligible to receive payments, the Bank shall pay the remaining computed
value of such payment discounted a seven (7%) percent in one sum to the
Executive's estate. In the event that after commencement of annual
payments to a designated beneficiary there shall at any time be no
designated beneficiary eligible to receive monthly payments, the remaining
commuted value of such payments designated at seven (7%) percent shall be
paid in one sum to the estate of the Executive.
7. Termination of Relationship. Notwithstanding any paragraph in
the Agreement to the contrary, in the event that the Executive's
relationship with the Bank as a director or officer shall terminate for any
reason except for death as set forth in Paragraph 6, prior to his attaining
age Fifty-Five (55), or in the event the Executive shall commit suicide
(suicide shall be determined by any policy or the life of the Executive) at
any time within a period of two (2) years after the later of the date of
signing the Agreement or the effective date of any life insurance policy
owned by the Bank covering the Executive, the Executive shall then be
entitled to receive only the amounts as set forth on Exhibit C-1 attached
hereto (and not as otherwise provided under this Agreement). The payment
set forth on Exhibit D shall be paid in a lump sum as soon as practicable
after the event of termination or suicide. In the event that the Executive
shall die prior to payment of all benefits due under Exhibit C-1, such
remaining unpaid benefits set forth on Exhibit C-1 shall be paid to the
Executive's beneficiary hereinafter designated. In the event that there
shall at any time be no designated beneficiary eligible to receive the
payments set forth on Exhibit C-1, the remaining payments shall be paid in
a lump sum of the estate of the Executive.
8. Life Insurance. The Bank may, but shall not be required to,
obtain life insurance coverage on the life on the Executive in order to
provide funds to make some or all of the benefit payments required by this
Agreement. Any such life insurance coverage shall be the sole property of
the Bank and the Executive shall have no interest whatever in said coverage
by way of security or assurance that the payments provided for in this
<PAGE> 3
agreement shall be made. Bank has relied, in entering into this Agreement,
on information supplied by the Executive to the Bank (or to insurer
designated by the Bank to provide the Bank with sufficient funds to satisfy
its obligations under the Agreement). The Executive warrants that all
information supplied is accurate and complete in all material respects. In
the event that the Executive makes any material misrepresentations or
omissions in the information and Bank is unable to realize on the life
insurance coverage on the life of the Executive then no payments shall be
due and payable by the Bank to the Executive, his estate, or to his
designated beneficiary hereunder.
9. Inalienability. Neither the Executive nor any designated
beneficiary hereunder shall have any right to anticipate any payments to be
made hereunder or to sell, assign, pledge, encumber or otherwise charge any
of the payments to be made hereunder and the Bank shall not be answerable
to any claim, demand or order as a result of any such alienation,
assignment or transfer.
10. Assignability. All of the rights, privileges and benefits
hereunder shall be personal to the Executive (or the Executive's estate)
and any designated beneficiary or such Executive and shall not be
assignable or transferable to any other persons. The obligations hereunder
and contained herein shall survive and shall be binding upon the successors
in effect and assigns of the Bank including, but not limited to, any sale,
transfer or other disposition of the stock or assets of the Bank.
11. Not An Employment Contract. This Agreement shall not be
construed as an employment contract between the Bank and the Executive,
shall not give the Executive any rights to continued employment by the Bank
or the right to continue as a director or officer of the Bank, and it shall
not in any manner restrict the right of the Bank acting through its Board
of Directors to terminate its relationship with the Executive at any time
subject, however, to the provision of Paragraph 7.
12. Amendment or Revocation. This Agreement may be amended or
revoked at any time during the lifetime of the Executive only by an
instrument in writing executed by both parties with the same formalities as
this Agreement.
13. Required Action. Any required action of the Bank shall be by
resolution of a simple majority of the board of directors of the Bank.
14. Variation in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons may require.
<PAGE> 4
15. Notice. Any notice to be given hereunder shall be in writing
and shall be deemed given when delivered to, when deposited in the United
States mails, postage prepaid, by registered or certified mail with return
receipt requests, addressed as follows:
If to the Bank: Union Bank
PO Box 667
Morrisville, VT 05661
If to the Executive: _______________________
_______________________
_______________________
16. Designation of Beneficiary. The designation of beneficiary by
the Executive shall be as set forth on Exhibit D attached hereto.
