UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number: 000-28449
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $2.00 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant, based on the last known trade price prior to March 10, 2000
was $37,310,973. (Since there is no active public trading market in the
registrant's stock, this may not reflect actual market value.)
As of March 10, 2000, there were 3,029,529 shares of the registrant's $2
par value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Document Part
-------- ----
Annual Report to Shareholders for the year ended December 31, 1999 I, II
Proxy Statement for the 2000 Annual Meeting of Shareholders III
UNION BANKSHARES, INC.
Table of Contents
Part I
Item 1 --- Business
Item 2 --- Properties
Item 3 --- Legal Proceedings
Item 4 --- Submission of Matters to a Vote of Security Holders
Part II
Item 5 --- Market for Registrant's Common Equity and Related Stockholder
Matters*
Item 6 --- Selected Financial Data
Item 7 --- Management's Discussion and Analysis of Financial Condition and
Results of Operations*
Item 7A --- Quantitative and Qualitative Disclosures about Market Risk*
Item 8 --- Financial Statements and Supplementary Data*
Item 9 --- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Part III
Item 10 --- Directors and Executive Officers of Registrant**
Item 11 --- Executive Compensation**
Item 12 --- Security Ownership of Certain Beneficial Owners and
Management**
Item 13 --- Certain Relationships and Related Party Transactions**
Part IV
Item 14 --- Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
- -------------------
[FN]
<F*> The information required by Part II, Items 5,7,7A and 10 is
incorporated herein by reference from the 1999 Annual Report to
Shareholders
<F**> The information required by Part III is incorporated herein by
reference from Union's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 26, 2000.
</FN>
Part I - Item 1 Business
General: Union Bankshares, Inc. is a two-bank holding company whose
subsidiaries are Citizens Savings Bank & Trust Co. and Union Bank. It was
incorporated in the State of Vermont in 1982. Citizens Savings Bank and
Trust Company was chartered under Vermont law in 1887 as a State bank and
is headquartered in St. Johnsbury, Vermont. Citizens became a wholly owned
subsidiary of Union on November 30, 1999 through a pooling of interests but
kept its separate name and banking franchise. Union Bank was organized and
chartered as a Vermont bank in 1891 and became a wholly owned subsidiary of
Union in 1982 upon its formation. Union and Union Bank are headquartered in
Morrisville, Vermont.
Union has two definable segments that are Citizens Savings Bank & Trust Co.
and Union Bank which both generally operate in the same geographic and
economic environments in Northern Vermont. Citizens Savings Bank & Trust
Co. has 50 full time equivalent employees while Union Bank has 98. Union,
itself, does not have any paid employees.
Union's income is derived principally from interest on loans and earnings
on other investments. Its primary expenses arise from interest paid on
deposits and borrowings and general overhead expenses. The assets of Union
have grown from $247 million to $295 million over the last five years or
19.5% while our total deposits have grown from $217 million to $258 million
or 18.5% during that same period. Please refer to our schedule of Selected
Financial Information, which has been restated for all periods for the
pooling of interest with Citizens, at Item 6 of this annual report for
further details.
The deposits of both banks are insured by the Bank Insurance Fund of the
FDIC up to legal limits (generally $100,000 per depositor).
Competition: Union and its two subsidiaries face substantial competition
in their market area from local commercial banks, savings banks, credit
unions, and financial services affiliates of bank holding companies, as
well as from national financial service providers such as mutual funds,
brokerage houses, consumer finance companies and internet banks. Union
anticipates continued strong competition from such financial institutions
in the foreseeable future. Within Union's market area are branches of
several commercial and savings banks that are substantially larger than
Union. Both the subsidiary banks focus on their niche of being community
banks and focus hours and modes of delivery to provide outstanding customer
service. We compete for checking, savings and other deposits by offering
depositors competitive rates, personal service, local area expertise,
convenient locations and access, and an array of financial services and
products.
The competition in originating real estate and other loans comes
principally from commercial banks, mortgage banking companies and credit
unions. Union competes for loan originations primarily through the interest
rates and loan fees it charges, the types of loans it offers, and the
efficiency and quality of services it provides. In addition to residential
mortgage lending and municipal loans, Union also emphasizes commercial real
estate, construction, and both conventional and SBA commercial lending.
Factors that affect Union's ability to compete for loans include general
and local economic conditions, prevailing interest rates including "prime"
rate, and pricing volatility of the secondary mortgage markets. Union
attempts to promote an increased level of personal service and expertise
within the community to position itself as a lender to small to middle
market business and residential customers, which tend to be under-served by
larger institutions.
Management's strategy includes continued evaluation of changing market
needs and design and implementation of products and services to meet those
needs. The directors and management of Union intend to continue to offer
products and services that will allow Union to manage responsibly the
growth of its assets, while building and enhancing both shareholder value
and both Citizens' and Union Bank's image as premiere Vermont community
banks.
Regulation and Supervision: As Vermont-chartered commercial banks, each
subsidiary is subject to regulation, examination, and supervision by the
Vermont Banking Department and the FDIC. Union, as a bank holding company,
is subject to regulation, examination and supervision by the Federal
Reserve Board. The regulations of these authorities govern certain of the
operations of Union. The following discussion summarizes the material
aspects of federal and state banking laws and regulations that apply to
Union, Citizens, and Union Bank:
Acquisitions and Activities. The activities of bank holding companies, such
as Union, and those of companies that they control or in which they hold
more than 5% of the voting stock, are limited to banking, managing or
controlling banks, furnishing services to or performing services for their
subsidiaries or any other activity that the Federal Reserve Board
determines to be so closely related to banking or managing or to
controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to consider whether
the performance of such activities by a bank holding company or its
subsidiaries can reasonably be expected to produce benefits to the public
such as greater convenience, increased competition or gains in efficiency
that outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or
unsound banking practices. Generally, bank holding companies, such as
Union, are required to obtain prior approval of the Federal Reserve Board
to engage in any new activity or to acquire more than 5% of any class of
voting stock of any bank or other company.
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to their subsidiary banks
and to commit resources to support them. This support may be called for at
times when a bank holding company may not have the required resources to
provide such support.
The federal Gramm-Leach-Bliley financial modernization act ("Gramm-Leach-
Bliley"), which became effective on March 11, 2000, permits eligible bank
holding companies to become financial holding companies and thereby
affiliate with securities firms and insurance companies and engage in a
broader range of activities than is otherwise permissible for bank holding
companies. A bank holding company is eligible to elect to become a financial
holding company and to engage in activities that are "financial in nature"
if each of its subsidiary banks is well capitalized for regulatory capital
purposes, is well managed and has at least a satisfactory rating under the
Community Reinvestment Act ("CRA"). No regulatory approval is required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incident
to activities that are financial in nature, as defined by the Federal
Reserve Board. Gramm-Leach-Bliley defines activities which are "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. Gramm-Leach-Bliley
also contains similar provisions authorizing eligible national banks to
engage indirectly through a financial subsidiary and subject to limitations
on investment, in activities that are financial in nature, other than
insurance underwriting, insurance company portfolio investment, real estate
development and real estate investment, through a financial subsidiary of
the bank, if the bank is well capitalized, well managed and has at least a
satisfactory CRA rating. State-chartered banks in Vermont would have
comparable powers under the state's national bank parity powers statute.
Implementation of Gramm-Leach-Bliley will likely result in structural changes
to the financial services industry, the full effect of which cannot be
predicted with any certainty.
Interstate Banking and Branching. With the passage of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, bank holding
companies became able to acquire banks based outside their home states,
generally without regard to whether the state's law would permit the
acquisition. The Riegle-Neal Act also authorizes banks to merge across
state lines, to create interstate branches. This provision, which was
effective June 1, 1997, allowed each state an opportunity to "opt out" of
interstate branching. Neither Vermont nor the contiguous states of New
Hampshire, New York and Massachusetts has "opted out" of interstate
branching. The Riegle-Neal Act also permits a bank to open new branches in
a state in which it does not already have banking operations if the state
has enacted a law permitting such de novo branching. Neither Vermont nor
any of the three contiguous states has adopted legislation permitting de
novo interstate branching, but all of such states except New Hampshire
permits out-of-state banks or bank holding companies to acquire existing
branches. Although interstate banking and branching may result in increased
competitive pressures in the markets in which we operate, we also believe
that they present competitive opportunities for locally owned and managed
banks, such as Union and Citizens, that emphasize personal service and
prompt, local decision-making.
Affiliate Restrictions. Bank holding companies and their affiliates are
subject to certain restrictions under the Federal Reserve Act in their
dealings with each other, such as in connection with extensions of credit,
transfers of assets, and purchase of services among affiliated parties.
Further, under the Federal Reserve Act and Federal Reserve Board
regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in-arrangements in connection with extensions
of credit or furnishing of property or services to third parties. Union,
Union Bank, and Citizens are subject to these restrictions in their
intercompany transactions.
Banks: The various laws and regulations applicable to Citizens and Union
that are administered by the FDIC and the Vermont Banking Commissioner
affect the banks' corporate practices, such as payment of dividends,
incurring of debt and acquisition of financial institutions and other
companies. These laws also affect their business practices, such as payment
of interest on deposits, the charging of interest on loans, or the location
of offices. There are no outstanding regulatory orders resulting from
regulatory examinations of Union, Union Bank or Citizens.
A comprehensive recodification of Vermont's banking laws is now pending in the
Vermont Legislature. If passed, the bill would modernize and streamline the
laws applicable to state bank corporate practices and regulatory procedures.
No prediction can be made at this time as to whether or when the
recodification will be enacted, or the final form the legislation may take.
Dividend Limitations: As a holding company, Union's ability to pay
dividends to its shareholders is largely dependent on the ability of its
subsidiaries to pay dividends to it. Payment of dividends by Vermont-
chartered banks, such as Union Bank and Citizens, is subject to applicable
state and federal laws. A Vermont bank may pay dividends only if the bank's
board has reviewed the bank's financial results and has found that the
proposed dividend will be paid out of amounts actually earned. The Vermont
Banking Commissioner may limit or condition a bank's ability to pay
dividends, if the bank does not have a segregated surplus fund which,
together with earned surplus, equals at least 10% of the amount of the
bank's deposits and other liabilities, except surplus, capital notes and
debentures. In addition, the Federal Reserve Board, the FDIC and the
Vermont Banking Commissioner are authorized under applicable federal and
state laws to prohibit payment of dividends that they determine would be an
unsafe or unsound practice. Payment of dividends that deplete the capital
of a bank or a bank holding company, or render it illiquid, could be found
to be an unsafe or unsound practice.
Capital Requirements: The Federal Reserve Board, the FDIC and other
federal banking regulators have issued substantially similar risk-based and
leverage capital guidelines for United States Banking organizations. Those
regulatory agencies are also authorized to require that a banking
organization maintain capital above the minimum levels, whether because of
its financial condition of actual or anticipated growth. The Federal
Reserve Board's risk-based capital guidelines define a three-tier capital
framework and specify three relevant capital ratios: Tier 1 Capital Ratio,
a Total Capital Ratio and a "Leverage Ratio." Tier 1 Capital consists of
common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. The remainder (Tier 2 and Tier 3 Capital
) consists of subordinate and other qualifying debt, preferred stock the
does not qualify as Tier 1 Capital, and the allowance of credit losses up
to 1.25% of risk-weighted assets.
The sum of Tier 1,Tier2 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 states minimum Leverage Ratio
is 3%, most banking organizations are required to maintain Leverage Ratios
of at least 1 to 2 percentage points above 3%.
Federal bank regulatory agencies require banking organizations that engage
in significant trading activity to calculate a capital charge for market
risk. Significant trading activity means trading activity of at least 10%
of total assets or $1 billion, whichever is smaller, calculated on a
consolidated basis for bank holding companies. Federal bank regulators may
apply the market risk measure to other bank holding companies, as the
agency deems necessary or appropriate for safe and sound banking practices.
Each agency may exclude organizations that it supervises that otherwise
meet the criteria under certain circumstances. The market risk charge will
be included in the calculation of an organization's risk-based capital
ratio. Neither Union, Union Bank, nor Citizens is currently subject to this
special capital charge.
Federal Reserve Board policy provides that banking organizations generally,
and, in particular, those that are experiencing internal growth or actively
making acquisitions, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets, such as goodwill. Furthermore, the capital
guidelines indicate that the Federal Reserve Board will continue to
consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for
expansion or new activities. The Tangible Tier 1 Leverage Ratio is
calculated by dividing a banking organization's Tier 1 Capital less all
intangible assets by its total consolidated quarterly average assets less
all intangible assets.
The Federal Reserve Board's capital adequacy guidelines generally provide
that bank holding companies with a ratio of intangible assets to tangible
Tier 1 Capital in excess of 25% will be subject to close scrutiny for
certain purposes, including the Federal Reserve Board's evaluation of
acquisition proposals. Union does not have a material amount of intangibles
in its capital base, nor was any goodwill intangible created as a result of
the merger.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and requires the respective federal banking agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements. FDICIA imposes
progressively more restrictive constraints on operations, management and
capital distributions, depending on the category in which an institution is
classified. Failure to meet the capital guidelines could also subject a
banking institution to capital raising requirements. An "undercapitalized"
bank must develop a capital restoration plan and its parent holding company
must guarantee that bank's compliance with the plan. The liability of the
parent holding company under any such guarantee is limited to the lesser of
5% of the bank's assets at the time it became undercapitalized or the
amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take
priority over the parent's general unsecured creditors. In addition, FDICIA
requires the various federal banking agencies to prescribe certain
noncapital standards for safety and soundness related generally to
operations and management, asset quality and executive compensation, and
permits regulatory action against a financial institution that does not
meet such standards.
The various federal banking agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA,
using the Total Capital, Tier 1 Ratio and the Leverage Ratio as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution
must have a Tier 1 capital ratio of at least 6%, a total capital ratio of
at least 10% and a leverage ratio of at least 5% and not be subject to a
capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8%
and a leverage ratio of at least 4%, or 3% in some cases.
Community Reinvestment Act: Union Bank and Citizens are subject to the
federal Community Reinvestment Act ("CRA"), which requires banks to
demonstrate their commitment to serving the credit needs of low and
moderate income residents of their communities. Both banks participate in a
variety of direct and indirect lending programs and other investments for
the benefit of the low and moderate income residents in our communities. At
their last CRA compliance examinations by the FDIC, Union Bank received a
rating of "outstanding" and Citizens received a rating of "satisfactory."
Deposit Insurance Premium Assessments: Under applicable federal laws and
regulations, deposit insurance premium assessments to the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are based
on a supervisory risk rating system, with the most favorably rated
institutions paying 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 the minimum deposit premium assessment.
FDICIA Cross-Guarantees: Under the cross-guarantee provisions of FDICIA,
in some circumstances in the event of a loss suffered or anticipated by the
FDIC - either as a result of a bank's insolvency or FDIC assistance
provided to a bank in danger of default - the FDIC may assess the other
banks in the same holding company family to recoup its losses to the
deposit insurance fund.
Part I - Item 2 Properties
As of December 31, 1999, Union's subsidiaries operated 12 community-banking
locations all of which are in Lamoille or Caledonia counties of Vermont.
Eight of these branch locations are Union Bank's and four are Citizens.
Together they also operate 21 automated banking machines in northern
Vermont. The Company owns eight of its branch locations and leases the
other branches and certain ATM premises from third parties under terms and
conditions considered by management to be favorable to the Company.
Additional information relating to the Company's properties is set forth in
Note 7 to the consolidated financial statements and incorporated herein by
reference.
Part I - Item 3 Legal Proceedings
There are no known pending legal proceedings to which Union or its
subsidiaries are a party, or to which any of the properties are subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, based
upon the opinion of counsel, any such liability will not have a material
effect on the consolidated financial position of Union and its
subsidiaries.
Part I - Item 4 Submission of Matters to a Vote of Security Holders
On November 19, 1999 a special meeting of shareholders of Union Bankshares,
Inc. was held 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.
