-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FEmPsiyZtPFa4mw8x4EXTtsjTIYbQbfFLHwQBnygh3bfbrKLnuI67zSr1VgSL/zX /bJ0DKAsdINY1+QljKPrQw== 0000910647-02-000237.txt : 20021114 0000910647-02-000237.hdr.sgml : 20021114 20021114164637 ACCESSION NUMBER: 0000910647-02-000237 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION BANKSHARES INC CENTRAL INDEX KEY: 0000706863 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030283552 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15985 FILM NUMBER: 02825630 BUSINESS ADDRESS: STREET 1: 20 MAIN STREET STREET 2: P O BOX 667 CITY: MORRISVILLE STATE: VT ZIP: 05661-0667 BUSINESS PHONE: 8028886600 MAIL ADDRESS: STREET 1: 20 MAIN STREET STREET 2: P O BOX 667 CITY: MORRISVILLE STATE: VT ZIP: 05661-0667 10-Q 1 uni-10q3.txt BODY OF FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2002 Commission file number: 000-28449 UNION BANKSHARES, INC. VERMONT 03-0283552 P.O. BOX 667 MAIN STREET MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 8, 2002: Common Stock, $2 par value 3,027,757 shares 1 UNION BANKSHARES, INC. TABLE OF CONTENTS PART 1 FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Financial Statements. Union Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Item 4. Controls and Procedures 27 PART II OTHER INFORMATION Item 1. Legal Proceedings. 28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 28 Certifications 29
2 Union Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited)
September 30, December 31, (Dollars in Thousands) 2002 2001 ------------- ------------ Assets Cash and due from banks $ 15,787 $ 13,926 Federal funds sold and overnight deposits 6,237 7,630 -------------------------- Cash and Cash Equivalents 22,024 21,556 Interest bearing deposits 3,728 4,700 Securities available-for-sale 48,155 49,613 Federal Home Loan Bank stock 1,235 1,064 Loans held for sale 19,308 16,333 Loans 243,972 234,874 Unearned net loan fees (255) (263) Allowance for loan losses (2,936) (2,801) -------------------------- Loans, net 240,781 231,810 -------------------------- Accrued interest receivable 1,925 2,037 Premises and equipment, net 4,729 4,156 Other real estate owned, net 1,081 1,296 Other assets 5,148 4,910 -------------------------- Total assets $348,114 $337,475 ========================== Liabilities and Stockholders' equity: Liabilities: Deposits: Non-interest bearing $ 40,614 $ 39,547 Interest bearing 253,179 246,175 -------------------------- Total Deposits 293,793 285,722 Borrowed funds 11,387 10,344 Accrued interest and other liabilities 4,401 4,194 -------------------------- Total liabilities 309,581 300,260 -------------------------- Stockholders' Equity: Common stock, $2 par value; 5,000,000 shares authorized; 3,268,189 shares issued at 9/30/02 and 12/31/01 6,536 6,536 Paid-in capital 277 277 Retained earnings 32,734 31,629 Treasury stock at cost (240,632 shares at 9/30/02 and 12/31/01) (1,722) (1,722) Accumulated other comprehensive income 708 495 -------------------------- Total stockholders' equity 38,533 37,215 -------------------------- Total liabilities and stockholders' equity $348,114 $337,475 ==========================
The accompanying notes are an integral part of the consolidated unaudited financial statements 3 Union Bankshares, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- (Dollars in Thousands) 2002 2001 2002 2001 ---- ---- ---- ---- Interest income: Interest and fees on loans $ 4,863 $ 5,186 $ 14,423 $ 15,458 Interest and dividends on investment securities 642 760 1,991 2,369 Interest on federal funds sold and overnight deposits 30 98 84 278 Interest on interest bearing deposits 48 41 150 101 --------------------------------------------------- 5,583 6,085 16,648 18,206 --------------------------------------------------- Interest expense: Interest on deposits 1,428 2,174 4,516 6,916 Interest on federal funds purchased 0 1 3 4 Interest on borrowed funds 118 156 375 399 --------------------------------------------------- 1,546 2,331 4,894 7,319 --------------------------------------------------- Net interest income 4,037 3,754 11,754 10,887 Provision for loan losses 95 86 290 199 --------------------------------------------------- Net interest income after provision for loan losses 3,942 3,668 11,464 10,688 --------------------------------------------------- Other income: Trust income 7 54 123 204 Service fees 647 600 1,841 1,786 Gain (loss) on sale of securities 0 5 (3) 79 Gain on sale of loans 272 1 308 74 Other 45 (9) 119 7 --------------------------------------------------- 971 651 2,388 2,150 --------------------------------------------------- Other expenses: Salaries and wages 1,299 1,210 3,835 3,510 Pension and employee benefits 382 332 1,187 1,007 Occupancy expense, net 165 149 492 487 Equipment expense 232 212 648 625 Net operation of Other Real Estate Owned 153 14 497 44 Other expense 720 661 2,125 2,043 --------------------------------------------------- 2,951 2,578 8,784 7,716 --------------------------------------------------- Income before income tax expense 1,962 1,741 5,068 5,122 Income tax expense 566 519 1,420 1,487 --------------------------------------------------- Net income $ 1,396 $ 1,222 $ 3,648 $ 3,635 =================================================== Earnings per common share $ 0.46 $ 0.41 $ 1.20 $ 1.20 =================================================== Weighted average number of common shares outstanding 3,027,557 3,033,842 3,027,557 3,031,133 =================================================== Dividends declared per share $ 0.28 $ 0.26 $ 0.84 $ 0.78 ===================================================
The accompanying notes are an integral part of the consolidated unaudited financial statements 4 Union Bankshares, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Accumulated Other Total Common Paid-in Capital Retained Treasury Comprehensive Stockholders' Stock & Surplus Earnings Stock Income Equity ------ --------------- -------- -------- ------------- ------------- (Dollars in Thousands) Balance, December 31, 2001 $6,536 $277 $31,629 $(1,722) $495 $37,215 Net income - - 3,648 - - 3,648 Change in net unrealized gain on securities available-for-sale, net of reclassification adjustment and tax effects. - - - - 213 213 ------- Comprehensive income - - - - - 3,861 ------- Cash dividends declared ($0.84 per share) - - (2,543) - - (2,543) -------------------------------------------------------------------------------- Balance September 30, 2002 $6,536 $277 $32,734 $(1,722) $708 $38,533 ================================================================================
The accompanying notes are an integral part of the consolidated unaudited financial statements 5