17. Tax Effect. It is intended that this Agreement represents a
mere contractual obligation for the Executive to receive a benefit from
the Bank at a later date (pursuant to the Agreement), and shall not result
in actual or constructive receipt of income or economic benefit to the
Executive and shall not be subject to tax until the benefit is actually
paid to the Executive pursuant to the Agreement. This Agreement
constitutes a nonqualified deferred compensation plan for tax purposes.
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
UNION BANK
_____________________________ BY:_______________________________
Attest
EXECUTIVE
_____________________________ BY:_______________________________
Attest
STATE OF VERMONT
COUNTY OF LAMOILLE
As of the day and year first above written, before me personally
appeared_______________, to me known, who, being by me duly sworn, did
depose and say that he resided at ___________________; that he is the
___________________ of Union Bank, the Corporation described in and which
executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
Before me ________________________
Notary Public
STATE OF VERMONT
COUNTY OF LAMOILLE
As of the day and year first above written, before me personally came
________________, to me known, who, being by me duly sworn, did depose and
say that he resided at ___________________; that he is the
___________________ of Union Bank, the Corporation described in and which
executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
Before me ________________________
Notary Public
<PAGE>
EXHIBIT A
ELECTION BY PARTICIPATING EXECUTIVE
DEFERRED COMPENSATION PLAN AND AGREEMENT
UNION BANK
Date:
Union Bank
PO Box 667
Morrisville, VT 05661
Gentlemen:
In accordance with the Deferred Compensation Plan and Agreement of Union
Bank (the "Plan"), I hereby elect to defer receipt of $___________ of my
annual fees and compensation for serving as a Director or Officer of Union
Bankshares, Inc. (the "Company") and/or Union Bank (the "Bank") effect with
respect to fees and compensation to be earned effective _____________.
This election shall remain effective as set forth in paragraph 2 of the
Plan.
Sincerely,
_____________________________
Accepted by:
BY: _________________________
Duly Authorized Agent
Date:
<PAGE>
EXHIBIT 23.5
------------
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Union Bankshares,
Inc. on Form S-4 of our reports dated January 27, 1999 (except for Note 19,
as to which the date is January 18, 1999) and January 28, 1998 relating to
the financial statements as of December 31, 1998 and December 31, 1997 of
Union Bankshares, Inc. and subsidiary, appearing in the Joint Proxy
Statement/Prospectus, which is part of this Registration Statement, and to
the reference to us under the heading "EXPERTS" in such Joint Proxy
Statement/Prospectus.
A.M. Peisch & Company /s/ A.M. Peisch & Company
July 9, 1999
White River Junction, Vermont
VT Reg. No. 92-0000102
<PAGE>
EXHIBIT 23.6
------------
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Union Bankshares,
Inc. on Form S-4 of our reports dated January 12, 1999 and January 9, 1998
relating to the financial statements as of December 31, 1998 and December
31, 1997 of Citizens Savings Bank & Trust Company, appearing in the Joint
Proxy Statement/Prospectus, which is part of this Registration Statement,
and to the reference to us under the heading "EXPERTS" in such Joint Proxy
Statement/Prospectus.
A.M. Peisch & Company /s/ A.M. Peisch & Company
July 9, 1999
White River Junction, Vermont
VT Reg. No. 92-0000102
<PAGE>
EXHIBIT 23.7
------------
CONSENT
I hereby consent to being named in the Joint Proxy Statement/Prospectus of
Union Bankshares, Inc. ("Union") and Citizens Savings Bank and Trust
Company ("Citizens") included in the Registration Statement on Form S-4 of
Union, as designee for appointment or election to the Board of Directors of
Union upon consummation of the affiliation between Union and Citizens
pursuant to their Affiliation Agreement dated as of February 16, 1999.
Dated as of June 30, 1999.
/s/ William T. Costa, Jr.