This increase was necessary in order for Union to complete the affiliation
with Citizens Savings Bank & Trust Co. 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. As of the meeting date, there were
2,038,140 shares issued and outstanding. The results of the vote taken was
as follows:
<TABLE>
<CAPTION>
<S> <C>
1,710,621 For
6,950 Against
120 Abstained
320,449 Not voted
---------
2,038,140 Total Issued and Outstanding
</TABLE>
Part II - Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
Please refer to page 63 of the Company's 1999 Annual Report to Shareholders,
which page is incorporated herein by reference.
Part II - Item 6 Selected Financial Data
<TABLE>
<CAPTION>
At or For The Years Ended December 31 (5)
--------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------
Balance Sheet Data: (Dollars in thousands except per share data)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $295,476 $290,129 $273,280 $255,747 $247,146
Investment Securities 60,441 58,585 45,900 44,341 38,616
Loans, net of unearned income 209,353 202,468 201,918 189,051 182,436
Allowance for loan losses (2,870) (2,845) (2,811) (2,844) (2,711)
Total nonperforming loans 4,123 2,407 4,161 4,028 2,574
Total nonperforming assets 4,150 2,932 4,829 4,462 2,800
Other real estate owned 27 525 668 434 226
Deposits 257,593 248,919 239,229 224,419 217,385
Borrowed funds 2,872 6,084 1,636 1,693 1,747
Shareholders' equity (1) 32,220 31,762 29,023 26,393 24,921
Income Statement Data:
Net interest and dividend income $ 13,743 $ 13,374 $ 12,884 $ 12,291 $ 12,185
Provision for loan losses 359 400 425 580 630
Noninterest income 2,545 2,911 2,412 2,555 2,422
Noninterest expense 10,038 9,279 8,567 8,430 8,374
Net income 4,075 4,551 4,355 4,043 3,883
Per Common Shara Data: (2)
Net income (3) $ 1.35 $ 1.51 $ 1.44 $ 1.31 $ 1.26
Cash dividends paid 0.90 0.82 0.75 0.69 0.62
Book value (1) 10.64 10.50 9.60 8.72 8.07
Selected Ratios:
Return on average assets 1.39% 1.65% 1.66% 1.60% 1.66%
Return on average equity 12.70% 14.95% 15.73% 15.58% 16.34%
Dividend payout (4) 66.67% 54.30% 52.08% 52.67% 49.21%
Interest rate spread 4.41% 4.61% 4.61% 4.62% 5.00%
Net interest margin 5.13% 5.34% 5.35% 5.35% 5.69%
Operating expenses to average assets 3.42% 3.36% 3.26% 3.34% 3.57%
Average interest earning assets to
average interest bearing liabilities 121.58% 120.42% 121.11% 119.66% 119.52%
Average Shareholders' equity to
average assets 10.92% 11.03% 10.52% 10.29% 10.04%
Tier 1 leverage capital ratio 11.35% 10.87% 10.68% 10.45% 10.23%
Tier 1 risk-based capital ratio 17.27% 16.24% 15.95% 15.43% 14.09%
Total risk-based capital ratio 18.55% 17.57% 17.21% 16.68% 15.21%
Asset Quality Ratios:
Non-performing loans to total loans 1.97% 1.19% 2.06% 2.13% 1.41%
Non-performing assets to total assets 1.40% 1.01% 1.77% 1.74% 1.13%
Allowance for loan losses to
non-performing loans 69.61% 118.20% 67.56% 70.61% 105.32%
Allowance for loan losses to
percentage of loans 1.37% 1.41% 1.39% 1.50% 1.49%
<FN>
<F1> Shareholders' equity includes unrealized gains or losses, net of
applicable income taxes, on investment securities classified as
"available-for-sale".
<F2> 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.
<F3> Computed using the weighted average number of shares outstanding for
the period.
<F4> Cash dividend declared and paid per share for the holding company
divided by consolidated net income per share.
<F5> Restated for all periods presented to reflect the merger with
Citizens accomplished through a pooling of interest.
</FN>
</TABLE>
Part II - Items 7 and 7A Management's Discussion and Analysis of
Financial Condition and Results of Operation;
Quantitative and Qualitative Disclosures About
Market Risk
Please refer to pages 45 to 62 of the Company's 1999 Annual
Report to Shareholders, which pages are incorporated herein by reference.
Part II - Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of Union Bankshares, Inc. as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999, together with related notes and the
opinion of A.M. Peisch and Company, independent public accountants, all as
contained on pages 7 to 44 of the Company's 1999 Annual Report to
Shareholders, are incorporated herein by reference.
Part II - Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There were no changes in accountants, nor were there any
disagreements with the accountants on accounting and financial disclosure.
Part III - Item 10 Directors and Executive Officers of Registrant
Please refer to the following designated portions of the Company's proxy
statement for the 2000 annual meeting of shareholders, which designated
portions are incorporated herein by reference:
List of Directors, page 4
List of Executive Officers, page 8
Part III - Item 11 Executive Compensation
Please refer to the following designated portions of the Company's proxy
statement for the 2000 annual meeting of shareholders, which designated
portions are incorporated herein by reference:
Directors Compensation, page 5
Executive Compensation and Benefit Plans, pages 8-12
Part III - Item 12 Security Ownership of Certain Beneficial Owners and
Management
Please refer to the following designated portions of the Company's proxy
statement for the 2000 annual meeting of shareholders, which designated
portions are incorporated herein by reference:
Share Ownership of Management and Principal Holders, pages 2-3
Section 16(a) Beneficial Ownership Reporting Compliance, page 3
Part III - Item 13 Certain Relationships and Related Party
Transactions
Please refer to the following designated portions of the Company's proxy
statement for the 2000 annual meeting of shareholders, which designated
portions are incorporated herein by reference:
Transactions with Management, pages 5-6
Compensation Committee Interlocks and Insider Participation, page 6
Part IV - Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K
A. Documents Filed as Part of this Report:
(1) The following consolidated financial statements, as included in
the 1999 Annual Report to Shareholders, are incorporated herein
by reference.
1) Consolidated Balance Sheets at December 31, 1999 and 1998
2) Consolidated Income Statements for the years ended December
31, 1999, 1998 and 1997
3) Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997
4) Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
(2) The following exhibits are either filed as part of
this report, or are incorporated herein by reference.
Item No:
2.1 Affiliation Agreement, dated as of February 16, 1999, by and
between Union Bankshares, Inc. and Citizens Savings Bank &
Trust Company, attached as Appendix A to the Joint Proxy
Statement/Prospectus included in Part I of the Form S-4
Registration Statement (#333-82709) filed on July 12, 1999 and
amended on September 15, September 29 and December 16, 1999 and
incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation of Union
Bankshares, Inc. (as of May 7, 1997), previously filed with the
Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (#333-82709) and incorporated Herein by
reference.
3.2 Amendment filed May 19, 1998 to Amended and Restated Articles
of Association of Union Bankshares, Inc., adding new sections 8
and 9, previously filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-4 (#333-82709)
and incorporated herein by reference.
3.3 Amendment filed November 24, 1999 to Amended and Restated
Articles of Association of Union Bankshares, Inc., increasing
the authorized common shares to 5,000,000, previously filed with
the Commission on December 10, 1999 as Exhibit 3.3 to the
Company's Current Report on Form 8-K12g3, and incorporated herein
by reference.
3.4 Bylaws of Union Bankshares, Inc., as amended, , previously
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
10.1 Union Bankshares, Inc. Shareholder Agreement, dated as of
February 16, 1999, Among Union Bankshares, Inc., Citizens
Savings Bank & Trust Company, and certain Shareholders of
Citizens Savings Bank & Trust Company named therein, previously
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
10.2 Citizens Savings Bank & Trust Company Shareholder Agreement,
dated as of February 16, 1999, among Citizens Savings Bank &
Trust Company, Union Bankshares, Inc., and certain shareholders
of Union Bankshares, Inc. named therein, previously filed with
the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (#333-82709) and incorporated herein by
reference.
10.3 Stock Registration Agreement dated as of February 16, 1999,
among Union Bankshares, Inc., Genevieve L. Hovey, individually
and as Trustee of the Genevieve L. Hovey Trust (U.A. dated
8/22/89), and Franklin G. Hovey, II, Individually, previously
filedwith the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (#333-82709) and
incorporated herein by reference.
10.4 1998 Incentive Stock Option Plan of Union Bankshares, Inc. and
Subsidiary, previously filed with the Commission as Exhibit 3.1
to the Company's Registration Statement on Form S-4 (#333-
82709) and incorporated herein by reference.*
10.5 Form of Union Bankshares, Inc. Deferred Compensation Plan and
Agreement, previously filed with the Commission as Exhibit 3.1
to the Company's Registration Statement on Form S-4 (#333-
82709) and incorporated herein by reference.*
10.6 Employment Agreement, dated December 10, 1998, between Citizens
Savings Bank & Trust Company and Jerry S. Rowe.*
11 Statement re: Computation of per share earnings: See footnote
1 to the Consolidated financial statements for details on
earnings per share computations For 1999, 1998 and 1997
13 The following specifically designated portions of Union's 1999
Annual Report to Shareholders have been incorporated by
reference in this Report on Form 10-K, and are filed
herewith: pages 7-63.
21 Subsidiaries of Union Bankshares, Inc.
Union Bank, Morrisville, Vermont
Citizens Savings Bank & Trust Company, St. Johnsbury,
Vermont
22 Published report regarding matters submitted to a vote of
security holders:
See Part 1, Item 4
23 Independent Auditors' Report: Consent of A.M. Peisch & Co.
27 Financial Data Schedule
(3) Reports on Form 8-K
Form 8-k12g(3) filed on December 10, 1999 to report the
completion of the Company's acquisition of Citizens and to
evidence Union's succession to the reporting and information
requirements of Citizens under Section 12(g) of the Securities
as Exchange Act of 1934.
- -------------------
[FN]
<F*> denotes management contract or compensatory plan
</FN>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Union Bankshares, Inc.
By: /s/ Kenneth D. Gibbons By: /s/ Marsha A. Mongeon
- -------------------------- -------------------------
Kenneth D. Gibbons Marsha A. Mongeon
President and Chief Executive Officer Treasurer and Chief Financial
Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ W. Arlen Smith Director, Chairman of the Board March 30, 2000
W. Arlen Smith
/s/ Kenneth D. Gibbons Director, President and Chief Executive Officer March 30, 2000
Kenneth D. Gibbons (Principal Executive Officer)
/s/ Marsha A. Mongeon Treasurer and Chief Financial Officer March 30, 2000
Marsha A. Mongeon (Principal Financial Officer)
/s/ Cynthia D. Borck Director and Vice President March 30, 2000
Cynthia D. Borck
/s/ Oscar E. Churchill Director March 30, 2000
Oscar E. Churchill
/s/ William T. Costa Jr. Director March 30, 2000
William T. Costa Jr.
/s/ Peter M. Haslam Director and Secretary March 30, 2000
Peter M. Haslam
/s/ Franklin G. Hovey II Director March 30, 2000
Franklin G. Honey II
/s/ William F. Kinney Director March 30, 2000
William F. Kinney
/s/ Richard C. Marron Director March 30, 2000
Richard C. Marron
/s/ Robert P. Rollins Director March 30, 2000
Robert P. Rollins
/s/ Jerry S. Rowe Director and Vice President March 30, 2000
Jerry S. Rowe
/s/ Richard C. Sargent Director March 30, 2000
Richard C. Sargent
/s/ Walter M. Sargent Director March 30, 2000
Walter M. Sargent
</TABLE>
EXHIBIT 10.6
------------
EMPLOYMENT AGREEMENT
--------------------
Agreement made December 10, 1998 by and between Citizens Savings Bank
& Trust Company, a banking institution organized and existing under the
laws of the State of Vermont with its principal office in St. Johnsbury,
Vermont (hereinafter the "Bank") and Jerry S. Rowe of St. Johnsbury
(hereinafter "Employee").
1. Employment. The Bank hereby employees Employee and Employee hereby
accepts employment in the capacity of President and Chief Executive
Officer of the Bank, all in accordance with the terms and conditions
hereof.
2. Term. The term of this Agreement shall commence on January 1, 1999
(the "Commencement Date") and shall continue for a period of three
years (the "Employment Period"), unless sooner terminated as herein
provided.
Prior to the end of the first year of the Employment Period,
and prior to each subsequent anniversary of the Commencement Date,
either party may give the other party written notice of their
intention not to renew or extend the Agreement. If no such notice is
given, the Employment period will be extended for an additional year
without further action and the dates contained herein will be
automatically adjusted accordingly. If such notice is given by
either party, this Agreement shall terminate at the end of the then
current Employment Period.
3. Time and Efforts. Employee shall diligently and conscientiously
devote his full and exclusive time and attention and best efforts in
discharging his duties as the Bank's President and Chief Executive
Officer. This provision shall not be deemed to prohibit the Employee
from serving, with the consent of the Bank, as an outside director of
any corporation including the performance of duties customarily
incidental to such service.
4. Board of Directors. Employee shall at all times discharge his duties
in connection with and under the supervision of the Bank's Board of
Directors.
5. Compensation
a. Salary. The Bank shall pay the Employee as compensation for
his services on an annual salary of One Hundred Twenty-Five
Thousand Dollars ($125,000.00) beginning on January 1, 1999,
payable in equal bi-weekly installments ("Base Salary").
Thereafter the Bas Salary shall be determined in accordance
with the provisions of Subsection f hereof. If the Employee is
elected or appointed as a Director of the Bank, the Employee
shall serve in such capacity without further compensation.
b. Automobile. The Bank recognized the Employee's need for an
automobile for business purposes and therefore shall provide
the Employee with an automobile, including all related
maintenance, repairs, insurance, taxes, fuel and other costs.
c. Health, Disability Insurance. The Bank shall provide Employee
with coverage for health insurance, short-term disability,
long-term disability, accidental death and dismemberment as
provided in the Bank's standard plan as the same may be adopted
or amended form time to time.
d. Life Insurance. The Bank shall provide Employee with
supplemental life insurance Coverage on his life in an amount
not less then two times Employee's Base Salary.
e. Pension Plan. The Employee is eligible to participate in the
Bank's 401K Pension Plan and the Bank shall make contributions
to such plan in Employee's behalf as provided in the terms of
said plan.
f. Salary Increase. Each December, the Compensation Committee of
the Board will review the Employee's Base Salary and at the
option of the Board of Directors may increase the Base Salary
of the Employee.
g. Incentive Bonus. The Bank, at the option of the Board of
Directors and at such Board's total discretion as to amount and
time of payment, may pay Employee, an incentive bonus.
6. Non-Compete
- -----------------
The Employee agrees that if he resigns from the Ban's employ,
or is terminated pursuant to the provisions of Section 7 hereof, he
will not compete within a fifteen (15) mile radius of the main office
of the Bank for a period of one year. Employee further agrees not to
publish, disclose or use, on his own behalf or on behalf of any third
party, any confidential information, customer lists, or business
secrets related to Bank's business, without the prior written
authorization of Bank. Upon termination of his employment with Bank,
Employee shall return to Bank all data, records, customer lists,
notes, correspondence, or any other documents or copies thereof,
which came into Employee's possession and are related to Bank's
business
7. Termination.
- ------------------
a. Employee's Disability. If the Employee is prevented from
rendering services or performing his duties because of illness,
incapacity or injury for a period of One Hundred Eighty (180)
consecutive days during the term of this Agreement, the Bank
may terminate this Agreement by giving ten (10) days written
notice to the Employee.
b. Termination for Cause. The Employee may be terminated for
cause if a regulatory agency requires his dismissal or if he is
guilty of insubordination, disloyalty, misconduct or similar
action or if he is involved in any illegal act which causes
monetary harm to the Bank.
8. Miscellaneous
- -------------------
a. Governing Law. This Agreement shall be governed by and
interpreted according to the law of the State of Vermont.
b. Successor and Assigns. This Agreement shall not be assignable
but shall be binding upon and inure to the benefit of the
parties hereto and any successors in interest to the Bank.
c. Severability. In the event that any provision hereof shalt be
declared invalid or unenforceable by any court such invalidity
shall not affect the validity or enforceability of the
remainder of this Agreement.
d. Entire Agreement. This Agreement supercedes all previous
agreements between Employee and the Bank and contains the
entire understanding and agreement between the parties with
respect to its subject matter. This Agreement cannot be
amended, modified or supplemented in any respect, except by
subsequent written agreement entered into by both parties.
e. 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.
f. Headings. The headings have been inserted for convenience only
and are not to be considered when construing the provisions of
the Agreement.