Union Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows (UNAUDITED) Year to Date ------------------------------- September 30, September 30, 2002 2001 ------------- ------------- (Dollars in Thousands) Cash Flows From Operating Activities Net Income $ 3,648 $ 3,635 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 477 462 Provision for loan losses 290 199 Provision (credit) for deferred income taxes (132) (213) Net amortization on securities 137 51 Equity in losses of limited partnerships 93 47 Write-downs of other real estate owned 275 0 Increase (decrease) in unamortized loan fees (8) 14 Increase in loans held for sale (2,667) (2,423) Decrease in accrued interest receivable 112 484 Increase in other assets (291) (572) Increase in income taxes 188 365 Decrease in accrued interest payable (357) (4) Increase in other liabilities 630 253 Loss (gain) on sale of securities 3 (79) Gain on sale of loans (308) (74) (Gain) loss on sale of OREO (21) 16 Loss (gain)on disposal of fixed assets (1) 9 ------------------------- Net cash provided by operating activities 2,068 2,170 Cash Flows From Investing Activities Interest bearing deposits Sales and maturities 1,964 685 Purchases (992) (2,563) Securities available for sale Maturities and redemptions 12,733 22,943 Purchases (11,089) (16,781) Purchase of Federal Home Loan Bank Stock (171) (47) Increase in loans, net (9,406) (19,576) Recoveries of loans charged off 82 81 Purchases of premises and equipment, net (1,049) (525) Investment in limited partnerships (254) (136) Proceeds from sale of OREO 0 106 6 Proceeds from sale of repossessed property 11 21 ------------------------- Net cash used in investing activities (8,171) (15,792) Cash Flows From Financing Activities Borrowings, net of repayments 1,043 3,342 Proceeds from exercise of stock options 0 41 Net increase in non-interest bearing deposits 1,067 15,422 Net increase in interest bearing deposits 7,004 5,163 Dividends paid (2,543) (2,364) ------------------------- Net cash provided by financing activities 6,571 21,604 Increase in cash and cash equivalents $ 468 $ 7,982 Cash and cash equivalents Beginning $21,556 $ 11,423 Ending $22,024 $ 19,405 Supplemental Disclosure of Cash Flow Information: Interest Paid $ 5,251 $ 7,324 ========================= Income Taxes Paid $ 1,040 $ 1,335 ========================= Supplemental Schedule of Noncash Investing and Financing Activities: Other Real Estate Acquired in Settlement of Loans $ 1,209 $ 85 ========================= Repossessed Property Acquired in Settlement of Loans $ 32 $ 13 ========================= Loans Originated to Finance the Sale of Other Real Estate Owned $(1,170) $ 0 ========================= Total Change in Unrealized Gain (Loss) on Securities Available-For-Sale $ 326 $ 1,375 =========================
The accompanying notes are an integral part of the consolidated unaudited financial statements 7 UNION BANKSHARES, INC. NOTES TO FINANCIAL STATEMENTS: Note 1. The accompanying interim unaudited consolidated financial statements of Union Bankshares, Inc. (the Company) for the interim periods ended September 30, 2002 and 2001 and for the quarters then ended have been prepared in accordance with U.S. generally accepted accounting principles and the accounting policies described in the Company's Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Company's 2001 Annual Report to Shareholders, 2001 Annual Report on Form 10-K, and current reports on Form 8-K. Note 2. Commitments and Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management any liability resulting from such proceedings would not have a material adverse effect on the Company's financial condition or results of operations. Note 3. Earnings Per Share Earnings per common share amounts are computed based on the weighted average number of shares of common stock outstanding during the period (retroactively adjusted for stock dividends) and reduced for shares held in Treasury. The assumed conversion of available stock options does not result in material dilution. Note 4. New Accounting Pronouncements In October 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain Financial Institutions". SFAS No. 147 amends previously issued guidance regarding the accounting and reporting for the acquisition of all or part of a financial institution. The statement also provides guidance on the accounting for the impairment or disposal of core deposits and is effective for acquisitions after October 1, 2002. Management has determined there is no current impact from this statement on the Company's financial statements. 8 Note 5. Reportable Segments The Company has two reportable operating segments, Union Bank (Union) and Citizens Savings Bank and Trust Company (Citizens). 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 the reconciliation of such information to the consolidated financial statements as of and for the periods ended September 30, 2002 and 2001 follows:
(dollars in thousands) Intersegment Consolidated 2002 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------------- Interest income $ 11,412 $ 5,236 $ 0 $ 0 $ 16,648 Interest expense 3,131 1,762 0 1 4,894 Provision for loan loss 135 155 0 0 290 Service fee income 1,446 395 0 0 1,841 Income tax expense (benefit) 1,092 401 0 (73) 1,420 Net income (loss) 2,946 820 0 (118) 3,648 Assets 240,477 107,230 (33) 440 348,114 (dollars in thousands) Intersegment Consolidated 2001 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------------- Interest income $ 12,473 $ 5,733 $ 0 $ 0 $ 18,206 Interest expense 4,862 2,456 0 1 7,319 Provision for loan loss 30 169 0 0 199 Service fee income 1,388 398 0 0 1,786 Income tax expense (benefit) 1,157 381 0 (51) 1,487 Net income (loss) 2,938 776 0 (79) 3,635 Assets 224,862 104,699 (61) 401 329,901
Amounts in the "Other" column encompass activity in Union Bankshares, Inc., the "parent company." Holding company assets are stated after intercompany eliminations. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis provides information regarding Union Bankshares, Inc.'s (Union's or the Company's) financial position as of September 30, 2002 and as of December 31, 2001, and its results of operations for the three and nine months ended September 30, 2002 and 2001. This discussion should be read in conjunction with the information in this document under Financial Statements and related notes and with other financial data appearing elsewhere in this filing. In the opinion of Union's management, the interim unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary to fairly present Union's consolidated financial position and results of operations to be expected for the interim period. Management is not aware of the occurrence of any events after September 30, 2002, which would materially affect the information presented. Union's common stock was listed on the American Stock Exchange on July 13, 2000 with an opening price of $15.125 and it closed on November 8, 2002 at $22.25. In May of 2001, Citizens Savings Bank and Trust Company opened a loan production office in Littleton, New Hampshire. Littleton is 19 miles east of St. Johnsbury, Vermont where Citizens is based, and is a rapidly growing community with a diverse economic base. This office generates loans for both consumer and commercial purposes. On April 15, 2002 we modified our Route 108 Branch in Stowe to a fully electronic branch. On April 22, 2002 our newest, full service branch was