- ------------------------------
William T. Costa, Jr.
<PAGE>
EXHIBIT 23.8
------------
CONSENT
I hereby consent to being named in the Joint Proxy Statement/Prospectus of
Union Bankshares, Inc. ("Union") and Citizens Savings Bank and Trust
Company ("Citizens") included in the Registration Statement on Form S-4 of
Union, as designee for appointment or election to the Board of Directors of
Union upon consummation of the affiliation between Union and Citizens
pursuant to their Affiliation Agreement dated as of February 16, 1999.
Dated as of June 30, 1999.
/s/ Franklin G. Hovey, II
- ------------------------------
Franklin G. Hovey, II
<PAGE>
EXHIBIT 23.9
------------
CONSENT
I hereby consent to being named in the Joint Proxy Statement/Prospectus of
Union Bankshares, Inc. ("Union") and Citizens Savings Bank and Trust
Company ("Citizens") included in the Registration Statement on Form S-4 of
Union, as designee for appointment or election to the Board of Directors of
Union upon consummation of the affiliation between Union and Citizens
pursuant to their Affiliation Agreement dated as of February 16, 1999.
Dated as of June 30, 1999.
/s/ Jerry S. Rowe
- ------------------------------
Jerry S. Rowe
<PAGE>
EXHIBIT 24.1
------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors
and/or officers of Union Bankshares, Inc., a corporation organized under
the laws of the State of Vermont (the "Company") hereby constitutes and
appoints Kenneth D. Gibbons, Cynthia D. Borck, Marsha A. Mongeon, Denise J.
Deschenes and John L. Primmer, and each of them (with full power to each of
them to act alone), his (her) true and lawful attorneys-in-fact and agents
for him (her) and on his (her) behalf and in his (her) name, place and
stead, in any and all capacities, to execute and file with the Securities
and Exchange Commission (or any other federal, state or foreign
governmental or regulatory authority, including any state or foreign
securities or "blue sky" regulatory agencies), a Registration Statement on
Form S-4 (or other appropriate form or filing), and all amendments
(including post-effective amendments on Form S-4 or other appropriate form
or filing) thereto, with all exhibits and any and all documents required to
be filed with respect thereto, relating to the registration under the
Securities Act of 1933, as amended, and/or registration, qualification or
exemption under the securities or "blue sky" laws of any state or foreign
jurisdiction, of shares of the Company's Common Stock to be issued or sold
in connection with the Company's proposed acquisition of control of
Citizens Savings Bank and Trust Company, granting unto said attorneys, and
each of them, full power and authority to do and to perform each and every
act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he
(she) might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned directors and/or officers has
hereunto set his hand, as of the 16th day of June, 1999.
/s/ Kenneth D. Gibbons /s/ Cynthia D. Borck
- ------------------------------ -------------------------------
Kenneth D. Gibbons Cynthia D. Borck
/s/ Marsha A. Mongeon /s/ Oscar E. Churchill
- ------------------------------ -------------------------------
Marsha A. Mongeon Oscar E. Churchill
/s/ Peter M. Haslam /s/ Robert P. Rollins
- ------------------------------ -------------------------------
Peter M. Haslam Robert P. Rollins
/s/ Richard C. Sargent /s/ Walter M. Sargent
- ------------------------------ -------------------------------
Richard C. Sargent Walter M. Sargent
/s/ William F. Kinney /s/ W. Arlen Smith
- ------------------------------ -------------------------------
William F. Kinney W. Arlen Smith
/s/ Richard C. Marron
- ------------------------------
Richard C. Marron
<PAGE>
EXHIBIT 99.1
------------
REVOCABLE PROXY
UNION BANKSHARES, INC
SPECIAL MEETING OF SHAREHOLDERS
Wednesday, October 6, 1999
The undersigned shareholder(s) hereby appoints Richard Sargent,
________________ and _________________, and each of them individually,
as proxies, with full power of substitution in each, to vote all shares
of common stock of Union Bankshares, Inc. ("Union") that the
undersigned is (are) entitled to vote at the Special Meeting of
Shareholders of Union to be held at __________________________________
___________________________________________, Vermont, on
Wednesday, October 6, 1999 at 10:00 a.m., Eastern Time, and at
any adjournment thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE.