IN WITNESS WHEREOF, this agreement is entered into this 10th day of
December, 1998.
EMPLOYEE
/S/ Thomas F. Collins /S/ Jerry S. Rowe
- --------------------- -----------------
Witness Jerry S. Rowe
CITIZENS SAVINGS BANK & TRUST COMPANY
/S/ Thomas F. Collins /S/ Genevieve L. Hovey
- --------------------- ----------------------
Witness Chairman
/S/ Joseph M. Sherman
---------------------
Director
/S/ Franklin G. Hovey II
------------------------
Director
/S/ William T. Costa Jr.
------------------------
Director
/S/ Dwight A. Davis
-------------------
Director
/S/ J. R. Alexis Clouatre
-------------------------
Director
UNION BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY
The management of Union Bankshares, Inc. is responsible for the integrity
and objectivity of the information and representations in this annual
report, including the consolidated financial statements. These statements
have been prepared in conformity with generally accepted accounting
principles, using informed estimates where appropriate, to reflect the
Company's financial condition and results of operations. The information in
other sections of the annual report is consistent with these statements.
The Company's Board of Directors has oversight responsibilities for
determining that management has fulfilled its obligation in the preparation
of the financial statements and in the ongoing examination of the Company's
established internal control structure over financial reporting. The Audit
Committee, which consists solely of outside directors and which reports
directly to the Board of Directors, meets regularly with management, A.M.
Peisch & Company Certified Public Accountants and the Company's internal
auditor to discuss accounting, auditing and reporting matters. To ensure
auditor independence, both A.M. Peisch & Company and the internal auditor
have unrestricted access to the Audit Committee.
The financial statements have been audited by A.M. Peisch & Company, whose
report appears on the next page. The auditors provide an objective,
independent review as to management's discharge of its responsibilities
insofar as they relate to the fairness of the Company's reported financial
condition and results of operations. Their audit includes procedures
believed by them to provide reasonable assurance that the financial
statements are free of material misstatement and includes a review of the
Company's internal control structure over financial reporting.
/s/ Marsha A. Mongeon /s/ Kenneth D. Gibbons
- -------------------------------------------------------------
Marsha A. Mongeon Kenneth D. Gibbons
Chief Financial Officer Chief Executive Officer
UNION BANKSHARES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1999
Board of Directors
Union Bankshares, Inc. and Subsidiaries
Morrisville, Vermont
We have audited the accompanying consolidated balance sheets of Union
Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1999, 1998, and 1997. 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 Subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for the
years ended December 31, 1999, 1998, and 1997 in conformity with generally
accepted accounting principles.
/s/ A. M. Peisch & Company
January 14, 2000
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,627,481 $ 9,870,258
Federal funds sold and overnight deposits 3,474,064 9,325,994
---------------------------
Cash and cash equivalents 15,101,545 19,196,252
Interest bearing deposits 1,956,999 1,873,000
Securities available-for-sale 60,440,524 58,585,499
Federal Home Loan Bank stock 938,800 904,000
Loans held for sale 8,101,815 7,399,856
Loans 201,524,889 195,333,970
Allowance for loan losses (2,869,983) (2,844,929)
Unearned net loan fees (273,305) (265,468)
---------------------------
Net loans 198,381,601 192,223,573
Accrued interest receivable 2,199,426 2,105,702
Premises and equipment, net 4,039,886 4,574,071
Other real estate owned 26,667 524,756
Other assets 4,288,383 2,745,280
---------------------------
Total assets $295,475,646 $290,131,989
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 32,988,892 $ 32,948,621
Interest bearing 224,603,911 215,969,595
---------------------------
257,592,803 248,918,216
Borrowed funds 2,871,929 6,084,368
Accrued expenses and other liabilities 2,790,900 3,367,182
---------------------------
263,255,632 258,369,766
---------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2 par value; 5,000,000 shares
authorized; 3,263,489 shares issued in 1999;
3,259,398 shares in 1998 6,526,978 6,518,796
Paid-in capital 238,353 211,394
Retained earnings 28,180,180 26,029,355
Treasury stock at cost (233,960 shares at
December 31, 1999 and 1998) (1,592,451) (1,592,451)
Accumulated other comprehensive income (loss) (1,133,046) 595,129
---------------------------
32,220,014 31,762,223
---------------------------
Total liabilities and
stockholders' equity $295,475,646 $290,131,989
===========================
</TABLE>
See notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $18,631,113 $18,836,133 $18,483,056
Interest on debt securities
Taxable 3,363,022 3,041,725 2,673,297
Tax exempt 207,222 73,856 57,312
Dividends 115,282 130,283 134,029
Interest on federal funds sold 425,389 461,541 313,991
Interest on interest bearing deposits 122,300 82,641 4,736
---------------------------------------
Total interest income 22,864,328 22,626,179 21,666,421
---------------------------------------
Interest expense
Interest on deposits 8,833,767 8,958,729 8,652,448
Interest on federal funds purchased 88,763 1,647 1,033
Interest on other borrowed money 199,041 292,088 128,581
---------------------------------------
Total interest expense 9,121,571 9,252,464 8,782,062
Net interest income 13,742,757 13,373,715 12,884,359
Provision for loan losses 359,496 400,000 425,000
---------------------------------------
Net interest income after provision
for loan losses 13,383,261 12,973,715 12,459,359
---------------------------------------
Other income
Trust department income 165,770 120,410 94,305
Service fees 2,228,873 2,145,998 2,060,717
Gain (loss) on sale of securities 2,976 150,038 (18,038)
Gain on sale of loans 39,991 301,919 158,444
Other 107,246 192,588 116,766
---------------------------------------
2,544,856 2,910,953 2,412,194
---------------------------------------
Other expenses
Salaries and wages 4,233,731 4,111,063 3,914,329
Pension and employee benefits 1,094,754 1,057,568 1,063,099
Occupancy expense, net 534,813 502,549 505,580
Equipment expense 1,124,755 1,005,109 773,249
Other operating expense 3,049,334 2,602,076 2,311,106
---------------------------------------
10,037,387 9,278,365 8,567,363
---------------------------------------
Income before income taxes 5,890,730 6,606,303 6,304,190
Income tax expense 1,815,259 2,054,907 1,948,686
---------------------------------------
Net income $ 4,075,471 $ 4,551,396 $ 4,355,504
=======================================
Earnings per common share $ 1.35 $ 1.51 $ 1.44
=======================================
</TABLE>
See notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
Accumulated
other
Common Stock Paid-in Retained Treasury comprehensive
------------
Shares Amount capital earnings stock
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 2,009,728 $4,242,396 $158,069 $23,219,699 $(1,429,688)
Comprehensive income
Net income 0 0 0 4,355,504 0
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects 0 0 0
Total comprehensive income
Stock split effected in the form of
a dividend 1,018,430 2,259,800 0 (2,259,800) 0
Cash dividends declared 0 0 0 (1,829,925) 0
Treasury stock purchased (8,800) 0 0 0 (118,803)
Exercise of stock option 4,200 8,400 24,550 0 0
---------------------------------------------------------------
Balances, December 31, 1997 3,023,558 6,510,596 182,619 23,485,478 (1,548,491)
Comprehensive income
Net income 0 0 0 4,551,396 0
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects 0 0 0
Total comprehensive income
Cash dividends declared 0 0 0 (2,007,519) 0
Treasury stock purchased (2,220) 0 0 0 (43,960)
Exercise of stock option 4,100 8,200 28,775 0 0
---------------------------------------------------------------
Balances, December 31, 1998 3,025,438 6,518,796 211,394 26,029,355 (1,592,451)
Comprehensive income
Net income 0 0 0 4,075,471 0
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects 0 0 0
Total comprehensive income
Cash dividends declared 0 0 0 (1,924,646) 0
Exercise of stock option 4,300 8,600 31,325 0 0
Retirement of common stock (209) (418) (4,366) 0 0
---------------------------------------------------------------
Balances, December 31, 1999 3,029,529 $6,526,978 $238,353 $28,180,180 $(1,592,451)
===============================================================
<CAPTION>
Accumulated
other Total
comprehensive stockholders'
income (loss) equity
------------------------------
<S> <C> <C>
Balances, December 31, 1996 $ 201,742 $26,392,218
Comprehensive income
Net income 0 4,355,504
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects 190,962 190,962
-----------
Total comprehensive income 4,546,466
-----------
Stock split effected in the form of
a dividend 0 0
Cash dividends declared 0 (1,829,925)
Treasury stock purchased 0 (118,803)
Exercise of stock option 0 32,950
----------------------------
Balances, December 31, 1997 392,704 29,022,906
Comprehensive income
Net income 0 4,551,396
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects 202,425 202,425
-----------
Total comprehensive income 4,753,821
-----------
Cash dividends declared 0 (2,007,519)
Treasury stock purchased 0 (43,960)
Exercise of stock option 0 36,975
----------------------------
Balances, December 31, 1998 595,129 31,762,223
Comprehensive income
Net income 0 4,075,471
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects (1,728,175) (1,728,175)
-----------
Total comprehensive income 2,347,296
-----------
Cash dividends declared 0 (1,924,646)
Exercise of stock option 0 39,925
Retirement of common stock 0 (4,784)
----------------------------
Balances, December 31, 1999 $(1,133,046) $32,220,014
============================
</TABLE>
See notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,075,471 $ 4,551,396 $ 4,355,504
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 867,114 789,826 572,307
Provision for loan losses 359,496 400,000 425,000
Provision (credit) for deferred income taxes 52,958 28,650 (16,524)
Amortization, net 123,705 108,818 131,005
Write-downs of other real estate owned 7,421 77,578 117,748
Increase (decrease) in unamortized loan fees 7,837 11,361 (52,053)
(Increase) decrease in loans held for resale (661,968) (902,839) 213,877
Increase in accrued interest receivable (93,724) (82,907) (44,667)
Increase in other assets (339,262) (65,736) (100,309)
Decrease (increase) in income taxes receivable 24,281 75,689 (47,098)
(Decrease) increase in accrued interest payable (107,210) (79,649) 71,009
(Decrease) increase in other liabilities (127,072) (33,947) 58,698
(Gain) loss on sale of securities (2,976) (150,038) 18,038
Gain on sale of loans (39,991) (301,919) (158,444)
Gain on sale of other real estate owned (4,779) (50,005) (94,787)
Loss on disposal of fixed assets 15,530 2,358 0
--------------------------------------------
Net cash provided by operating activities 4,156,831 4,378,636 5,449,304
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest bearing deposits
Maturities and redemptions 982,000 1,586,000 0
Purchases (1,065,999) (3,459,000) 0
Securities available-for-sale
Sales and maturities 18,581,808 16,616,681 18,558,772
Purchases (23,176,008) (28,953,788) (19,977,757)
Purchase of Federal Home Loan Bank stock (34,800) (46,600) (94,200)
Increase in loans, net (6,696,985) (474,700) (14,414,400)
Recoveries of loans charged off 94,194 120,826 91,136
Purchase of premises and equipment, net (350,659) (928,708) (683,047)
Investments in limited partnerships, net (451,360) (24,889) 0
Proceeds from sales of premises and equipment 2,200 4,660 1,244
Proceeds from sales of other real estate owned 559,498 629,855 648,114
Proceeds from sales of repossessed property 73,930 87,243 106,995
--------------------------------------------
Net cash used in investing activities (11,482,181) (14,842,420) (15,763,143)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net of repayments (3,212,439) 4,448,484 (57,523)
Proceeds from exercise of stock options 39,925 36,975 32,950
Net increase in noninterest bearing deposits 40,271 3,884,066 3,010,276
Net increase in interest bearing deposits 8,634,316 5,804,527 11,800,245
Purchase of stock (4,784) (43,960) (118,803)
Dividends paid (2,266,646) (1,969,519) (1,776,725)
--------------------------------------------
Net cash provided by financing activities 3,230,643 12,160,573 12,890,420
--------------------------------------------
(Decrease) increase in cash and
cash equivalents (4,094,707) 1,696,789 2,576,581
Cash and cash equivalents:
Beginning 19,196,252 17,499,463 14,922,882
--------------------------------------------
Ending $ 15,101,545 $ 19,196,252 $ 17,499,463
============================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Interest paid $ 9,228,781 $ 9,332,113 $ 8,711,053
============================================
Income taxes paid $ 1,738,020 $ 1,996,000 $ 1,979,000
============================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 102,658 $ 636,934 $ 943,674
============================================
Repossessed property acquired in settlement
of loans $ 151,356 $ 295,405 $ 253,729
============================================
Total change in unrealized (loss) gain on
securities available-for-sale $ (2,618,447) $ 306,704 $ 289,336
============================================
Stock dividends $ 0 $ 0 $ 2,259,800
============================================
</TABLE>
See notes to consolidated financial statements.
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policies of Union Bankshares, Inc. and Subsidiaries (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 presentation and consolidation
The consolidated financial statements include the accounts of Union
Bankshares, Inc., and its wholly-owned subsidiaries, Union Bank (Union), and
Citizens Savings Bank and Trust Company (Citizens). All financial information
has been restated historically for the acquisition of Citizens accounted for
as pooling of interests as described in Note 19. All significant intercompany
transactions and balances have been eliminated.
Nature of operations
The Company provides a variety of financial services to individuals and
corporate customers through its branches, ATM's, telebanking, and Internet
systems in northern Vermont which encompasses primarily small businesses,
agriculture, and the tourism industry. The Company's primary deposit
products are checking 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.
Note 4 discusses the types of securities that the Bank invests in. Note 5
discusses the types of lending which the Bank engages in. In addition, a
substantial portion of the Company's loans are secured by real estate and/or
are SBA guaranteed.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for losses
on loans and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans and deferred tax assets. The amount
of the change that is reasonably possible cannot be estimated.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents includes cash on hand, amounts due from banks
(including cash items in process of clearing), federal funds sold (generally
purchased and sold for one day periods), and overnight deposits.
Trust assets
Assets of the Trust Department, other than trust cash on deposit, are not
included in these consolidated financial statements because they are not
assets of the Company.
Investment securities
Investment securities purchased and held primarily for resale in the near
future are classified as trading securities and are carried at fair value
with unrealized gains and losses included in earnings. Debt securities the
Company has the positive intent and ability to hold to maturity are
classified as held to maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods
approximating the interest method. Debt and equity securities not classified
as either held-to-maturity or trading are classified as available-for-sale.
Investments classified as available-for-sale are carried at fair value.
Unrealized gains and losses on available-for-sale securities are reported as
a net amount in other comprehensive income, net of tax and reclassification
adjustment. Declines in the fair value of held-to-maturity and available-
for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. The specific
identification method is used to determine realized gains and losses on
sales of securities available-for-sale.
Federal Home Loan Bank stock
As 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 cost or estimated fair value in the aggregate. All sales are
made without recourse. Net unrealized losses are recognized through a
valuation allowance by charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their unpaid
principal adjusted for any charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The accrual
of interest is discontinued when a loan is specifically determined to be
impaired or management believes, after considering collection efforts and
other factors, that the borrowers financial condition is such that
collection of interest is doubtful. Any unpaid interest previously accrued
on those loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss
is remote. Interest payments received on such loans are generally applied as
a reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of
the related loan's yield using methods that approximate the interest method.
The Company is generally amortizing these amounts over the contractual life.
Allowance for loan losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
periodic evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight-line method over their
estimated useful lives. The cost of assets sold or otherwise disposed of and
the related allowance for depreciation is eliminated from the accounts and
the resulting gains or losses are reflected in the income statement.
Maintenance and repairs are charged to current expense as incurred and the
cost of major renewals and betterments are capitalized.
Other real estate owned
Real estate properties acquired through or in lieu of loan foreclosure are
to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new carrying basis. After foreclosure, valuations
are periodically performed by management, and the real estate is carried at
the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation are included in other
income and expenses.