opened by Union Bank in Fairfax, Vermont, which is the Company's first entry into the Franklin County market. CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS The Company may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Company may include forward-looking statements in its filings with the Securities and Exchange Commission, in its reports to stockholders, including this Quarterly Report, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risk exists those predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. Also when we use any of the words "believes," "expects," "anticipates," "intend," "plan," "seek", "estimate" or similar expressions, we are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of our company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. The possible events or factors that might affect our forward-looking statements include, but are not limited to, the following: * uses of monetary, fiscal and tax policy by various governments * political, legislative or regulatory developments in Vermont, New Hampshire or the United States including changes in laws concerning accounting, taxes, banking and other aspects of the financial services industry * developments in general economic or business conditions, including interest rate fluctuations, market fluctuations and perceptions, and inflation and their effect on the Company or its customers * changes in the competitive environment for financial services organizations * the Company's ability to retain key personnel 10 * changes in technology including demands for greater automation * acts of terrorism * adverse changes in the securities market * unanticipated lower revenues, loss of customers or business or higher operating expenses * the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities 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. RESULTS OF OPERATIONS The Company's net income for the quarter ended September 30, 2002 was $1.4 million, compared with net income of $1.2 million for the third quarter of 2001. Net income per share was $.46 for the third quarter of 2002 compared to $.41 for the same quarter of 2001. Net income for the first nine months of 2002 and 2001 was $3.6 million. Net income per share was $1.20 for the first nine months of 2002 and 2001. 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 tables show, for the periods indicated, the total amount of income recorded from interest-earning assets, and the related average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and average rates, and the relative net interest spread and net interest margin. All yield and rate information is calculated on an annualized basis. Yield and rate information for a period is average information for the period, and is calculated by dividing the annualized income or expense item for the period by the average balances of the appropriate balance sheet item during the period. Net interest margin is annualized net interest income divided by average interest-earning assets. Nonaccrual loans are included in asset balances for the appropriate periods, but recognition of interest on such loans is discontinued and any remaining accrued interest receivable is reversed, in conformity with federal regulations. The yields, net interest spread and net interest margins appearing in the following tables have been calculated on a pre-tax basis:
Three months ended September 30, 2002 2001 --------------------------------- --------------------------------- Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate ------- -------- ------- ------- -------- ------- (dollars in thousands) Average Assets: Federal funds sold and overnight deposits $ 7,633 $ 30 1.55% $ 11,109 $ 98 3.53% Interest bearing deposits 3,854 48 4.93% 3,247 41 5.05% Investments (1), (2) 46,570 642 5.75% 50,500 760 6.23% Loans, net (1), (3) 256,558 4,863 7.59% 238,288 5,186 8.78% -------- ------- ----- -------- ------- ---- Total interest-earning assets (1) 314,615 5,583 7.14% 303,144 6,085 8.12% Cash and due from banks 12,655 9,965 Premises and equipment 4,808 3,819 Other assets 8,824 6,544 -------- -------- Total assets $340,902 $323,472 ======== ======== Average Liabilities and Shareholders' Equity: Now accounts $ 39,082 $ 105 1.07% $ 36,769 $ 144 1.57% 11 Savings and money market accounts 106,379 426 1.59% 92,977 678 2.92% Certificates of deposit 104,150 897 3.42% 107,224 1,352 5.04% Borrowed funds 11,761 118 3.94% 10,421 157 6.03% -------- ------- ----- -------- ------- ---- Total interest-bearing liabilities 261,372 1,546 2.34% 247,391 2,331 3.77% Non-interest bearing deposits 39,088 36,767 Other liabilities 3,534 3,569 -------- -------- Total liabilities 303,994 287,727 Shareholders' equity 36,908 35,745 -------- -------- Total liabilities and shareholders' equity $340,902 $323,472 ======== ======== Net interest income (1) $ 4,037 $ 3,754 ======= ======= Net interest spread (1) 4.80% 4.35% ==== ==== Net interest margin (1) 5.19% 5.05% ==== ==== - -------------------- Average yield reported on a tax-equivalent basis. The average balance of investments is calculated using the amortized cost basis. Includes loans held for sale and is net of unearned income and allowance for loan losses. Nine months ended September 30, 2002 2001 --------------------------------- --------------------------------- Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate ------- -------- ------- ------- -------- ------- (dollars in thousands) Average Assets: Federal funds sold and overnight deposits $ 7,093 $ 84 1.58% $ 8,821 $ 278 4.20% Interest bearing deposits 4,126 150 4.87% 2,459 101 5.48% Investments (1), (2) 46,679 1,991 5.92% 51,659 2,369 6.31% Loans, net (1), (3) 251,439 14,423 7.74% 230,978 15,458 9.02% -------- ------- ----- -------- ------- ---- Total interest-earning assets (1) 309,337 16,648 7.29% 293,917 18,206 8.37% Cash and due from banks 12,667 9,941 Premises and equipment 4,641 3,908 Other assets 8,876 5,803 -------- -------- Total assets $335,521 $313,569 ======== ======== Average Liabilities and Shareholders' Equity: Now accounts $ 37,333 $ 317 1.13% $ 34,985 $ 454 1.73% Savings and money market accounts 104,746 1,340 1.71% 90,246 2,193 3.24% Certificates of deposit 102,939 2,859 3.71% 105,965 4,269 5.37% Borrowed funds 12,567 378 3.99% 9,187 403 5.85% -------- ------- ----- -------- ------- ---- Total interest-bearing liabilities 257,585 4,894 2.54% 240,383 7,319 4.06% Non-interest bearing deposits 37,325 34,394 Other liabilities 3,719 3,537 -------- -------- Total liabilities 298,629 278,314 Shareholders' equity 36,892 35,255 -------- -------- Total liabilities and shareholders' equity $335,521 $313,569 ======== ======== Net interest income (1) $11,754 $10,887 ======= ======= 12 Net interest spread (1) 4.75% 4.31% ==== ==== Net interest margin (1) 5.17% 5.05% ==== ==== - -------------------- Average yield reported on a tax-equivalent basis. The average balance of investments is calculated using the amortized cost basis. Includes loans held for sale and is net of unearned income and allowance for loan losses.