Please complete, sign, date and mail this proxy card promptly in the
enclosed postage-paid envelope to The Union Bank, P.O. Box 667,
Morrisville, Vermont 05661-0667 Attn: JoAnn Tallman. If you do not
sign and return your proxy or attend the meeting and vote in person,
your shares cannot by voted.
1. To approve the amendment of Section 7 of Union's Amended and Restated
Articles of Association to increase the number of authorized shares
of Union's common stock, $2.00 par value per share, from 2,400,000 to
5,000,000 shares. The increase is necessary to complete the proposed
affiliation with Citizens Savings Bank and Trust Company ("Citizens")
under the terms of the Affiliation Agreement between Union and
Citizens dated as of February 16, 1999, as described in the Joint
Proxy Statement/Prospectus of Union and Citizens dated
________________, 1999. If approved, the proposed increase in
Union's authorized common stock will take effect even if the
affiliation with Citizens is not completed for any reason.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Should any other matter requiring a vote of the shareholders arise, the
proxies named above are authorized to vote in accordance with the
recommendations of Union's management. The Board of Directors is not
aware of any matter which is to be presented for action at the Special
Meeting other than as set forth on this card.
<PAGE>
This proxy card, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). If no direction is
made, this proxy will be voted FOR Item 1.
Please sign exactly as name or names appear on this proxy
card. When signing as attorney, executor, administrator,
trustee, guardian or in any other representative capacity,
please so indicate. If a corporation, please sign in corporate
name by an authorized officer. If a partnership, please sign
in partnership name by authorized person.
_______________________________________________
Signature of Shareholder Date
_______________________________________________
Signature of Shareholder Date
<PAGE>
EXHIBIT 99.2
------------
REVOCABLE PROXY
CITIZENS SAVINGS BANK AND TRUST COMPANY
SPECIAL MEETING OF SHAREHOLDERS
Wednesday, October 6, 1999
The undersigned shareholder(s) hereby appoints ___________________________,
________________ and _________________, and each of them individually, as
proxies, with full power of substitution in each, to vote all shares of
common stock of Citizens Savings Bank and Trust Company ("Citizens") that
the undersigned is (are) entitled to vote at the Special Meeting of
Shareholders of Citizens to be held at _______________________, Vermont
on Wednesday, October 6, 1999 at 10:00 a.m., Eastern Time,
and at any adjournment thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR
TO ITS EXERCISE.
Please complete, sign, date and mail this proxy card promptly in the
enclosed postage-paid envelope to Citizens Savings Bank and Trust Company,
P.O. Box 219, St. Johnsbury, Vermont 05819 Attn:______________. If you do
not sign and return your proxy or attend the meeting and vote in person,
your shares cannot by voted.
1. To approve the Affiliation Agreement between Citizens and Union
Bankshares, Inc. ("Union") dated as of February 16, 1999 and a
related Agreement and Plan of Merger (together, the "Agreement"),
pursuant to which Citizens will merge with an interim bank subsidiary
of Union, with Citizens as the surviving corporation, and with the
result that Citizens will become a wholly-owned subsidiary of Union,
all upon the terms and subject to the conditions set forth in the
Agreement and as described in the Joint Proxy Statement/Prospectus of
Union and Citizens dated ________________, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Should any other matter requiring a vote of the shareholders arise, the
proxies named above are authorized to vote in accordance with the
recommendations of Citizens' management. The Board of Directors is not
aware of any matter which is to be presented for action at the Special
Meeting other than as set forth on this card.
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This proxy card, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). If no direction is
made, this proxy will be voted FOR Item 1.
Please sign exactly as name or names appear on this proxy
card. When signing as attorney, executor, administrator,
trustee, guardian or in any other representative capacity,
please so indicate. If a corporation, please sign in corporate
name by an authorized officer. If a partnership, please sign
in partnership name by authorized person.
_______________________________________________
Signature of Shareholder Date
_______________________________________________
Signature of Shareholder Date
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