Mortgage servicing
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into noninterest
income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets. Servicing assets are
evaluated for impairment based upon the fair value of the rights as compared
to amortized cost. Impairment is determined by stratifying rights by
predominant characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics,
when available, or based upon discounted cash flows using market-based
assumptions. Impairment is recognized through a valuation allowance for an
individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
Pension plans
Union maintains a non-contributory defined benefit pension plan covering all
eligible employees who meet certain service requirements. Union also has a
contributory 401(k) pension plan covering all employees who meet certain
service requirements. The plan is voluntary, and in 1999, 1998, and 1997,
Union contributed fifty cents for every dollar contributed by participants,
up to three percent of each participant's salary.
Citizens has a contributory 401(k) pension plan covering all employees who
meet certain age and service requirements. The plan is voluntary, and
Citizens contributes fifty cents for every dollar contributed by
participants, up to six percent of each participant's salary.
Pension costs are charged to pension and other employee benefits expense and
are funded as accrued.
Advertising costs
The Company expenses advertising costs as incurred.
Stock split effected in the form of a dividend
On May 7, 1997, the Company's 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 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, stock dividends, and stock issues relating to the
acquisition of Citizens in a merger accounted for as a pooling of interests
as described in Note 19 and reduced for shares held in treasury. The
weighted average shares outstanding were 3,028,457, 3,022,223, and 3,025,978
for the years ended December 31, 1999, 1998, and 1997, respectively.
Income taxes
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled. Adjustments to the Company's deferred tax assets are recognized
as deferred income tax expense or benefit based on management's judgment
relating to the realizability of such assets.
Off-balance-sheet financial instruments
In the ordinary course of business, the Company has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Fair values of financial instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets'
fair values.
Investment securities and interest bearing deposits: Fair values for
investment securities and interest bearing deposits are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments or discounted present values of cash flows.
Federal Home Loan Bank stock: The carrying amount of this stock
approximates its fair value.
Loans and loans held for sale: For variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values
are based on carrying amounts. The fair values for other loans (for
example, fixed-rate residential, commercial real estate, and rental
property mortgage loans, and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Loan fair value estimates include judgments
regarding future expected loss experience and risk characteristics.
The carrying amounts reported in the balance sheet for loans that are
held for sale approximate their fair market values. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits (for example,
checking and savings accounts) are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying
amounts). The carrying amounts of variable rate certificates of
deposit approximate their fair values at the reporting date. The fair
values for fixed rate certificates of deposit and borrowed funds are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates and debt to a
schedule of aggregated contractual maturities on such time deposits
and debt.
Accrued interest: The carrying amounts of accrued interest
approximates their fair values.
Borrowed funds: The fair values of the Bank's long term debt are
estimated using discounted cash flow analysis based on interest rates
currently being offered on similar debt instruments.
Other liabilities: Commitments to extend credit were evaluated and
fair value was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed
rates.
Comprehensive income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The adoption of SFAS No.
130 had no effect on the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains on available-for-sale
securities $(2,615,471) $ 456,742 $271,298
Reclassification adjustment for (gains) losses realized
in income (2,976) (150,038) 18,038
------------------------------------
Net unrealized (losses) gains (2,618,447) 306,704 289,336
Tax effect 890,272 (104,279) (98,374)
------------------------------------
Net of tax amount $(1,728,175) $ 202,425 $190,962
====================================
</TABLE>
Stock option plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. FASB
Statement No. 123, "Accounting for Stock-Based Compensation", permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, Statement No.
123 also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide proforma net income disclosures for employee stock-based
awards made in 1995 and future years as if the fair value based method
defined in Statement No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the proforma
disclosures of Statement No. 123. See Note 18.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over
the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Company,
(2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Segment reporting
The FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, which establishes standards relative to public
companies for the reporting of certain information about operating segments
within their financial statements. Management has determined that the
Company has two reportable segments as defined within the Statement. These
segments are disclosed in Note 20 of the financial statements.
Recent accounting pronouncements
In June 1998, FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective for quarters
beginning after June 30, 2000. This Statement establishes new accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those derivatives at fair
value. The accounting for the gains or losses resulting in the changes of
value of those derivatives will depend on the intended use of the
derivatives and whether it qualifies for hedge accounting. Management is
currently evaluating the impact of this Statement on the Company's financial
statements but does not anticipate it will have a material impact.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the current year presentation.
The Company is required to maintain reserve balances in cash with Federal
Reserve Banks. The totals of those reserve balances were approximately
$2,513,000 and $1,914,000 at December 31, 1999 and 1998, respectively.
The nature of the Bank's business requires that it maintain amounts due from
banks which, at times, may exceed federally insured limits. The balance in
these accounts at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Noninterest-bearing accounts $ 869,325 $1,551,193
Federal Reserve Bank 4,873,648 5,522,256
Federal funds sold 3,474,064 9,325,994
</TABLE>
No losses have been experienced in these accounts. In addition, the Company
was required to maintain contracted clearing balances of $1,000,000 and
$1,250,000 at December 31, 1999 and 1998, respectively.
Note 3. Interest Bearing Deposits
Interest bearing deposits consist of certificates of deposit purchased from
various financial institutions. Deposits at each institution are maintained
at or below the FDIC insurable limits of $100,000. These certificates were
issued with rates ranging from 5.15% to 6.70% and mature at various dates
through 2004 with approximately $1,089,999 scheduled to mature in 2000.
Note 4. Investment Securities
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Government and agency and
corporation securities $35,506,095 $ 5,881 $ 781,225 $34,730,751
State and political subdivisions 5,047,300 0 257,705 4,789,595
Corporate debt securities 21,043,240 432 802,391 20,241,281
Marketable equity securities 560,625 133,325 15,053 678,897
----------------------------------------------------
$62,157,260 $139,638 $1,856,374 $60,440,524
====================================================
December 31, 1998:
U.S. Government and agency and
corporation securities $34,984,515 $332,603 $ 18,109 $35,299,009
State and political subdivisions 3,654,676 10,449 10,364 3,654,761
Corporate debt securities 18,483,973 233,054 25,389 18,691,638
Marketable equity securities 560,625 379,466 0 940,091
----------------------------------------------------
$57,683,789 $955,572 $ 53,862 $58,585,499
====================================================
</TABLE>
Included in the caption "U.S. Government and agency and corporation
securities" are mortgage-backed securities with a carrying amount of
$6,171,658 and $5,616,992 at December 31, 1999 and 1998, respectively.
Investment securities with a carrying amount of $9,919,532 and $4,580,156 at
December 31, 1999 and 1998, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
All realized gains and losses in 1999, 1998, and 1997 were from the sale of
securities available-for-sale. Proceeds from the sale of securities
available-for-sale were $9,651,088, $2,350,035, and $10,556,690 in 1999,
1998, and 1997, respectively. Realized gains from sales of investments
available-for-sale were $7,751, $194,563, and $11,304 with realized losses
of $4,775, $44,525, and $29,342 for the years 1999, 1998, and 1997,
respectively.
The scheduled maturities of securities available-for-sale as of December 31,
1999 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
Due in one year or less $ 8,274,893 $ 8,244,374
Due from one to five years 27,144,691 26,529,724
Due from five to ten years 16,003,082 15,233,279
Due after ten years 3,850,295 3,582,592
Mortgage-backed securities 6,323,674 6,171,658
Marketable equity securities 560,625 678,897
-------------------------
$62,157,260 $60,440,524
=========================
</TABLE>
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be called or
repaid without any penalties. Therefore, these securities are not included
in the maturity categories in the above maturity summary.
Note 5. Loans
The composition of net loans at December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Real estate $ 87,153,823 $ 76,832,449
Commercial real estate 69,806,893 67,706,827
Commercial 16,246,118 17,446,055
Consumer 18,661,352 23,518,771
Term Federal funds sold 0 1,000,000
Municipal loans 9,656,703 8,829,868
---------------------------
201,524,889 195,333,970
---------------------------
Deduct:
Allowance for loan losses 2,869,983 2,844,929
Net deferred loan fees, premiums, and discounts 273,305 265,468
---------------------------
3,143,288 3,110,397
---------------------------
$198,381,601 $192,223,573
===========================
</TABLE>
Commercial and mortgage loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of commercial and
mortgage loans serviced for others were $59,590,014 and $61,144,487 at
December 31, 1999 and 1998, respectively. Mortgage servicing rights of
$48,015 and $94,607 were capitalized in 1999 and 1998, respectively.
Impairment of loans having recorded investments of $814,018 at December 31,
1999 and $458,259 at December 31, 1998 has been recognized in conformity
with FASB Statement No. 114, as amended by FASB Statement No. 118. The
average recorded investment in impaired loans during 1999, 1998, and 1997
was $693,000, $796,566, and $1,218,476, respectively. The total allowance
for loan losses related to these loans was $67,217 and $47,938 on December
31, 1999 and 1998, respectively. Interest income on impaired loans of
$2,835, $11,993, and $35,814 was recognized for cash payments received in
1999, 1998, and 1997, respectively.
The Company is not committed to lend additional funds to borrowers with
impaired loans.
Residential real estate loans aggregating $4,907,921 and $4,442,202 at
December 31, 1999 and 1998, respectively, were pledged as collateral on
deposits of municipalities.
Note 6. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance, beginning $2,844,929 $2,811,412 $2,843,859
Provision for loan losses 359,496 400,000 425,000
Recoveries of amounts charged off 94,194 120,826 91,136
------------------------------------
3,298,619 3,332,238 3,359,995
Amounts charged off 428,636 487,309 548,583
------------------------------------
Balance, ending $2,869,983 $2,844,929 $2,811,412
====================================
</TABLE>
Note 7. Premises and Equipment
The major classes of premises and equipment and accumulated depreciation at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Land and land improvements $ 573,249 $ 565,349
Buildings and improvements 3,726,227 3,665,101
Furniture and equipment 6,220,135 6,042,727
-------------------------
10,519,611 10,273,177
Less accumulated depreciation (6,479,725) (5,699,106)
-------------------------
$ 4,039,886 $ 4,574,071
=========================
</TABLE>
Depreciation included in occupancy and equipment expenses amounted to
$867,114, $789,826, and $572,307 for the years ended December 31, 1999,
1998, and 1997, respectively.
The Company is obligated under noncancelable 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,
1999 were as follows:
<TABLE>
<S> <C>
2000 $ 61,265
2001 41,741
2002 11,443
--------
$114,449
========
</TABLE>
Rent expense for 1999, 1998, and 1997 amounted to $69,555, $68,977, and
$67,935, respectively.
Occupancy expense is shown in the consolidated statements net of rental
income of $55,585 in 1999, $68,840 in 1998, and $69,915 in 1997.
Note 8. Other Real Estate Owned
A summary of foreclosed real estate at December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Other real estate owned $26,667 $567,344
Less allowance for losses on OREO 0 42,588
------------------
Other real estate owned, net $26,667 $524,756
==================
</TABLE>
Changes in the allowance for losses on OREO for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Balance, beginning $ 42,588 $ 71,952 $ 7,108
Provision for losses 7,421 77,578 117,748
Charge-offs, net (50,009) (106,942) (52,904)
---------------------------------
Balance, ending $ 0 $ 42,588 $ 71,952
=================================
</TABLE>
Note 9. Investments Carried at Equity
During 1998, the Company purchased an interest in a low income housing
limited partnership. This was established to acquire, own and rent
residential housing for low and moderate income Vermonters located in
northeastern Vermont. The investment is accounted for under the equity
method of accounting. This equity investment, which is included in other
assets, is recorded at cost and adjusted for the Company's proportionate
share of the partnership's undistributed earnings or losses. The carrying
values of this investment were $476,249 and $24,889 at December 31, 1999 and
1998, respectively. The provision for undistributed net losses of the
partnership charged to earnings was $21,523 and $0 for 1999 and 1998,
respectively.
Note 10. Deposits
The following is a summary of interest bearing deposits at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
NOW accounts $ 37,536,937 $ 35,342,901
Savings and money market 91,284,331 81,827,632
Time, $100,000 and over 21,414,788 19,442,204
Other time 74,367,855 79,356,858
---------------------------
$224,603,911 $215,969,595
===========================
</TABLE>
The following is a summary of time certificates of deposit by maturity at
December 31, 1999:
<TABLE>
<S> <C>
2000 $71,286,690
2001 21,153,920
2002 2,167,448
2003 888,825
2004 and thereafter 285,760
-----------
$95,782,643
===========
</TABLE>
A maturity distribution of time certificates of deposit in denominations of
$100,000 or more at December 31, 1999 is as follows:
<TABLE>
<S> <C>
Three months or less $ 2,300,460
Over three months through six months 11,872,320
Over six months through twelve months 3,751,057
Over twelve months 3,490,951
-----------
$21,414,788
===========
</TABLE>
Note 11. Borrowed Funds
Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the years
ended December 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 $ 0 $1,028,569
6.10% note payable to FHLB, payable in monthly installments of
$4,636, including interest, through January 24, 2014 0 546,427
Community Investment Program "Plus"
5.01% term borrowing from FHLB maturing June 25, 2008 0 1,000,000
5.66% term borrowing from FHLB maturing February 4, 2003 0 1,000,000
Option Advances
6.06% note payable to FHLB, payable in monthly installments of
$11,178, including interest, through May 6, 2008 886,176 963,273
6.06% note payable to FHLB, payable in monthly installments of
$5,589, including interest, through March 24, 2008 436,443 475,386
5.95% note payable to FHLB, payable in monthly installments of
$13,354, including interest, through March 24, 2003 482,662 609,595
6.06% note payable to FHLB, payable in monthly installments of
$7,341, including interest, through March 23, 2005 399,648 461,118
IDEAL Way advances payable monthly, various rates as
determined by FHLB 667,000 0
-----------------------
$2,871,929 $6,084,368
=======================
</TABLE>
Principal maturities of borrowed funds as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 990,150
2001 343,274
2002 365,677
2003 279,723
2004 240,986
Thereafter 652,119
----------
$2,871,929
==========
</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.
Under the terms of the Community Investment Program "Plus", the Company has
unadvanced funds available of $10,159,098. This funding commitment expires
March 31, 2000.
Additionally, Union and Citizens each maintain an IDEAL Way Line of Credit
with the Federal Home Loan Bank of Boston. As of December 31, 1999, the
total amounts of these lines approximated $3,356,000 and $3,040,000 for
Union and Citizens, respectively. Total borrowings against this line of
credit were $667,000 and $0 at December 31, 1999 and 1998, respectively.
Interest on these borrowings is chargeable at a rate determined by the
Federal Home Loan Bank and payable monthly.
Collateral on these borrowings consists of Federal Home Loan Bank stock
purchased by each Bank, all funds placed in deposit with the Federal Home
Loan Bank, and qualified first mortgages held by each Bank, and any
additional holdings which may be pledged as security.
Note 12. Income Taxes
The Company prepares its Federal income tax return on a consolidated basis.
Federal income taxes are allocated to members of the consolidated group
based on taxable income.