Union's net interest income increased by $283 thousand, or 7.5%, to $4.04 million for the three months ended September 30, 2002, from $3.75 million for the three months ended September 30, 2001. The net interest spread increased by 45 basis points to 4.80% for the three months ended September 30, 2002, from 4.35% for the three months ended September 30, 2001 as interest rates paid on most liabilities and earned on most assets moved downward in response to earlier decreases in the prime rate. The net interest margin for the 2002 period increased 14 basis points to 5.19% from the 2001 period at 5.05%. Union's net interest income year to date was $11.7 million compared to the prior year of $10.9 million or an increase of 8.0% between the two years. The net interest spread increased by 44 basis points to 4.75% for the nine months ended September 30, 2002 from 4.31% for the nine months ended September 30, 2001. This increase was fueled by the eight decreases in the prime rate since January 1, 2001 which had taken it from 9.50% to 4.75% by December, 2001. The net interest margin for the 2002 period increased to 5.17% from 5.05% for the 2001 period or an increase of 12 basis points. A decrease in prime rate is not necessarily beneficial to Union in the near term, see Management's Discussion and Analysis "Other Financial Considerations - Market Risk and Asset and Liability Management." 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.
Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 ---------------------------------------------- Increase/(Decrease) Due to Change In ---------------------------------------------- Volume Rate Net ------ ---- --- (dollars in thousands) Interest-earning assets: Federal funds sold and overnight deposits $ (30) $ (38) $ (68) Interest bearing deposits 8 (1) 7 Investments (62) (56) (118) Loans, net 427 (750) (323) -------------------------------- Total interest-earning assets 343 (845) (502) Interest-bearing liabilities: Now accounts 10 (49) (39) Savings and money market accounts 102 (354) (252) Certificates of deposit (35) (420) (455) Borrowed funds 22 (61) (39) -------------------------------- Total interest-bearing liabilities 99 (884) (785) -------------------------------- Net change in net interest income $ 244 $ 39 $ 283 ================================ 13 Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 --------------------------------------------- Increase/(Decrease) Due to Change In --------------------------------------------- Volume Rate Net ------ ---- --- (dollars in thousands) Interest-earning assets: Federal funds sold and overnight deposits $ (54) $ (140) $ (194) Interest bearing deposits 68 (19) 49 Investments (239) (139) (378) Loans, net 1,376 (2,411) (1,035) -------------------------------- Total interest-earning assets 1,151 (2,709) (1,558) Interest-bearing liabilities: Now accounts 30 (167) (137) Savings and money market accounts 348 (1,201) (853) Certificates of deposit (127) (1,283) (1,410) Borrowed funds 149 (174) (25) -------------------------------- Total interest-bearing liabilities 400 (2,825) (2,425) -------------------------------- Net change in net interest income $ 751 $ 116 $ 867 ================================
Quarter Ended September 30, 2002 compared to Quarter Ended September 30, 2001. Interest and Dividend Income. Union's interest and dividend income decreased by $502 thousand or 8.2%, to $5.6 million for the three months ended September 30, 2002, from $6.1 million for the three months ended September 30, 2001. Average earning assets increased by $11.5 million, or 3.8%, to $314.6 million for the three months ended September 30, 2002, from $303.1 million for the three months ended September 30, 2001. Average loans approximated $256.6 million for the three months ended September 30, 2002 up from $238.3 million for the three months ended September 30, 2001. The $8.1 million, or 9.0% increase in residential real estate secured loans, the $10.8 million, or 9.3% increase in commercial and commercial real estate loans, and the $2.1 million increase in municipal loans was partially offset by the $1.7 million, or 13.3% decrease in personal loans and the $527 thousand, or 4.6% decrease in construction loans. A conscious decision to retain a number of loans underwritten for sale in our portfolio accounts for a portion of the increase in both the residential real estate and commercial loan portfolios. The decrease in personal loans is due in part to a late 1998 decision to exit the indirect lending business at Citizens. The average balance of investment securities (including mortgage-backed securities) decreased by $3.9 million, or 7.8%, to $46.6 million for the three months ended September 30, 2002, from $50.5 million for the three months ended September 30, 2001. The average balance in interest bearing deposits increased by $.6 million to $3.8 million from $3.2 million or 18.7%. The average level of federal funds sold and overnight deposits decreased by $3.5 million or 31.3%, to $7.6 million for the three months ended September 30, 2002, from $11.1 million for the three months ended September 30, 2001. The net decrease in the investment portfolio, federal funds sold and overnight deposits, and interest bearing deposits in 2002 reflects the continuing growth in our loan portfolio. Interest income from non-loan instruments was $.7 million in 2002 compared to $.9 million for 2001, which is explained by the $6.8 million decrease in volume and the drop in interest rates. Interest Expense. Union's interest expense decreased by $785 thousand, or 33.7%, to $1.5 million for the three months ended September 30, 2002 from $2.3 million for the three months ended September 30, 2001. Average interest-bearing liabilities increased by $14.0 million, or 5.7% to $261.4 million for the three months ended September 30, 2002, from $247.4 million for the three months ended September 30, 2001. Average time deposits decreased $3.0 million, or 2.8%, to $104.2 million for the three months ended September 30, 2002, from $107.2 million for the three months ended September 30, 2001. The average balances for money market and saving accounts increased by $13.4 million, or 14.4% to $106.4 million for the three months ended September 30, 2002, from $93.0 million for the three months ended. September 30, 2001. The average balance in Now accounts rose $2.3 million or 6.3% from $36.8 million 14 to $39.1 million. Customers have maintained very liquid positions during the last 2 years as they anticipate that interest rates paid on all deposit instruments will rise. The average balance on funds borrowed has increased from $10.4 million on average in 2001 to $11.8 million in 2002 as Union's subsidiaries took some short term Federal Home Loan Bank borrowings during the second quarter of 2002 to fund loan demand. Noninterest Income. Union's noninterest income increased $320 thousand, or 49.2%, to $971 thousand for the three months ended September 30, 2002, from $651 thousand for the three months ended September 30, 2001. Trust department income decreased to $7 thousand in the third quarter of 2002 from $54 thousand in the same period of 2001 or an 87% decrease primarily due to the decline in interest rates and the stock market as the majority of fee income is based on the asset's market value. There was a $272 thousand gain on Sale of Loans for 2002 versus $1 thousand for 2001 as Union chose to sell low rate, long term loans on the secondary market during the third quarter of 2002. Service fees (sources of which