Income taxes for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Currently paid or payable $1,762,301 $2,026,257 $1,965,210
Deferred 52,958 28,650 (16,524)
------------------------------------
$1,815,259 $2,054,907 $1,948,686
====================================
</TABLE>
Total income tax expense differs from the amounts computed at the statutory
federal income tax rate of 34% primarily due to the following at December
31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $2,002,848 $2,246,143 $2,143,424
Tax exempt interest (223,150) (223,262) (212,649)
Disallowed interest expense 29,902 31,557 30,576
Dividend exclusion (11,737) (11,576) (19,456)
Increase in CSV life (27,990) (27,494) (25,139)
Nondeductible acquisition costs 169,708 23,632 0
Tax credits on limited partnership investments (141,484) 0 0
Other 17,162 15,907 31,930
--------------------------------------
$1,815,259 $2,054,907 $1,948,686
======================================
</TABLE>
The deferred income tax provision consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Bad debts $(50,219) $(15,121) $(10,197)
Mark-to-market, loans 16,223 (130) (48,632)
Deferred loan fees 17,389 26,928 21,671
Nonaccrual loan interest (24,371) 15,808 (16,289)
OREO 14,480 9,984 (22,047)
Deferred compensation 57,208 4,626 764
Pension 6,001 (31,762) 22,774
Depreciation (41,922) (14,692) 14,019
Limited partnership tax credits 60,316 0 0
Mortgage servicing rights (1,468) 10,199 3,454
Other (679) 22,810 17,959
--------------------------------
$ 52,958 $ 28,650 $(16,524)
================================
</TABLE>
Listed below are the significant components of the net deferred tax asset at
December 31:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Components of the deferred tax asset:
Bad debts $ 775,488 $ 725,269
Mark-to-market loans 17,824 34,047
Deferred loan fees 33,690 51,079
Nonaccrual loan interest 62,087 37,716
OREO writedowns 0 14,480
Deferred compensation 561,657 618,865
Pension 22,651 28,652
Unrealized loss on securities available-for-sale 583,690 0
-----------------------
Total deferred tax asset 2,057,087 1,510,108
Valuation allowance 0 0
-----------------------
Total deferred tax asset, net of valuation allowance 2,057,087 1,510,108
=======================
Components of the deferred tax liability:
Depreciation (114,866) (156,788)
Mortgage servicing rights (28,894) (30,362)
Limited partnership tax credits (60,316) 0
Other (64,117) (64,796)
Unrealized gain on securities available-for-sale 0 (306,581)
-----------------------
Total deferred tax liability (268,193) (558,527)
-----------------------
Net deferred tax asset $1,788,894 $ 951,581
=======================
</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 asset will be realized.
Net deferred income tax assets are included in the caption "Other assets" on
the balance sheets at December 31, 1999 and 1998, respectively.
Note 13. Employee Benefits
Union sponsors a non-contributory defined benefit pension plan covering all
eligible employees. Union's policy is to accrue annually an amount equal to
the actuarially calculated expense.
Net pension cost for Union's defined benefit pension plan consisted of the
following components at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Service cost $ 185,950 $ 162,697
Interest cost on projected benefit obligation 270,765 229,930
Actual return on plan assets (269,861) (263,989)
Net amortization and deferral (7,656) (7,656)
----------------------
$ 179,198 $ 120,982
======================
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the accompanying consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 2,954,924 $2,923,795
Nonvested benefits 46,980 46,562
-------------------------
Accumulated benefits 3,001,904 2,970,357
=========================
Projected benefits (4,269,543) (3,875,397)
Plan assets at fair value 3,645,807 3,747,456
-------------------------
Projected benefit obligation in excess of plan assets (623,736) (127,941)
Unrecognized transition amount (30,617) (38,273)
Unrecognized net loss 587,733 105,225
-------------------------
Accrued pension $ (66,620) $ (60,989)
=========================
</TABLE>
Assumptions used by Union in the determination of pension plan information
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------------
<S> <C> <C>
Discount rate 7.00% 6.50%
Rate of increase in compensation levels 4.25% 3.25%
Expected long-term rate of return of plan assets 7.25% 7.25%
</TABLE>
Contributions to the plan are invested in diversified portfolios, mainly
corporate stocks and bonds.
Contributions to Union's defined contribution 401(k) plan, including
employer matching amounts, are at the discretion of the Board of Directors.
Employer contributions to the plan were $65,785, $63,375, and $59,439 for
1999, 1998, and 1997, respectively.
Additionally, the Company and Union have a non-qualified Deferred
Compensation Plan for Directors and certain key officers. Under the plan,
compensation may be deferred that would otherwise be currently payable.
Deferrals are made to an uninsured interest bearing account and are payable
upon attainment of a certain age or death over a 15 year period. The Company
and Union have purchased life insurance contracts for each participant in
order to fund these benefits. The benefits accrued under this plan
aggregated $1,651,932 and $1,820,194 at December 31, 1999 and 1998,
respectively, and is included in the financial statement caption "Accrued
expenses and other liabilities". The cash surrender value of the life
insurance policies purchased to fund these plans aggregated $1,124,222 and
$1,041,898 at December 31, 1999 and 1998, respectively. These amounts are
included in the financial statement caption "Other assets". The annual net
cost of the plan is immaterial to the financial statements of the Company.
Citizens maintains separately a 401(k) plan and a discretionary profit
sharing plan. The 401(k) plan covers all employees meeting certain
eligibility requirements. Employees are permitted to contribute any amount,
up to 10% of their compensation, to the 401(k) plan. Citizens makes matching
contributions up to 6% of an employee's compensation. Matching contributions
to this plan were $37,178, $30,852, and $27,772 for 1999, 1998, and 1997,
respectively.
Contributions to the profit sharing plan are at the discretion of Citizens'
Board of Directors. Contributions to this plan were $42,003, $74,934, and
$67,935 for 1999, 1998, and 1997, respectively.
Note 14. Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, interest rate caps and floors written on adjustable rate
loans, and commitments to sell loans. Such instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps and floors written on adjustable rate
loans, the contract or notional amounts do not represent exposure to credit
loss. The Company controls the risk of interest rate cap agreements through
credit approvals, limits, and monitoring procedures.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
<TABLE>
<CAPTION>
Contract or
Notional
Amount
1999
-----------
<S> <C>
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit $19,104,660
===========
Standby letters of credit and commercial letters of credit $ 675,369
===========
Credit card arrangements $ 1,194,558
===========
Home equity lines $ 3,978,431
===========
</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 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 15. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, after consulting with the
Company's legal counsel, any liability resulting from such proceedings would
not have a material adverse effect on the Company's financial statements.
Note 16. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
--------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,101,545 $ 15,101,545
Interest bearing deposits 1,956,999 1,942,088
Securities available-for-sale 60,440,524 60,440,524
Federal Home Loan Bank stock 938,800 938,800
Loans and loans held for sale, net 206,483,416 204,026,180
Accrued interest receivable 2,199,426 2,199,426
Financial liabilities:
Deposits 257,592,803 257,993,340
Borrowed funds 2,871,929 2,181,136
Accrued interest payable 549,712 549,712
</TABLE>
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 $ 19,196,252 $ 19,196,252
Interest bearing deposits 1,873,000 1,887,766
Securities available-for-sale 58,585,499 58,585,499
Federal Home Loan Bank stock 904,000 904,000
Loans and loans held for sale, net 199,623,429 201,288,319
Accrued interest receivable 2,105,702 2,105,702
Financial liabilities:
Deposits 248,918,216 250,108,783
Borrowed funds 6,084,368 6,268,726
Accrued interest payable 656,922 656,922
</TABLE>
The estimated fair values of deferred fees on commitments to extend credit
and letters of credit were immaterial at December 31, 1999 and 1998.
The carrying amounts in the preceding table are included in the balance
sheet under the applicable captions.
Note 17. Transactions With Related Parties
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they
are principal stockholders (commonly referred to as related parties), all of
which have been, in the opinion of management, on the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
Aggregate loan transactions with related parties for the year ended December
31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Balance, beginning $ 866,865 $1,055,187
New loans 248,822 1,225,546
Repayments (246,524) (839,696)
Other, net (5,500) (574,172)
-----------------------
Balance, ending $ 863,663 $ 866,865
=======================
Balance available on lines of credit $ 217,908 $ 204,415
=======================
</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 $2,015,213 and $2,043,615
at December 31, 1999 and 1998, respectively.
Note 18. Incentive Stock Option Plan
Under the terms of a Stock Option Plan with certain key employees, options
to purchase shares of the Company's common stock are granted at a price
equal to the market price of the stock at the date of grant. These stock
options are exercisable within five years from the date of grant, depending
on when granted. Following is a summary of transactions:
<TABLE>
<CAPTION>
Shares Under Option
--------------------------
1999 1998 1997
--------------------------
<S> <C> <C> <C>
Outstanding, January 1 13,700 15,300 17,000
Granted during the year 2,500 2,500 2,500
Exercised during the year (4,000 shares at $9.25 per
share and 300 shares at $9.75 in 1999, 4,000 shares
at $9.00 per share and 100 shares at $9.75 in 1998, and
4,000 shares at $7.75 pershare and 200 shares at
$9.75 per share during 1997) (4,300) (4,100) (4,200)
--------------------------
Outstanding, December 31 11,900 13,700 15,300
==========================
</TABLE>
<TABLE>
<CAPTION>
Shares Under Option
------------------------
1999 1998 1997
------------------------
<S> <C> <C> <C>
Eligible, December 31, for exercise currently at:
$ 9.00 per share 0 0 4,000
$ 9.25 per share 0 4,000 4,000
$ 9.75 per share 4,400 4,700 4,800
$18.00 per share 2,500 2,500 2,500
$20.25 per share 2,500 0 0
$22.00 per share 2,500 2,500 0
------------------------
11,900 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 at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net income
As reported $4,075,471 $4,551,396 $4,355,504
====================================
Proforma $4,071,059 $4,547,953 $4,353,479
====================================
</TABLE>
Note 19. Acquisitions
Effective November 30, 1999, the Company acquired Citizens Savings Bank and
Trust Company in a merger accounted for in a tax-free transaction as a pooling
of interests with the exchange of 991,089 shares (net of 196 fractional shares
redeemed for approximately $4,516) of newly-issued Company common stock in
exchange for all of the outstanding shares of Citizens' common stock. Interest
income, net income, and earnings per share (as restated) for the Company and
Citizens Savings Bank and Trust Company prior to the acquisition are as
follows:
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended December 31, November 30,
---------------------------------------
1997 1998 1999
---------------------------------------
<S> <C> <C> <C>
Interest income
Union Bankshares, Inc. $14,116,364 $14,733,104 $13,694,631
Citizens Savings Bank and Trust Company 7,550,057 7,893,075 7,178,879
---------------------------------------
Combined $21,666,421 $22,626,179 $20,873,510
=======================================
Net income, giving effect to proforma income taxes
Union Bankshares, Inc. $ 3,346,118 $ 3,449,912 $ 2,937,645
Citizens Savings Bank and Trust Company 1,009,386 1,101,484 987,109
---------------------------------------
Combined $ 4,355,504 $ 4,551,396 $ 3,924,754
=======================================
Basic earnings per share
Union Bankshares, Inc. $ 1.64 $ 1.70 $ 1.44
Citizens Savings Bank and Trust Company 1.02 1.11 1.00
---------------------------------------
Combined $ 1.44 $ 1.51 $ 1.30
=======================================
</TABLE>
Note 20. Reportable Segments
The Company has two reportable operating segments, Union Bank (Union) and
Citizens Savings Bank and Trust Company (Citizens). The accounting policies,
including the operation of each, are the same as those described in the
summary of significant accounting policies in Note 1. Management regularly
evaluates separate financial information for each segment in deciding how to
allocate resources and in assessing performance.
The Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows:
<TABLE>
<CAPTION>
Intersegment Consolidated
1999 Union Citizens Elimination Other Totals
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 15,035,945 $ 7,828,383 $ 0 $ 0 $ 22,864,328
Interest expense 5,757,892 3,362,522 0 1,157 9,121,571
Provision for loan loss 62,500 296,996 0 0 359,496
Service fee income 1,666,244 562,629 0 0 2,228,873
Income tax expense (benefit) 1,277,950 560,195 0 (22,886) 1,815,259
Net income (loss) 3,496,397 937,342 0 (358,268) 4,075,471
Assets 197,648,845 97,512,372 (79,755) 394,184 295,475,646
<CAPTION>
Intersegment Consolidated
1998 Union Citizens Elimination Other Totals
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 14,733,104 $ 7,893,075 $ 0 $ 0 $ 22,626,179
Interest expense 5,778,179 3,472,861 0 1,424 9,252,464
Provision for loan loss 100,000 300,000 0 0 400,000
Service fee income 1,559,924 586,074 0 0 2,145,998
Income tax expense (benefit) 1,541,504 547,650 0 (34,247) 2,054,907
Net income (loss) 3,540,023 1,101,484 0 (90,111) 4,551,396
Assets 190,783,600 98,966,698 0 381,691 290,131,989
<CAPTION>
Intersegment Consolidated
1997 Union Citizens Elimination Other Totals
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 14,116,364 $ 7,550,057 $ 0 $ 0 $ 21,666,421
Interest expense 5,429,873 3,350,773 0 1,416 8,782,062
Provision for loan loss 125,000 300,000 0 0 425,000
Service fee income 1,504,173 556,544 0 0 2,060,717
Income tax expense (benefit) 1,478,895 498,186 0 (28,395) 1,948,686
Net income (loss) 3,401,237 1,009,386 0 (55,119) 4,355,504
Assets 180,384,242 92,567,035 0 328,607 273,279,884
</TABLE>
Amounts in the "Other" column encompass activity in Union Bankshares, Inc.,
the "parent company". Holding company assets are stated after intercompany
eliminations.
Note 21. Regulatory Capital Requirements
Union and Citizens (the Banks) are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999,
that the Banks meet all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Banks
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Banks'
category.
The Banks' actual capital amounts (000's omitted) and ratios are also
presented in the table.
<TABLE>
<CAPTION>
Minimums
To be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions:
--------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital to risk weighted assets
Union $23,506 18.80% $10,002 8.0% $12,502 10.0%
Citizens 12,057 17.35% 5,559 8.0% 6,949 10.0%
Tier I capital to risk weighted assets
Union 21,889 17.51% 5,001 4.0% 7,501 6.0%
Citizens 11,188 16.10% 2,780 4.0% 4,169 6.0%
Tier I capital to average assets
Union 21,889 10.93% 8,010 4.0% 10,013 5.0%
Citizens 11,188 11.43% 3,914 4.0% 4,893 5.0%
As of December 31, 1998:
Total capital to risk weighted assets
Union 22,353 18.70% 9,563 8.0% 11,954 10.0%
Citizens 11,219 16.02% 5,602 8.0% 7,003 10.0%
Tier I capital to risk weighted assets
Union 20,688 17.31% 4,781 4.0% 7,172 6.0%
Citizens 10,342 14.77% 2,801 4.0% 4,202 6.0%
Tier I capital to average assets
Union 20,688 11.49% 7,200 4.0% 9,000 5.0%
Citizens 10,342 10.37% 3,990 4.0% 4,988 5.0%
</TABLE>
Note 22. Restrictions on Retained Earnings
The Company is subject to restrictions on the amount of dividends that it
may declare without prior regulatory approval. Also, Vermont state banking
regulations require each Bank to transfer, at a minimum, 10% of annual net
profits to restricted retained earnings until such amounts of capital equal
10% of each Bank's deposits and other liabilities.
Note 23. Subsequent Events
On January 5, 2000, Union Bankshares, Inc. declared a $0.24 per share
dividend payable January 14, 2000 to stockholders of record on January 5,
2000.
Note 24. Condensed Financial Information (Parent Company Only)
The following financial statements are for Union Bankshares, Inc. (Parent
Company Only), and should be read in conjunction with the consolidated
financial statements of Union Bankshares, Inc. and Subsidiaries.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
ASSETS
Cash $ 344,714 $ 191,538
Investment in Subsidiary-Union 21,176,978 21,143,746
Investment in Subsidiary-Citizens 10,768,302 0
Other assets 394,184 381,691
--------------------------
Total assets $32,684,178 $21,716,975
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 464,164 $ 442,189
--------------------------
Total liabilities 464,164 442,189
--------------------------
Stockholders' equity
Common stock, $2 par value; 5,000,000 shares authorized,
3,263,489 shares issued at 12/31/99 and 2,268,100 shares
issued at 12/31/98 6,526,978 4,536,200
Paid-in capital 238,353 849,190
Retained earnings (Note 21) 28,180,180 17,031,320
Less treasury stock, at cost 233,960 shares; 1999 and 1998 (1,592,451) (1,592,451)
Accumulated other comprehensive (loss) income (1,133,046) 450,527
--------------------------
Total stockholders' equity 32,220,014 21,274,786
--------------------------
Total liabilities and stockholders' equity $32,684,178 $21,716,975
==========================
</TABLE>
The investment in the subsidiary banks is carried under the equity method of
accounting. The investment and cash, which is on deposit with the Bank, has
been eliminated in consolidation.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Revenues
Dividends
Bank subsidiaries $2,300,000 $1,850,000 $1,750,000
Loss on sale of securities (109) 0 0
----------------------------------------
Total revenues 2,299,891 1,850,000 1,750,000
----------------------------------------
Expenses
Interest 1,157 1,424 1,416
Merger and acquisition costs 332,940 23,632 0
Administrative and other 46,948 99,302 82,099
----------------------------------------
Total expenses 381,045 124,358 83,515
----------------------------------------
Income before applicable income tax and equity
in undistributed net income of subsidiaries 1,918,846 1,725,642 1,666,485
Applicable income tax (benefit) (22,886) (34,247) (28,395)
----------------------------------------
Income before equity (deficit) in undistributed
net income of subsidiaries 1,941,732 1,759,889 1,694,880
Equity in undistributed net income-Union 1,196,398 1,690,023 1,651,238
Deficit in undistributed net income-Citizens (49,768) 0 0
----------------------------------------
Net income $3,088,362 $3,449,912 $3,346,118
========================================
</TABLE>
Equity in undistributed net income of Citizens represents earnings of
Citizens subsequent to the merger occurring November 30, 1999.
UNION BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,088,362 $ 3,449,912 $ 3,346,118
Adjustments to reconcile net income
to net cash provided by operating activities
Equity in undistributed net income of Union (1,196,398) (1,690,023) (1,651,238)
Deficit in undistributed net loss of Citizens 49,768 0 0
Increase in income taxes receivable (6,404) (2,078) (15)
Increase in other assets (23,891) (33,203) (24,502)
Loss on sale of securities 109 0 0
Increase in other liabilities 21,974 42,116 28,717
-------------------------------------------
Net cash provided by operating activities 1,933,520 1,766,724 1,699,080
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities 17,693 0 0
Purchases of securities 0 (17,802) 0
-------------------------------------------
Net cash provided (used) by investing
activities 17,693 (17,802) 0
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock 0 (43,960) (118,803)
Dividends paid (1,833,446) (1,665,519) (1,525,925)
Proceeds from exercise of stock option 39,925 36,975 32,950
Purchase of fractional shares (4,516) 0 0
-------------------------------------------
Net cash used by financing activities (1,798,037) (1,672,504) (1,611,778)
-------------------------------------------
Net increase in cash 153,176 76,418 87,302
Cash
Beginning 191,538 115,120 27,818
-------------------------------------------
Ending $ 344,714 $ 191,538 $ 115,120
===========================================
SUPPLEMENTAL SCHEDULE OF CASH PAID
(RECEIVED) DURING THE YEAR
Interest $ 1,157 $ 1,424 $ 1,416
===========================================
Income taxes $ (34,247) $ (28,395) $ (20,624)
===========================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock dividends $ 0 $ 0 $ 2,259,800
===========================================
</TABLE>
Note 25. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 1999, 1998, and 1997 is
presented below:
UNION BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarters in 1999 Ended
-----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
<S> <C> <C> <C> <C>
Interest income $5,524,141 $5,615,172 $5,823,586 $5,901,429
Interest expense 2,248,158 2,248,747 2,302,990 2,321,676
Provision for loan losses 99,999 87,499 62,499 109,499
Securities gains (loss) 512 2,636 (63) (109)
Other operating expenses 2,427,371 2,425,095 2,477,214 2,707,707
Net income 985,191 1,030,388 1,133,409 926,483
Earnings per common share 0.33 0.34 0.37 0.31
<CAPTION>
Quarters in 1998 Ended
March 31, June 30, Sept. 30, Dec. 31,
-----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,505,812 $5,672,110 $5,663,914 $5,784,343
Interest expense 2,282,584 2,315,519 2,311,415 2,342,946
Provision for loan losses 112,500 112,500 100,000 75,000
Securities gains (loss) (41,668) 310 65,366 126,030
Other operating expenses 2,357,182 2,274,553 2,314,371 2,332,259
Net income 978,422 1,180,128 1,095,515 1,297,331
Earnings per common share 0.33 0.39 0.36 0.43
<CAPTION>
Quarters in 1997 Ended
March 31, June 30, Sept. 30, Dec. 31,
-----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,223,619 $5,365,433 $5,507,672 $5,569,697
Interest expense 2,091,475 2,161,901 2,212,699 2,315,987
Provision for loan losses 150,000 125,000 75,000 75,000
Securities gains (loss) (13,682) 5,091 (9,447) 0
Other operating expenses 2,167,740 2,076,390 2,253,351 2,069,882
Net income 960,334 1,098,162 1,080,126 1,216,882
Earnings per common share 0.32 0.36 0.36 0.40
</TABLE>
Note 26. Other Income and Other Expenses
The components of other income and other expenses which are in excess of one
percent of total revenues in any of the three years disclosed are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Expenses
State franchise tax $ 281,480 $ 266,009 $ 168,631
Legal fees 280,503 33,438 28,768
Professional fees 308,431 136,871 143,197
Fees to directors 261,609 246,717 218,212
Postage and shipping 246,321 253,634 241,665
Other 1,670,990 1,665,407 1,510,633
------------------------------------
$3,049,334 $2,602,076 $2,311,106
====================================
</TABLE>
UNION BANKSHARES, INC. AND SUBSIDIARIES
---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The following discussion and analysis by Management focuses on those factors
that had a material effect on Union Bankshares, Inc.'s (Union's) financial
position as of December 31, 1999 and 1998, and its results of operations for
the years ended December 31, 1999, 1998, and 1997. This discussion should be
read in conjunction with the consolidated Financial Statements and related
notes and with other financial data appearing elsewhere. Management is not
aware of the occurrence of any events after December 31, 1999, which would
materially affect the information presented below.
The Company may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include financial projections, statements of plans and objectives for future
operations, estimates of future economic performance and assumptions
relating thereto. The Company may include forward-looking statements in its
filings with the Securities and Exchange Commission, in its reports to
stockholders, including this Annual Report, in other written materials, and
in statements made by senior management to analysts, rating agencies,
institutional investors, representatives of the media and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risk exists that predictions,
forecasts, projections and other estimates contained in forward-looking
statements will not be achieved. Also when we use any of the words
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Many possible events or factors could affect the
future financial results and performance of our company. This could cause
results or performance to differ materially from those expressed in our
forward-looking statements. The possible events or factors that might affect
our forward-looking statements include, but are not limited to, the
following:
* uses of monetary, fiscal and tax policy by various governments
* political, legislative or regulatory developments in Vermont or the
United States including changes in laws concerning taxes, banking and
other aspects of the financial services industry
* developments in general economic or business conditions, including
interest rate fluctuations, market fluctuations and perceptions, and
inflation
* changes in the competitive environment for financial services
organizations
* the Company's ability to retain key personnel
* changes in technology including demands for greater automation and
systems integration of Citizens Savings Bank and Trust Co. (Citizens)
* timely integration of Citizens, unanticipated lower revenues, loss of
customers or business, or higher operating expenses
* adverse changes in the securities market
When relying on forward-looking statements to make decisions with respect to
the Company, investors and others are cautioned to consider these and other
risks and uncertainties.
ACQUISITION
Effective November 30, 1999, following the receipt of all required
stockholder, state and federal regulatory approvals, Union Bankshares, Inc.
acquired Citizens Savings Bank and Trust Co. This makes Union a two bank
holding company. The accompanying consolidated financial statements reflect
the accounting for the acquisition as a pooling of interests and are
presented as if the companies were combined as of the earliest period
presented. However, the financial information is not necessarily indicative
of the results of operations, financial position or cash flows that would
have occurred had the acquisition been consummated for the periods for which
it is given effect, nor is it necessarily indicative of future results of
operations, financial position, or cash flows. The financial statements
reflect the conversion of each outstanding share of Citizens common stock
into 6.5217 shares of Union common stock. Additional information with
respect to this acquisition can be found in Note 19 to the Financial
Statements.
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 1999 was $4.075
million compared with net income of $4.551 million for the year 1998.
Without merger related nondeductible expenses and Y2K expenses, 1999's net
income would have been $4.614 million versus 1998 of $4.597 million. Net
income per share was $1.35 for 1999 compared to $1.51 for 1998 and would
have been $1.52 per share for both years without the merger related and Y2K
expenses.
Net Interest Income. The largest component of Union's operating income is
net interest income, which is the difference between interest and dividend
income received from interest-earning assets and the interest expense paid
on its interest-bearing liabilities.
Yields Earned and Rates Paid. The following table shows for the periods
indicated, the total amount of income recorded from interest-earning assets,
and the related average yields, the interest expense associated with
interest-bearing liabilities, expressed in dollars and average rates, and
the relative net interest spread and net interest margin. Yield and rate
information for a period is average information for the period, and is
calculated by dividing the income or expense item for the period by the
average balances of the appropriate balance sheet item during the period.
Net interest margin is net interest income divided by average interest-
earning assets. Nonaccrual loans are included in asset balances for the
appropriate periods, but recognition of interest on such loans is
discontinued and any remaining accrued interest receivable is reversed, in
conformity with federal regulations. The yields and net interest margins
appearing in the following table have been calculated on a pre-tax basis:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 8,604 $ 425 4.94% $ 8,799 $ 461 5.24% $ 6,168 $ 314 5.09%
Interest-bearing deposits 2,223 122 5.49% 1,494 83 5.56% 296 5 1.69%
Investments (1)(2) 61,097 3,685 6.21% 51,663 3,246 6.35% 45,573 2,864 6.34%
Loans, net (1)(3) 202,674 18,631 9.31% 194,716 18,836 9.83% 193,585 18,483 9.70%
------------------ ------------------- -------------------
Total interest-
earning assets (1) 274,598 22,863 8.45% 256,672 22,626 8.95% 245,622 21,666 8.95%
Cash and due from banks 9,195 8,507 8,105
Premises and equipment 4,330 4,596 4,330
Other assets 5,621 6,227 4,985
-------- -------- --------
Total assets $293,744 $276,002 $263,042
Average Liabilities and
Stockholders' Equity:
NOW accounts $ 34,654 $ 676 1.95% $ 30,957 $ 691 2.23% $ 27,175 $ 570 2.10%
Savings/money market
accounts 87,360 3,072 3.52% 75,579 2,712 3.59% 71,910 2,525 3.51%
Certificates of deposit 98,901 5,086 5.14% 101,578 5,556 5.47% 102,371 5,557 5.43%
Borrowed funds 4,948 287 5.80% 5,027 294 5.85% 2,198 130 5.91%
------------------ ------------------- -------------------
Total interest-bearing
liabilities 225,863 9,121 4.04% 213,141 9,253 4.34% 203,654 8,782 4.31%
Non-interest bearing
deposits 32,505 28,838 26,362
Other liabilities 3,292 3,581 5,344
-------- -------- --------
Total liabilities 261,660 245,560 235,360
Stockholders' equity 32,084 30,442 27,682
-------- -------- --------
Total liabilities and
stockholders equity $293,744 $276,002 $263,042
======== ======== ========
Net interest income (1) $13,742 $13,373 $12,884
======= ======= =======
Net interest spread 4.41% 4.61% 4.65%
Net interest margin 5.13% 5.34% 5.38%
- --------------------
<FN>
<F1> Average yield reported on a tax-equivalent basis
<F2> Average balance of investments calculated on the amortized cost basis
<F3> Net of unearned income and allowance for loan losses
</FN>
</TABLE>
Union's net interest income increased by $369 thousand, or 2.76%, to $13.7
million for the year ended December 31, 1999, from $13.4 million for the
year ended December 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 total interest-earning assets of 7%
versus an increase in interest-bearing liabilities of 6%. On average for the
year 93.5% of our assets were earning interest in 1999 versus 93% in 1998.
The net interest spread decreased by 20 basis points to 4.41% for the year
ended December 31, 1999, from 4.61% for the year ended December 31, 1998.
The net interest margin for the 1999 period decreased by 21 basis points to
5.13% from 5.34% for the 1998 period.
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected Union's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by current volume); and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate. All
changes are expressed as Dollars in thousands.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 Increase/ December 31, 1997 Increase/
(Decrease) Due to Change In (Decrease) Due to Change In
-----------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (10) $ (26) $ (36) $134 $ 13 $147
Interest-bearing deposits 41 (2) 39 20 58 78
Investments (1) (2) 599 (160) 439 376 6 382
Loans, net (1) (3) 782 (987) (205) 109 244 353
----------------------------------------------------------
Total interest-earning assets $1,412 $(1,175) $ 237 $639 $321 $960
Interest-bearing liabilities:
NOW accounts $ 83 $ (98) $ (15) $ 79 $ 42 $121
Savings/money market accounts 423 (63) 360 129 58 187
Certificates of deposit (146) (324) (470) (43) 42 (1)
Borrowed funds (5) (2) (7) 167 (3) 164
----------------------------------------------------------
Total interest-bearing liabilities $ 355 $ (487) $(132) $332 $139 $471
----------------------------------------------------------
Change in net interest income $1,057 $ (688) $ 369 $307 $182 $489
==========================================================
</TABLE>
Interest and Dividend Income. Union's interest and dividend income increased
by $237,000, or 1.05%, to $22.9 million for the year ended December 31,
1999, from $22.6 million for the year ended December 31, 1998. Average
earning assets increased by $17.9 million, or 7.0%, to $274.6 million for
the year ended December 31, 1999, from $256.7 million for the year ended
December 31, 1998. Average loans were $202.8 million for the year ended
December 31, 1999 up from $194.7 million for the year ended December 31,
1998. Increases in commercial, construction and real estate secured loans
were partially offset by a decrease in average municipal loans. Decreases in
loan interest rates led by the average prime rate for 1999 being 7.99%, down
from 8.35% in 1998, increasing competition, and ever increasing competition,
and the lower volume of municipal loans mainly accounted for the decrease in
loan interest income of $205,000 or 1.1%.
The average balance of investment securities (including mortgage-backed
securities) increased by $9.4 million, or 18.3%, to $61.1 million for the
year ended December 31, 1999, from $51.7 million for the year ended December
31, 1998. Lower interest rates during 1999 partially offset the volume
increase in the investment portfolio as total interest and dividend income
was only up 13.5%. Union deliberately kept the investment maturity window
shorter during 1999 in order to be able to more quickly take advantage of an
increase in interest rates in the future. The average level of federal funds
sold decreased slightly by $195,000, or 2.2%, to $8.6 million for the year
ended December 31, 1999, from $8.8 million for the year ended December 31,
1998. The average balances invested in interest-bearing deposits increased
to $2.2 million at December 31, 1999 from $1.5 million, or 48.8%, at
December 31, 1998. These deposits are FDIC insured and were an under-
utilized investment vehicle until 1998. There was and continues to be value
in this segment.
Interest Expense. Union's interest expense decreased by $132,000, or 1.4%,
to $9.1 million for the year ended December 31, 1999, from $9.2 million for
the year ended December 31, 1998. Average interest-bearing liabilities
increased by $12.7 million, or 6.0% to $225.9 million for the year ended
December 31, 1999, from $213.1 million for the year ended December 31, 1998.
Average time deposits decreased $2.7 million, or 2.6%, to $98.9 million for
the year ended December 31, 1999, from $101.6 million for the year ended
December 31, 1998. The average balances for NOW accounts increased by $3.7
million to $34.7 million for the year ended December 31, 1999, from $31
million for the year ended December 31, 1998. The average balances in
savings and money market accounts grew to $87.4 million in 1999 from $75.6
million in 1998 or a 15.6% increase. Lower interest rates prevailed for all
interest-bearing liabilities for the current year.
Noninterest Income. Union's noninterest income decreased $366,000, or 12.6%,
to $2.5 million for the year ended December 31, 1999, from $2.9 million for
the year ended December 31, 1998. The results for the period reflected a net
gain of $40 thousand from the sale of loans compared to a net gain of $302
thousand from these sales during 1998. The net gain on Sales of Securities
was $3 thousand for 1999 compared to $150 thousand for 1998. These changes
can be explained by management's decision to retain in portfolio a higher
percentage of loans and securities that could be sold due to the dropping
interest rate environment and the reinvestment rates available. Other
noninterest income and service fees (sources of which include deposit fees,
loan servicing fees, ATM fees, and safe deposit fees) increased by $83,000,
or 3.9%, to $2.2 million for the year ended December 31, 1999, from $2.1
million for the year ended December 31, 1998. Trust income increased to
$166,000 in 1999 from $120,000 in 1998 or a 37.7% increase.