include, among others, deposit and loan servicing fees, ATM fees, and safe deposit fees) increased by $47 thousand, or 7.8%, to $647 thousand for the three months ended September 30, 2002, from $600 thousand for the three months ended September 30, 2001. Noninterest Expense. Union's noninterest expense increased $373 thousand, or 14.5%, to $3.0 million for the three months ended September 30, 2002, from $2.6 million for the three months ended September 30, 2001. Salaries increased $89 thousand, or 7.4%, to $1.3 million for the three months ended September 30, 2002, from $1.2 million for the three months ended September 30, 2001, reflecting normal salary activity, growth and the addition of the new Fairfax, Vermont branch. Pension and employee benefits increased $50 thousand or 15.1% to $382 thousand for the three months ended September 30, 2002, from $332 thousand for the three months ended September 30, 2001 mainly due to a $51 thousand increase in employee insurance plans expense, mainly health insurance costs. Occupancy expense for the quarter was $165 thousand, up $16 thousand or 10.7% from $149 thousand in the third quarter of 2001. The increase was across the majority of individual line items between quarters. Equipment expense increased $20 thousand, or 9.4% to $232 thousand for the three months ended September 30, 2002, from $212 thousand for the same period in 2001 primarily resulting from increased depreciation cost on computer equipment and software which are depreciated as an expense over a time period of three to five years. Net operation of other real estate owned was $153 thousand for the quarter up from $14 thousand for the corresponding quarter in 2001. This increase of $139 thousand is principally due to the cost of remediating one property for $80 thousand and a $25 thousand writedown on an Other Real Estate Owned (OREO) property. Other operating expense for the quarter was $720 thousand up from $661 thousand for the same quarter in 2001. The increase of $59 thousand, or 8.9%, is mainly due to the increase in legal fees from $15 thousand to $28 thousand, increase in amortization of low income housing investments from $16 thousand to $31 thousand and a $9 thousand increase in checking accounts charged off. Income Tax Expense. Union's income tax expense increased by $47 thousand, or 9.1%, to $566 thousand for the three months ended September 30, 2002, from $519 thousand for the comparable period of 2001 because of increased income before taxes partially offset by the increased federal income tax credits available to us in 2002 due to investments in low income housing projects. Year to Date September 30, 2002 compared to Year to Date September 30, 2001. Interest and Dividend Income. Union's interest and dividend income decreased by $1.5 million, or 8.6%, to $16.6 million for the nine months ended September 30, 2002, from $18.2 million for the nine months ended September 30, 2001. Average earning assets increased by $15.4 million, or 5.2%, to $309.3 million for the nine months ended September 30, 2002, from $293.9 million for the nine months ended September 30, 2001. Average loans approximated $251.4 million for the nine months ended September 30, 2002 up from $231.0 million for the nine months ended September 30, 2001. The $9.3 million or 10.6% increase in residential real estate secured loans and the $14.3 million or 13.0% increase in commercial loans was partially offset by the $1.9 million or 13.7% decrease in personal loans and a $732 thousand, or 7.0% decrease in construction loans to $9.7 million. A conscious decision to retain a portion 15 of loans underwritten for sale in our portfolio accounts for the majority of the increase in both the residential real estate and commercial loan portfolios. The decrease in personal loans is due in part to a late 1998 decision to exit the indirect lending business at Citizens. The average balance of investment securities (including mortgage-backed securities) decreased by $5.0 million, or 9.6%, to $46.7 million for the nine months ended September 30, 2002, from $51.7 million for the nine months ended September 30, 2001. The average level of federal funds sold and overnight deposits decreased by $1.7 million or 19.6%, to $7.1 million for the nine months ended September 30, 2002, from $8.8 million for the nine months ended September 30, 2001. The average balance in interest bearing deposits increased by $1.6 million to $4.1 million from $2.5 million, or 67.8% increase. The decrease in the investment portfolio, federal funds sold and interest bearing deposits in 2002 reflects the continuing growth in our loan portfolio. Interest income from non-loan instruments was $2.2 million for 2002 and $2.7 million for 2001 reflecting the decrease in yields and the overall decrease in volume. Interest Expense. Union's interest expense decreased by $2.4 million, or 33.1%, to $4.9 million for the nine months ended September 30, 2002 from $7.3 million for the nine months ended September 30, 2001. Average interest-bearing liabilities increased by $17.2 million, or 7.2%, to $257.6 million for the nine months ended September 30, 2002, from $240.4 million for the nine months ended September 30, 2001. Average time deposits were $102.9 million for the nine months ended September 30, 2002 and $106.0 million for the nine months ended September 30, 2001, or a decrease of 2.9%. The average balances for money market and savings accounts increased by $14.5 million, or 16.1% to $104.7 million for the nine months ended September 30, 2002, from $90.2 million for the nine months ended September 30, 2001. The 6.7% increase in Now accounts brought the average balance up to $37.3 million from $35.0 million. Customers have maintained very liquid positions during the last 2 years as they anticipate the interest rates paid on all deposit instruments will rise. The average balance on funds borrowed has increased from $9.2 million in 2001 to $12.6 million in 2002 as Union's subsidiaries took some short-term Federal Home Loan Bank advances during the second quarter of 2002 to fund loan demand. Noninterest Income. Union's noninterest income increased $238 thousand, or 11.1%, to $2.4 million for the nine months ended September 30, 2002 from $2.2 million for the nine months ended September 30, 2001. The results for the period reflected a net loss of $3 thousand from the sale of securities compared to a $79 thousand gain from sales during 2001. Trust department income decreased to $123 thousand for the nine months of 2002 from $204 thousand in the same period of 2001 or a 39.7% decrease primarily due to the decline in interest rates and the stock market since the majority of the fee income is based on the asset's market value. We also had a fewer number of estate settlements in 2002. Gain on Sale of Loans increased $234 thousand to $308 thousand for 2002 from $74 thousand for 2001. Service fees (sources of which include, among others, deposit and loan servicing fees, ATM fees, and safe deposit fees) increased by $55 thousand, or 3.0%, to $1.84 million for the nine months ended September 30, 2002, from $1.79 million for the nine months ended September 30, 2001. The main component of other income in 2002 is $78 thousand representing net servicing rights. Noninterest Expense. Union's noninterest expense increased $1.1 million, or 13.8%, to $8.8 million for the nine months ended September 30, 2002, from $7.7 million for the nine months ended September 30, 2001. Salaries increased $325 thousand, or 9.3%, to $3.8 million for the nine