Noninterest Expense. Union's noninterest expense increased $759,000, or
8.2%, to $10 million for the year ended December 31, 1999, from $9.3 million
for the year ended December 31, 1998. Salaries increased $123,000, or 3%, to
$4.2 million for the year ended December 31, 1999, from $4.1 million for the
year ended December 31, 1998, reflecting normal salary activity. Pension and
employee benefits increased $37 thousand or 3.5% to $1.1 million for the
year ended December 31, 1999, from $1.06 million for the year ended December
31, 1998 mainly due to the increase in the accrual for the Defined Benefit
Pension Plan caused by anticipated increases in future salaries and the
performance decline in the underlying investment instruments. Office
occupancy expense increased $32 thousand, or 6.4%, to $535,000 for the year
ended December 31, 1999, from $503,000 for the year ended December 31, 1998.
Equipment expense increased $120 thousand to $1.1 million for the year ended
December 31, 1999, from $1 million for 1998 primarily resulting from
increased depreciation cost on computer equipment and software purchases
which are depreciated as an expense over a time period of three to five
years.
Other operating expense includes $500,000 for the year ended December 31,
1999, for expenses related to the merger, including legal and advisory fees
compared to $34 thousand during 1998. The other one time only expense in
both 1999 and 1998 was for Year 2000 preparations. Union had $59 thousand of
non-payroll related expenses in 1999 and $18 thousand in 1998. Netting out
these one-time only expenses would leave $2.49 million of other operating
expenses for the year ended December 31, 1999 compared to $2.55 million for
1998 or a 2.4% decrease.
Income Tax Expense. Union's income tax expense decreased by $240,000, or
11.7%, to $1.8 million for the year ended December 31, 1999, from $2.05
million for 1998 mainly due to the low income housing and historic
rehabilitation credits that are available to us for the 1999 tax year
related to our partnership investment in a low income housing project
sponsored by Housing Vermont in our market area. Our effective tax rate for
1999 was 30.8% compared to 31.1% for 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Interest and Dividend Income. Union's interest and dividend income increased
by $960,000, or 4.4%, to $22.6 million for the year ended December 31, 1998,
from $21.7 million for the year ended December 31, 1997. Average earning
assets increased by $11.1 million, or 4.5%, to $256.7 million for the year
ended December 31, 1998, from $245.6 million for the year ended December 31,
1997. Average loans increased by $1.1 million, or .6%, to $194.7 million for
the year ended December 31, 1998, from $193.6 million for the year ended
December 31, 1997. The average balance of investment securities (including
mortgage-backed securities) increased by $6.1 million, or 13.4%, to $51.7
million for the year ended December 31, 1998, from $45.6 million for the
year ended December 31, 1997. The growth in the Investment portfolio is a
result of growth in our deposit base offset by moderate loan demand. Of the
loans booked, the decision was made to sell what had been originated for
possible sale in the secondary market while retaining servicing rights due
to the relatively low interest rate environment during 1998. The average
level of federal funds sold for the year ended December 31, 1998, increased
by $2.6 million, or 42.7%, to $8.8 million, from $6.2 million for the year
ended December 31, 1997. During 1997, investing in FDIC insured certificates
of deposit in other financial institutions became economically beneficial in
comparison to other investment options. The average invested in 1997 was
$296 thousand and grew to $1.5 million in 1998. The increase between years
continues to reflect the strong economic conditions of the area, our
continuing deposit growth, and the relatively low interest rate environment.
Interest Expense. Union's interest expense increased by $471,000, or 5.4%,
to $9.3 million for the year ended December 31, 1998, from $8.8 million for
the year ended December 31, 1997. Average interest-bearing liabilities
increased by $9.5 million or 4.7% to $213.1 million for the year ended
December 31, 1998, from $203.7 million for the year ended December 31, 1997.
Average time deposits decreased $793 thousand, or .8%, to $101.6 million for
the year ended December 31, 1998, from $102.4 million for the year ended
December 31, 1997, while the average balances for NOW, money markets, and
savings accounts increased by $7.5 million, or 7.5%, to $106.5 million for
the year ended December 31, 1998, from $99 million for the year ended
December 31, 1997.
Noninterest Income. Noninterest income increased $499,000, or 20.7%, to $2.9
million for the year ended December 31, 1998, from $2.4 million for the year
ended December 31, 1997. The results for 1998 reflected net gains of
$150,000 from the sale of securities versus a loss of $18 thousand for 1997.
Additionally, gains on sales of loans for 1998 increased approximately
$143,000 to $302,000 during 1998 as compared to $158,000 during 1997 due to
Management's decision to sell a greater portion of Loans Available for Sale
from our portfolio due to the continuing low interest rate environment.
Service fees rose $85,000 or 4.1% for the year ending December 31, 1998 to
$2.15 million from $2.06 million for 1997. The net gain on sale or writedown
of OREO properties was $7,000 for 1998 compared to a net loss of $23,000 in
1997. Trust income for the year ended December 31, 1998 was $120,000, up
$26,000 or 27.7% from $94,000 in 1997.
Noninterest Expense. Noninterest expense increased $711,000, or 8.3%, to
$9.3 million for the year ended December 31, 1998, from $8.6 million for the
year ended December 31, 1997. Salaries and employee benefits increased
$191,000, or 3.8%, to $5.2 million for the year ended December 31, 1998,
from $5 million for 1997, reflecting a slight increase in normal salary
costs. Equipment expense increased $232,000, or 30%, to $1 million for the
year ended December 31, 1998, from $773,000 for the year ended December 31,
1997. Depreciation and maintenance contract expense on computers and
software increased as a result of purchases made during late 1997 and 1998.
Other operating expenses increased by $291,000, or 12.6%, to $2.6 million
for the year ended December 31, 1998, from $2.3 million for the year ended
December 31, 1997. The company had one-time costs in 1998 attributable to
the merger of $34 thousand and $18 thousand in preparation for Year 2000.
Increases in supply costs, ATM expenses, Vermont franchise taxes, telephone,
advertising, directors' fees, and courier expense account for the majority
of the remainder of the increase.
Income Tax Expense. Income tax expense increased by $106,000, or 5.4%, to $2
million for the year ended December 31, 1998, from $1.9 million for 1997.
This increase reflects the increase in Income before income taxes.
FINANCIAL CONDITION
At December 31, 1999, Union had total consolidated assets of $295 million,
including net loans and loans held for sale of $207 million, deposits of
$258 million and shareholders' equity of $32 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
headquartered in Vermont and Citizens ranked 19th.
Union's total assets increased by $5.4 million or 1.8% to $295.5 million at
December 31, 1999 from $290.1 million at December 31, 1998. Total net loans
and loans held for sale increased by $6.8 million or 3.4% to $206.8 million
or 70% of total assets at December 31, 1999 as compared to $200 million or
69% of total assets at December 31, 1998, due to increases of $2.1 million
in commercial real estate loans, $10.3 million increase in real estate
loans, $1.0 million decrease in term federal funds sold, $4.8 million
decrease in loans to consumers. Cash and Due from banks increased from $9.9
million to $11.6 million between year ends due to Y2K liquidity buildup.
Federal funds sold decreased approximately $5.8 million or 62.7% to $3.5
million at December 31, 1999 from $9.3 million at December 31, 1998, which
was primarily attributable to an increase in loans and cash. Total deposits
increased $8.7 million or 3.5% to $257.6 million at December 31, 1999 from
$248.9 million at December 31, 1998. A $9.5 million or 11.6% increase in
money markets and savings accounts to $91.3 million from $81.8 million
accounted for the majority of the increase which was partially offset by a
reduction in time deposits. Total borrowings decreased approximately $3.2
million to $2.9 million at December 31, 1999 from $6.1 million at December
31, 1998.
Total equity increased by $458,000 or 1.4% to $32.2 million at December 31,
1999 from $31.8 million at December 31, 1998 as a result of an increase of
$1.7 million in the net unrealized holding loss on securities available-for-
sale and dividend payments of $2.3 million which were offset with net income
of $4.1 million and the exercise of employee stock options for $40,000.
Loan Portfolio. Union's loan portfolio primarily consists of adjustable- and
fixed-rate mortgage loans secured by one-to-four family, multi-family
residential or commercial real estate. As of December 31, 1999, Union's
gross loan portfolio net of loans held for sale totaled $201.5 million of
which $79.4 million, or 39.4% of gross loans, consisted of residential
mortgages, and $69.8 million, or 34.6%, of total loans consisted of
commercial real estate loans. As of such date, Union's loan portfolio also
included $7.7 million of real estate construction loans, $16.2 million of
commercial loans, $9.7 million of municipal loans, and $18.7 million of
consumer loans representing, in order, 3.8%, 8.1%, 4.8%, and 9.3% of total
loans outstanding on December 31, 1999. (See Footnote 5 to the Financial
Statements for a more complete breakdown of the loan portfolio)
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 $126.1 million residential mortgage portfolio,
approximately $46.6 million of which is serviced for unaffiliated third
parties at December 31, 1999. Additionally, Union originates commercial
loans under various SBA programs that 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. Union services approximately $13
million of commercial and commercial real estate loans that have been
previously sold.
Total loans have increased $6.2 million or 3.2% since December 31, 1998. The
majority of this increase is due to management's decision to, for the time
being, hold in portfolio loans that could be sold on the secondary market.
This strategy will increase our interest margin and combined with our
increased deposit base has not affected our liquidity adversely.
The following table breaks down by loan type the maturities of the loans
held in portfolio and held for sale as of December 31, 1999:
<TABLE>
<CAPTION>
Within 1 3-5 Over 5
Year Years Years
(Dollars in thousands)
----------------------------
<S> <C> <C> <C>
Real Estate
Fixed Rate $ 9,505 $ 9,499 $ 51,526
Variable Rate 274 1,857 19,038
Commercial
Fixed Rate 18,644 15,338 15,506
Variable Rate 6,265 4,941 38,414
Installment
Fixed Rate 6,574 10,315 592
Variable Rate 461 0 0
Other 878 0 0
----------------------------
Total $42,601 $41,950 $125,076
============================
</TABLE>
Asset Quality. Union, like all financial institutions, is exposed to certain
credit risks related to the value of the collateral that secures its loans
and the ability of borrowers to repay their loans. Management closely
monitors Union's loan and investment portfolios and other real estate owned
for potential problems on a periodic basis and reports to Union's Board of
Directors at regularly scheduled meetings.
Union had loans on non-accrual status totaling $951,000 at December 31, 1999
and $540,000 at December 31, 1998. The aggregate interest on non-accrual
loans not recognized through December 31, 1999 was $182,610, through 1998
was $110,930, and through 1997 was $157,424.
Union had $3.2 million and $1.9 million in loans past due 90 days or more
and still accruing at December 31, 1999 and 1998, respectively. At December
31, 1999, Union had internally classified certain loans totaling $1.6
million and $1 million at December 31, 1998. In management's view, such
loans represent a higher degree of risk and could become nonperforming loans
in the future. While still on a performing status, in accordance with
Union's credit policy, loans are internally classified when a review
indicates any of the following conditions making the likelihood of
collection questionable:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in absolute
terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
At December 31, 1999, Union had acquired by foreclosure or through
repossession real estate worth $26,667, consisting of commercial property
and undeveloped land. The balance at December 31, 1998 was $524,756.
Allowance for Loan Losses. Some of Union's loan customers ultimately do not
make all of their contractually scheduled payments, requiring Union to
charge off the remaining principal balance due. Union maintains an allowance
for loan losses to absorb such losses. While Union allocates the allowance
for loan losses based on the percentage category to total loans, the portion
of the allowance for loan losses allocated to each category does not
represent the total available for future losses which may occur within the
loan category since the total allowance for possible loan losses is a
valuation reserve applicable to the entire portfolio.
The following table reflects activity in the allowance for loan losses for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period $2,845 $2,811 $2,844 $2,710 $2,330
Charge-offs:
Real Estate 41 49 31 45 33
Commercial 49 67 150 148 164
Consumer and other 338 371 368 377 154
------------------------------------------
Total charge-offs 428 487 549 570 351
------------------------------------------
Recoveries:
Real Estate 3 0 4 22 0
Commercial 14 33 15 20 27
Consumer and other 77 88 72 68 74
------------------------------------------
Total recoveries 94 121 91 110 101
------------------------------------------
Net charge-offs (334) (366) (458) (460) (250)
Provision for loan losses 359 400 425 580 630
Transfer from Other Reserve 0 0 0 14 0
------------------------------------------
Balance at end of period $2,870 $2,845 $2,811 $2,844 $2,710
==========================================
</TABLE>
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>
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
Residential $ 557 42.3% $ 255 39.5% $ 278 36.8% $ 230 36.7% $ 246 34.3%
Commercial 1,014 30.6% 754 29.5% 774 27.9% 949 30.7% 914 28.8%
Construction 77 3.7% 12 3.8% 10 2.1% 9 2.5% 9 3.3%
Other Loans
Commercial 416 8.1% 498 9.0% 601 9.3% 583 7.4% 528 10.9%
Consumer installment 448 8.6% 545 11.3% 659 12.9% 662 13.8% 513 13.7%
Home equity loans 28 1.8% 21 2.3% 25 2.8% 27 3.1% 27 3.6%
Municipal, Other and
Unallocated 330 4.9% 760 4.6% 464 8.2% 384 5.8% 473 5.4%
--------------------------------------------------------------------------------------------
Total $2,870 100.0% $2,845 100.0% $2,811 100.0% $2,844 100.0% $2,710 100.0%
============================================================================================
Ratio of Net Charge Offs
to Average Loans .16% .19% .24% .25% .14%
Ratio of Allowance for
Loan Losses to Loans 1.42% 1.46% 1.39% 1.50% 1.48%
</TABLE>
Investment Activities. At December 31, 1999, the reported value of
investment securities available-for-sale was $60 million or 20.5% of assets.
Union had no securities classified as held-to-maturity or trading. The
adoption of FASB No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," has had an impact on our investment portfolio. This
accounting standard, effective for 1994 statements, requires banks to
recognize all appreciation or depreciation of the investment portfolio
either on the balance sheet or through the income statement even though a
gain or loss has not been realized. These changes require securities
classified as "trading securities" to be marked to market with any gain or
loss charged to income. Securities classified as "available-for-sale" are
marked to market with any gain or loss after taxes charged to the equity
portion of the balance sheet. Securities classified as "held-to-maturity"
are to be held at book value. The reported value of securities available-
for-sale at December 31, 1999 reflects a negative valuation adjustment of
$1.7 million. The offset of this adjustment, net of income tax effect, was a
$1.1 million decrease in Union's other comprehensive income component of
shareholders' equity and an increase in net deferred tax assets of $584,000.
The following tables show as of December 31, 1999 and 1998 the amortized
cost of Union's debt obligations maturing within the stated period.