months ended September 30, 2002, from $3.5 million for the nine months ended September 30, 2001, reflecting normal salary activity, growth and the addition of the Littleton Loan Production Office in May of 2001 and the Fairfax, Vermont branch in April of 2002. Pension and employee benefits increased $180 thousand, or 17.9%, to $1.2 million for the nine months ended September 30, 2002, from $1.0 million for the nine months ended September 30, 2001 mainly due to an $127 thousand increase in employee group insurance health plan costs and a $27 thousand increase in payroll taxes. Net occupancy expense increased $5 thousand, or 1.0%, to $492 thousand for the nine months ended September 30, 2002, from $487 thousand for the nine months ended September 30, 2001. Equipment expense increased $23 thousand or 3.7% to $648 thousand for the nine months ended September 30, 2002, from $625 thousand for the same period in 2001. Net operation of other real estate owned was $497 thousand for the nine months ended 16 September 30, 2002 compared to $44 thousand for the same period in 2001. This increase of $453 thousand was mainly due to $275 thousand in two writedowns on OREO and an increase of $199 thousand in expenses to carry these OREO properties from $44 thousand to $243 thousand. The impact of these expenses were partially off-set by a gain of $21 thousand on the sale of OREO properties. Other operating expenses were $2.1 million for the first nine months of 2002 compared to $2.0 million for the same period in 2001. The increase of $82 thousand, or 4.0%, is mainly due to the increase in trust department expenses growing from $37 thousand to $61 thousand due to the outsourcing of trust accounting, increase in amortization of low income housing investments from $47 thousand to $93 thousand and an $18 thousand increase in checking accounts charged off. Income Tax Expense. Union's income tax expense decreased by $67 thousand, or 4.5%, to $1.42 million for the nine months ended September 30, 2002, from $1.49 million for the comparable period of 2001, mainly due to increased federal tax credits available in 2002 resulting from investments in low income housing projects. FINANCIAL CONDITION At September 30, 2002, Union had total consolidated assets of $348.1 million, including net loans and loans held for sale of $260.1 million, deposits of $293.8 million and shareholders' equity of $38.5 million. Based on the most recent information published by the Vermont Banking Commissioner, in terms of total assets at December 31, 2001, Union Bank ranked as the 10th largest institution of the 23 commercial banks and savings institutions headquartered in Vermont, and Citizens ranked as the 19th. Union's total assets increased by $10.6 million or 3.2% to $348.1 million at September 30, 2002 from $337.5 million at December 31, 2001. Total net loans and loans held for sale increased by $12.0 million or 4.8% to $260.1 million or 74.7% of total assets at September 30, 2002 as compared to $248.1 million or 73.5% of total assets at December 31, 2001. Cash and cash equivalents, including federal funds sold and overnight deposits, increased $468 thousand or 2.2% to $22.0 million at September 30, 2002 from $21.6 million at December 31, 2001. Securities available for sale decreased from $49.6 million at December 31, 2001 to $48.2 million at September 30, 2002, a $1.4 million or 2.9% decrease. Securities maturing have not been replaced dollar for dollar and some securities have been sold in order to fund loan demand and our decision to currently hold in portfolio a portion of loans available for sale. Deposits increased $8.1 million or 2.8% to $293.8 million at September 30, 2002 from $285.7 million at December 31, 2001. Total borrowings increased $1.1 million to $11.4 million at September 30, 2002 from $10.3 million at December 31, 2001. The increase was in short-term borrowing from the Federal Home Loan Bank under existing lines of credit to fund loan demand. Loan Portfolio. Union's loan portfolio (including loans held for sale) primarily consists of adjustable- and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. As of September 30, 2002, Union's gross loan portfolio totaled $263.3 million, or 75.6%, of assets, of which $130.5 million, or 49.6% of gross loans, consisted of residential mortgages and construction loans, and $86.5 million, or 32.8%, of total loans consisted of commercial real estate loans. As of such date, Union's loan portfolio also included $21.8 million of commercial loans, $13.2 million of municipal loans, and $11.3 million of consumer loans representing, in order, 8.3%, 5.0% and 4.3% of total loans outstanding on September 30, 2002. The following table shows information on the composition of Union's loan portfolio as of September 30, 2002 and December 31, 2001: 17
September 30, December 31, Loan Type 2002 2001 - --------- ------------- ------------ Real estate $113,985 $112,564 Commercial real estate 84,030 78,898 Commercial 21,519 20,659 Consumer 11,261 12,201 Municipal loans 13,177 10,552 Loans held for sale 19,308 16,333 -------------------------- Total loans 263,280 251,207 Deduct: Allowance for loan losses (2,936) (2,801) Net deferred loan fees, premiums & discounts (255) (263) -------------------------- $260,089 $248,143 ==========================
Union originates and sells residential mortgages into the secondary market, with most such sales made to the Federal Home Loan Mortgage Corporation (FHLMC) and the Vermont Housing Finance Agency (VHFA). Union services an $177.2 million residential mortgage portfolio, approximately $46.7 million of which is serviced for unaffiliated third parties at September 30, 2002. Additionally, Union originates commercial real estate and commercial loans under various SBA programs that provide an agency guarantee for a portion of the loan amount. Union sometimes sells the guaranteed portion of the loan to other financial concerns and will retain servicing rights, which generates fee income. Union serviced $8.1 million of commercial and commercial real estate loans for unaffiliated third parties as of September 30, 2002. 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. Gross loans and loans held for sale have increased $12.1 million or 4.8% since December 31, 2001. An increase of $1.4 million or 1.3% in residential real estate loans net of loans sold year to date, an increase of $5.1 million or 6.5% in commercial real estate loans, an increase of $.9 million or 4.2% in commercial loans, an increase of $2.6 million or 24.9% in municipal loans and an increase in loans held for sale of $3.0 million or 18.2% was partially offset by a $.9 million or 7.7% decrease in consumer loans. Asset Quality. Union, like all financial institutions, is exposed to certain credit risks including those related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Management closely monitors Union's loan and investment portfolios and other real estate owned for potential problems on a periodic basis and reports to Union's and the subsidiaries' Boards of Directors at regularly scheduled meetings. The Company's loan review procedures include a credit quality assurance process that begins with approval of lending policies and underwriting guidelines by the Board of Directors, a loan review department staffed by experienced regulatory personnel, low individual lending limits for officers, Board approval for large credit relationships and a quality control process for loan documentation. The Company also maintains a monitoring process for credit extensions. The Company performs periodic concentration analyses based on various factors such as industries, collateral types, large credit sizes and officer portfolio loads. The Company has established underwriting guidelines to be followed by its officers. The Company monitors its delinquency levels for any negative or adverse trends. The Company continues to invest in its loan portfolio monitoring system to enhance its risk management capabilities. There can be no assurance, however, the Company's loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general or local economic conditions. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt exists as to the full collection of interest and principal. Normally, when a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of interest and principal is 18 probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Union had loans on nonaccrual status totaling $1.3 million at September 30, 2002, $1.8 million at December 31, 2001 and $2.1 million at September 30, 2001. Interest income not recognized on such nonaccrual loans amounted to approximately $325 thousand and $472 thousand as of September 30, 2002 and 2001, respectively and $450 thousand as of December 31, 2001. Union had $0.9 million and $3.0 million in loans past due 90 days or more and still accruing at September 30, 2002 and December 31, 2001, respectively. At September 30, 2002, Union had internally classified certain loans totaling $2.0 million. In management's view, such loans represent a higher degree of risk and could become nonperforming loans in the future. While still on a performing status, in accordance with Union's credit policy, loans are internally classified when a review indicates any of the following conditions makes the likelihood of collection uncertain: * the financial condition of the borrower is unsatisfactory; * repayment terms have not been met; * the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth; * confidence is diminished; * loan covenants have been violated; * collateral is inadequate; or * other unfavorable factors are present. At September 30, 2002, Union had acquired by foreclosure or through repossession real estate worth $1.1, consisting of 4 commercial properties, 1 piece of undeveloped land and 1 residential home. 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 a portion or all of the remaining principal balance due. Union maintains an allowance for loan losses to absorb such losses. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio; however, actual loan losses may vary from current estimates. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the composition of the portfolio, growth of the portfolio, credit concentrations, trends in historical loss experience, delinquency and past due trends, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. The provision for loan losses represents the current period credit cost associated with maintaining an appropriate allowance for loan 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. Based on an evaluation of the loan portfolio, management presents a quarterly analysis of the allowance for loan losses to the Board of Directors, indicating any changes in the allowance since the last review and any recommendations as to adjustments in the allowance. For the quarter ended September 30, 2002, the methodology used to determine the provision for loan losses was unchanged from the prior year. The composition of the Company's loan portfolio remained relatively unchanged from December 31, 2001 and there was no material change in the lending programs or terms during the quarter. The following table reflects activity in the allowance for loan losses for the quarter and nine months ended September 30, 2002 and 2001: 19
3 Months Ended, September 30, 9 Months Ended, September 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (dollars in thousands) Balance at the beginning of period $2,920 $2,770 $2,801 $2,863 Charge-offs: Real Estate 32 8 38 39 Commercial 28 20 91 191 Consumer and other 41 51 108 119 --------------------------------------------------- Total charge-offs 101 79 237 349 --------------------------------------------------- Recoveries: Real Estate 0 0 7 1 Commercial 2 1 13 18 Consumer and other 20 16 62 62 --------------------------------------------------- Total recoveries 22 17 82 81 --------------------------------------------------- Net charge-offs (79) (62) (155) (268) Provision for loan losses 95 86 290 199 --------------------------------------------------- Balance at end of period $2,936 $2,794 $2,936 $2,794 ===================================================
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:
September 30, December 31, 2002 2001 ------------------ ------------------ (dollars in thousands) Amount Percent Amount Percent ------ ------- ------ ------- Real Estate Residential $ 623 40.3% $ 610 41.3% Commercial 1,391 34.0% 1,342 34.1% Construction 145 5.5% 116 4.6% Other Loans Commercial 426 9.3% 421 9.1% Consumer installment 214 4.3% 253 4.9% Home equity loans 29 1.5% 29 1.6% Municipal, Other and Unallocated 108 5.1% 30 4.4% --------------------------------------- Total $2,936 100.0% $2,801 100.0% ======================================= Ratio of Net Charge Offs to Average Loans (1) 0.8% 0.15% ----- ----- Ratio of Allowance for Loan Losses to Average Loans 1.17% 1.21% ----- ----- - -------------------- Annualized
Management of the Company believes that the allowance for loan losses at September 30, 2002 is adequate to cover losses inherent in the Company's loan portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods, which could be greater than the size of the allowance at September 30, 2002. While the Company recognizes that the current economic slowdown may adversely impact its borrowers' financial performance and ultimately their ability to repay their loans, management continues to be cautiously optimistic about the key credit indicators from the Company's loan portfolio. 20 Investment Activities At September 30, 2002, the reported value of investment securities available-for-sale was $48.2 million or 13.8% of its assets. Union had no securities classified as held-to-maturity or trading securities. The reported value of securities available-for-sale at September 30, 2002, reflects a positive valuation adjustment of $1.1 million. The offset of this adjustment, net of income tax effect, was a $708 thousand increase in Union's other comprehensive income component of shareholders' equity and a decrease in net deferred tax assets of $365 thousand. 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 for the period ending September 30, 2002 and December 31, 2001:
Nine Months Ended, September 30, Year Ended December 31, 2002 2001 --------------------------------- --------------------------------- (dollars in thousands) Percent Percent Average Of Total Average Average of Total Average Amount Deposits Rate Amount Deposits Rate ------- -------- ------- ------- -------- ------- Non-certificate deposits: Demand deposits $ 37,325 13.22% $ 35,251 13.07% Now accounts 37,333 13.22% 1.13% 36,320 13.47% 1.63% Money Markets 66,103 23.41% 1.94% 56,875 21.09% 3.50% Savings 38,643 13.69% 1.32% 35,642 13.21% 2.13% ------------------- -------------------- Total non-certificate deposits: 179,404 63.54% 164,088 60.84% ------------------- -------------------- Certificates of deposit: Less than $100,000 73,181 25.92% 3.54% 76,641 28.42% 5.03% $100,000 and over 29,758 10.54% 4.15% 28,954 10.74% 5.53% ------------------- -------------------- Total certificates of deposit 102,939 36.46% 105,595 39.16% ------------------- -------------------- Total deposits $282,343 100.00% 2.46% $269,683 100.00% 3.26% =====================================================================