<TABLE>
<CAPTION>
At December 31, 1999
Maturities
-------------------------------------------------------------
Within One to Five to Over Weighted
One Five Ten Ten Total Average
Year Years Years Years Cost Yield
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government, Agency
and Corporation securities $ 7,499 $13,235 $ 7,948 $ 500 $29,182 5.96%
Mortgage-backed securities 0 2,298 1,827 2,199 6,324 6.48%
State and political subdivisions 25 73 3,743 1,206 5,047 6.24%
Corporate debt securities 751 13,837 4,312 2,143 21,043 6.33%
Marketable equity securities 0 0 0 558 558 10.94%
----------------------------------------------------------
Total Investment Securities $ 8,275 $29,443 $17,830 $6,606 $62,154 6.20%
==========================================================
Fair Value $ 8,245 $28,810 $17,009 $6,374 $60,438
==================================================
Weighted Average Yield 5.52% 6.15% 6.32% 7.02% 6.20%
<CAPTION>
At December 31, 1998
Maturities
-------------------------------------------------------------
Within One to Five to Over Weighted
One Five Ten Ten Total Average
Year Years Years Years Cost Yield
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government, Agency
and Corporation securities $ 9,839 $13,263 $ 5,818 $ 500 $29,420 6.05%
Mortgage-backed securities 0 3,141 331 2,093 5,565 6.55%
State and political subdivisions 79 251 1,659 1,665 3,654 6.68%
Corporate debt securities 751 13,261 2,781 1,691 18,484 6.31%
Marketable equity securities 0 0 0 558 558 10.29%
----------------------------------------------------------
Total investment securities $10,669 $29,916 $10,589 $6,507 $57,681 6.26%
==========================================================
Fair Value $10,753 $30,315 $10,702 $6,812 $58,582
==================================================
Weighted Average Yield 6.16% 6.14% 6.38% 6.67% 6.26%
</TABLE>
Deposits. The following table shows information concerning Union's deposits
by account type, and the weighted average nominal rates at which interest
was paid on such deposits as of December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Year Ended, December 31,
------------------------------------------------------------
1999 1998
------------------------------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
(Dollars in thousands)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-certificate deposits:
Demand deposits $ 32,775 12.92% $ 28,851 12.17%
NOW accounts 34,654 13.66% 1.95% 30,943 13.06% 2.23%
Money Markets 49,296 19.43% 4.10% 37,652 15.89% 4.26%
Savings and other 38,876 15.32% 2.87% 37,915 16.00% 2.84%
----------------- -----------------
Total non-certificate of deposits 155,601 61.33% 135,361 57.12%
----------------- -----------------
Certificates of deposit:
Less than $100,000 77,218 30.44% 5.29% 79,321 33.47% 5.40%
$100,000 and over 20,870 8.23% 5.48% 22,292 9.41% 5.78%
----------------- ----------------
Total certificates of deposit 98,088 38.67% 101,613 42.88%
----------------- ----------------
Total deposits $253,689 100.00% 3.56% $236,974 100.00% 3.77%
================= ----------------
</TABLE>
The following table sets forth information regarding the amounts of Union's
certificates of deposit in amounts of $100,000 or more at December 31, 1999
and December 31, 1998 that mature during the periods indicated:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
(Dollars in thousands)
-------------------------------------
<S> <C> <C>
Within 3 months $ 2,301 $ 1,796
3 to 6 months 11,872 6,851
6 to 12 months 3,751 4,701
Over 12 months 3,491 6,094
---------------------------
$21,415 $19,442
===========================
</TABLE>
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $6.1
million at December 31, 1998 at a weighted average rate of 5.82%. During the
second and third quarter of 1999, some of the borrowings with a weighted
average rate of 5.93% were repaid due to the prevailing interest rate
environment and low pre-payment penalties. The remaining long-term notes
totaling $2.9 million at December 31, 1999 have a weighted average rate of
5.77%. (See Footnote 11 to the Financial Statements for details.)
Other Financial Considerations
Market Risk and Asset and Liability Management. Market risk is the risk of
loss in a financial instrument arising from adverse changes in market prices
and rates, foreign currency exchange rates, commodity prices and equity
prices. Union's market risk arises primarily from interest rate risk
inherent in its lending 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.
Union's Asset/Liability Committee meets at least weekly to set loan and
deposit rates, make investment decisions, monitor liquidity and evaluate the
loan demand pipeline. Deposit runoff is monitored daily and loan prepayments
evaluated monthly. Union historically has maintained a substantial portion
of its loan portfolio on a variable rate basis and plans to continue this
ALM strategy in the future. The investment portfolio is all classified as
available for sale and the modified duration is relatively short. Union does
not utilize any derivative products or invest in any "high risk"
instruments.
Our interest rate sensitivity analysis (simulation) as of December 1998 for
a flat rate environment projected a Net Interest Income of $13.6 million for
1999 compared to actual results of $13.7 million or a .7% difference. Net
income was projected to be $4.8 million compared to actual results of $4.1
million. Of the $771 thousand difference, $499 thousand is merger-related
expense, which was not included in our analysis as they are unusual, one
time expenses. A portion of the remaining difference was due to a strategic
decision to, at this time, hold loans packaged for possible for sale within
our portfolio, thus decreasing loan servicing fees and gains on sale of
loans during the year, resulting in a 3% or $93 thousand decrease in Other
Income than anticipated. Our salary expense was .7% or $31 thousand less
than budget while our employee benefit costs are up 13.2% or $133 thousand.
We also incurred higher than anticipated administrative costs for supply and
printing expenses. Return on Assets was 1.39%. Return on Equity was 12.70%.
These two ratios were lower based on lower net income as explained above and
higher average balances than anticipated.
The Company generally requires collateral or other security to support
financial instruments with credit risk. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. (See Footnote 14 to the Financial Statements for details.)
Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap"
is defined as the difference between interest-earning assets and interest-
bearing liabilities maturing or repricing within a given time period. A gap
is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of
rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative
gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Because
different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market interest rates
or conditions, changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in
each maturity category.
Union prepares its interest rate sensitivity "gap" analysis by scheduling
interest-earning assets and interest-bearing liabilities into periods based
upon the next date on which such assets and liabilities could mature or
reprice. The amounts of assets and liabilities shown within a particular
period were determined in accordance with the contractual terms of the
assets and liabilities, except that:
* adjustable-rate loans, securities, and FHLB advances are included in
the period when they are first scheduled to adjust and not in the
period in which they mature;
* fixed-rate mortgage-related securities reflect estimated prepayments,
which were estimated based on analyses of broker estimates, the results
of a prepayment model utilized by Union, and empirical data;
* fixed-rate loans reflect scheduled contractual amortization, with no
estimated prepayments; and
* NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by Union of the sensitivity of each such category of
deposit to changes in interest rates.
Management believes that these assumptions approximate actual experience and
considers them reasonable. However, the interest rate sensitivity of Union's
assets and liabilities in the tables could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
The following tables show Union's rate sensitivity analysis as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
December 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 $ 3,474 $ 0 $ 0 $ 0 $ 0 $ 3,474
Interest-bearing deposits 297 793 673 194 0 1,957
Investments available for sale (1) 2,001 6,244 13,406 15,404 22,707 59,762
FHLB / VBSC Stock 0 0 0 0 941 941
Loans (2) 53,401 34,614 16,778 26,891 77,669 209,353
---------------------------------------------------------------------
Total interest sensitive assets $59,173 $41,651 $30,857 $42,489 $101,317 $275,487
=====================================================================
Interest sensitive liabilities:
Time deposits $21,242 $50,499 $22,867 $ 1,174 $ 0 $ 95,782
Money markets 43,825 0 0 0 10,952 54,777
Regular saving 2,084 3,485 0 0 30,939 36,508
NOW accounts 15,533 0 0 0 22,004 37,537
Borrowed funds (3) 745 235 685 755 452 2,872
Total interest sensitive
liabilities $83,429 $54,219 $23,552 $ 1,929 $ 64,347 $227,476
Net interest rate sensitivity gap (24,256) (12,568) 7,305 40,560 36,970 48,011
Cumulative net interest rate
sensitivity gap (24,256) (36,824) (29,519) 11,041 48,011
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (8.21)% (12.46)% (9.99)% 3.74% 16.25%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets (8.80)% (13.37)% (10.72)% 4.01% 17.43%
Cumulative net interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities (10.66)% (16.19)% (12.98)% 4.85% 21.10%
- --------------------
<FN>
<F1> Investments available for sale exclude marketable equity securities
with a fair value of $676,000 which may be sold by Union at any time.
<F2> Balances shown net of unearned income of $273,305.
<F3> Estimated repayment assumptions considered in Asset/Liability model.
</FN>
</TABLE>
<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 $ 9,326 $ 0 $ 0 $ 0 $ 0 $ 9,326
Interest-bearing deposits 495 887 392 99 0 1,873
Investments available for sale (1) 2,255 8,435 12,941 17,190 16,823 57,644
FHLB / VBSC Stock 0 0 0 0 906 906
Loans (2) 61,743 37,601 18,694 24,773 59,657 202,468
---------------------------------------------------------------------
Total interest sensitive assets $73,819 $46,923 $32,027 $42,062 $77,386 $272,217
======================================================================
Interest sensitive liabilities:
Time deposits $20,083 $48,742 $28,768 $ 1,047 $ 59 $ 98,799
Money markets 28,343 0 0 0 15,780 44,123
Regular savings 2,457 3,520 0 0 31,727 37,704
NOW accounts 12,610 0 0 0 22,733 35,343
Borrowed funds (3) 35 106 310 1,963 3,670 6,084
---------------------------------------------------------------------
Total interest sensitive
liabilities $63,528 $52,368 $29,078 $ 3,010 $74,069 $222,053
=====================================================================
Net interest rate sensitivity gap 10,291 (5,445) 2,949 39,052 3,317 50,164
Cumulative net interest rate
sensitivity gap 10,291 4,846 7,795 46,847 50,164
Cumulative net interest rate
sensitivity gap as a
percentage of total assets 3.55% 1.67% 1.55% 16.15% 17.29%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets 3.78% 1.78% 2.86% 17.21% 18.43%
Cumulative net interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities 4.63% 2.18% 3.51% 21.10% 22.59%
- --------------------
<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 $265,468.
<F3> Estimated repayment assumptions considered in Asset/Liability model.
</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, product pricing, changes in funding mix, and
asset and liability repricing and maturity characteristics. Based on the
results of these simulations, Union is able to quantify its interest rate
risk and develop and implement appropriate strategies.
The following chart reflects the results of our latest simulation analysis
for each of the next three year ends on Net Interest Income, Net Income,
Return on Assets, Return on Equity and Capital Value. The projection
utilizes a rate shock of 150 basis points from the current prime rate of
8.5%, this is the highest internal slope monitored and shows the best and
worse scenarios analyzed. This slope range was determined to be the most
relevant during this economic cycle.
UNION BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Return Return
Net on on
Year Prime Interest Change Net Assets Equity Capital Change
Ending Rate Income % Income % % Value %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December-00 10.00 $13,800 .80 $4,459 1.49 13.41 $25,377 (20.16)
8.50 13,690 0.00 4,349 1.46 13.08 31,787 0.00
7.00 13,504 (1.36) 4,163 1.39 12.52 38,369 20.71
December-01 10.00 14,477 1.75 4,751 1.52 13.55 25,218 (25.00)
8.50 14,228 0.00 4,587 1.47 13.09 33,624 0.00
7.00 13,910 (2.23) 4,377 1.40 12.49 42,316 25.85
December-02 10.00 15,150 3.03 5,034 1.54 14.05 26,733 (24.28)
8.50 14,704 0.00 4,740 1.45 13.23 35,305 0.00
7.00 14,196 (3.45) 4,405 1.34 12.29 44,188 25.16
</TABLE>
Liquidity. Liquidity is a measurement of Union's ability to meet potential
cash requirements, including ongoing commitments to fund deposit
withdrawals, repay borrowings, fund investment and lending activities, and
for other general business purposes. Union's principal sources of funds are
deposits, amortization and prepayment of loans and securities, maturities of
investment securities and other short-term investments, sales of securities
available-for-sale, and earnings and funds provided from operations. In
addition, as both subsidiary banks are members of the FHLB, Union has access
to preapproved lines of credit up to 5.6% of total assets. Under the terms
of the Community Investment Program "Plus", Union Bank has unadvanced funds
available of $10,159,098. This funding commitment expires March 31, 2000;
however, Union intends to apply for renewal of the commitment for another
one year period.
The Banks maintain IDEAL Way Lines of Credit with the Federal Home Loan Bank
of Boston. The total line available to Union Bank was $3,356,000 as of
December 31, 1999 and December 31, 1998, respectively. The total line
available to Citizens Savings Bank and Trust Company was $3,040,000 as of
both December 31, 1999 and 1998. Total borrowings against these lines of
credit was $667,000 and $ -0- at December 31, 1999 and December 31, 1998.
Interest on these borrowings is chargeable at a rate determined by the
Federal Home Loan Bank and payable monthly. Should the Company utilize these
lines of credit, qualified portions of the loan and investment portfolios
would collateralize these borrowings.
While scheduled loan and securities payments and FHLB advances are
relatively predictable sources of funds, deposit flows and prepayments on
loans and mortgage-backed securities are greatly influenced by general
interest rates, economic conditions, and competition. Union's liquidity is
actively managed on a daily basis, monitored by the Asset/Liability
Committee, and reviewed periodically with the Board of Directors. Union's
Asset/Liability Committee sets liquidity targets based on Union's financial
condition and existing and projected economic and market conditions. The
committee measures Union's 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. Since many of the loan commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Union's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 74.9% of Union's time deposits will mature within twelve
months, management believes, based upon past experience, that Union will
retain a substantial portion of these deposits. Management will continue to
offer a competitive but prudent pricing strategy to facilitate retention of
such deposits. Any reduction in total deposits could be offset by purchases
of federal funds, short-term FHLB borrowings, or liquidation of investment
securities or loans held for sale. Such steps could result in an increase in
Union's cost of funds and adversely impact the net interest margin.
Regulatory Capital Requirements. As of December 31, 1999, the most recent
notification from the FDIC categorized Union Bank and Citizens Savings Bank
& Trust Co. as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, the banks must
maintain a minimum total risk-based capital ratio of 10%, Tier I risk-based
capital ratio of 6% and Tier I leverage ratio of 5%. (See Footnote 21 to the
Financial Statements for details on the individual bank's capital ratios.)
Union's consolidated total risk-based capital ratio is 18.55%, Tier I risk-
based capital ratio is 17.27% , and Tier I leverage ratio if 11.35% as of
December 31, 1999. There are no conditions or events since the date of the
most recent notification that management believes might result in an adverse
change to either bank's or Union's regulatory capital category.
Impact of Inflation and Changing Prices. Union's consolidated financial
statements, included in this document, have been prepared in accordance with
generally accepted accounting principles, which require the measurements of
financial position and results of operations in terms of historical dollars,
without considering changes in the relative purchasing power of money over
time due to inflation. Banks have asset and liability structures that are
essentially monetary in nature, and their general and administrative costs
constitute relatively small percentages of total expenses. Thus, increases
in the general price levels for goods and services have a relatively minor
effect on Union's total expenses. Interest rates have a more significant
impact on Union's financial performance than the effect of general
inflation. Interest rates do not necessarily move in the same direction or
change in the same magnitude as the prices of goods and services, although
periods of increased inflation may accompany a rising interest rate
environment.
UNION BANKSHARES, INC. AND SUBSIDIARIES
MARKET FOR UNION'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
On March 10, 2000 there were 3,029,529 shares of common stock outstanding
held by 769 shareholders of record. The number or shareholders does not
reflect the number of persons or entities who may hold the stock in nominee
or 'street name.'
Union common stock is not listed on any exchange or quoted on NASDAQ. The
Company's stock trades under the symbol UUBS. No broker makes a market in
Union common stock and trading has been sporadic. The trades that have
occurred cannot be characterized as an established public trading market.
The 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 stock prices shown below reflect only the
transactions known to management. Due to the limited information available,
the stock prices shown may not accurately reflect the actual market value of
Union's common stock. The high and low prices for shares of the Company's
common stock for 1999 and 1998, as well as cash dividends paid thereon is
presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------
High Low Dividends High Low Dividends
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $23.00 $18.50 $ .22 $18.50 $18.00 $ .20
Second Quarter $22.25 $21.50 $ .22 $21.50 $20.00 $ .20
Third Quarter $21.25 $20.00 $ .22 $24.00 $22.00 $ .20
Fourth Quarter $22.00 $21.00 $ .24 $24.00 $22.75 $ .22
</TABLE>
On January 5, 2000 the Company declared a dividend of $ .24 per share to
stockholders of record as of that date, payable January 14, 2000.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Union Bankshares, Inc. of our report dated January 14, 2000,
included in the 1999 Annual Report to Shareholders of Union Bankshares, Inc.
/s/ A. M. Piesch & Company
March 27, 2000
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
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