The following table sets forth information regarding the amounts of Union's certificates of deposit in amounts of $100,000 or more at September 30, 2002 and December 31, 2001 that mature during the periods indicated:
September 30, 2002 December 31, 2001 ------------------ ----------------- (dollars in thousands) Within 3 months $ 4,514 $ 6,288 3 to 6 months 10,906 13,681 6 to 12 months 12,531 3,189 Over 12 months 4,235 6,711 ------------------------------ $32,186 $29,869 ==============================
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $11.4 million at September 30, 2002 at a weighted average rate of 4.00%. Borrowings from the Federal Home Loan Bank of Boston were $10.3 million at December 31, 2001 at a weighted average rate of 5.06%. The change between year end 2001 and the end of the third quarter of 2002 is a net increase of $1.1 million in short-term borrowings to fund loan demand. 21 OTHER FINANCIAL CONSIDERATIONS Market Risk and Asset and Liability Management. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Union's market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. Union does not have any market risk sensitive instruments acquired for trading purposes. Union attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. Union's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. Union's Asset/Liability Committee's methods for evaluating interest rate risk include an analysis of Union's interest-rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of Union's entire balance sheet, and a simulation analysis, which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving 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 Asset/Liability Management (ALM) strategy in the future. The investment portfolio is 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 2001 for a flat rate environment projected a Net Interest Income of $11.21 million for the first nine months of 2002 compared to actual results of $11.75 million in a flat rate environment, or an 8.9% difference. The prime rate had remained constant throughout 2002 at 4.75% until November 7, 2002 when it dropped to 4.25%. Our results were stronger than anticipated because of stronger loan demand than forecasted even though we had anticipated rate increases during 2002 which would have benefited us positively as well. Net income was projected to be $3.7 million in a flat rate environment compared to actual results of $3.6 million. The $17 thousand decrease in Net Income from projections is mainly due to expenses and writedowns incurred during the first nine months of the year on Other Real Estate Owned offset by the increase in Net Interest Income and the Gain on Sale of Loans. Return on Assets was projected to be 1.41% in a flat rate environment and actual results were 1.45%. Return on Equity was projected to be 13.29% in a flat rate environment compared to actual of 13.18%. The Company generally requires collateral or other security to support financial instruments with credit risk. As of September 30, 2002, the contract or notional amount of financial instruments whose contract or notional amount represents credit risk were as follows rounded to the nearest thousand: Commitments to extend credit $30,506 ------- Standby letters of credit and commercial letters of credit $ 1,216 ------- Credit Card arrangements $ 2,119 ------- Home Equity Lines of Credit $ 3,478 ------- 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. 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 22 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 and loans reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by Union, and empirical data; * other non-mortgage-related fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and * Now, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by 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. 23 The following tables show Union's rate sensitivity analysis as of September 30, 2002:
September 30, 2002 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) Interest sensitive assets: Federal funds sold overnight deposits $ 6,237 $ 0 $ 0 $ 0 $ 0 $ 6,237 Interest bearing deposits 297 1,375 1,365 691 0 3,728 Investments available for sale (1) 809 9,967 15,418 10,135 11,192 47,521 FHLB Stock 0 0 0 0 1,235 1,235 Loans (fixed and adjustable rate) (2) 77,457 63,590 55,165 42,089 24,724 263,025 ----------------------------------------------------------------------- Total interest sensitive assets $84,800 $74,932 $71,948 $ 52,915 $ 37,151 $321,746 ----------------------------------------------------------------------- Interest sensitive liabilities: Certificates of deposit $24,188 $58,186 $18,961 $ 2,676 $ 2 $104,013 Money markets 30,982 0 0 0 35,672 66,654 Regular savings 8,926 0 0 0 32,105 41,031 Now accounts 29,286 0 0 0 12,195 41,481 Borrowed funds (3) 1,370 3,121 3,362 3,534 0 11,387 ----------------------------------------------------------------------- Total interest sensitive liabilities $94,752 $61,307 $22,323 $ 6,210 $ 79,974 $264,566 ----------------------------------------------------------------------- Net interest rate sensitivity gap (9,952) 13,625 49,625 46,705 (42,823) 57,180 Cumulative net interest rate sensitivity gap (9,952) 3,673 53,298 100,003 57,180 Cumulative net interest rate sensitivity gap as a percentage of total assets (2.86%) 1.06% 15.31% 28.73% 16.43% Cumulative net interest rate sensitivity gap as a percentage of total interest-earning assets (3.09%) 1.14% 16.57% 31.08% 17.77% Cumulative net interest rate sensitivity gap as a percentage of total interest-bearing liabilities (3.76%) 1.39% 20.15% 37.80% 21.61% - -------------------- Investments available for sale exclude marketable equity securities with a fair value of $634 thousand that may be sold by Union at any time. Balances shown net of unearned income. Estimated repayment assumptions considered in Asset/Liability model.
Simulation Analysis. In its simulation analysis, Union uses computer software to simulate the estimated impact on net interest income and capital under various interest rate scenarios, balance sheet trends, and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loans and deposit growth, product pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Based on the results of these simulations, Union is able to quantify its interest rate risk and develop and implement appropriate strategies. The following chart reflects the results of our latest simulation analysis for each of the next two year ends on Net Interest Income, Net Income, Return on Assets, Return on Equity and Capital Value. The projection utilizes a rate shock of 300 basis points from the current prime rate of 4.75%, this is the highest internal slope monitored and shows the best and worse scenarios analyzed. This slope range was determined to be the most relevant during this economic cycle. 24 UNION BANKSHARES, INC. INTEREST RATE SENSITIVITY ANALYSIS MATRIX SEPTEMBER 30, 2002 (in thousands)
Return Return Capital on on to Year Prime Net Interest Change Net Assets Equity Asset Ending Rate Income % Income % % Ratio ------ ----- ------------ ------ ------ ------ ------ ------- December-02 7.75 15,393 0.31 5,115 1.50 13.76 10.84 4.75 15,345 0.00 5,086 1.49 13.68 10.83 1.75 15,234 (0.73) 5,015 1.47 13.50 10.82 December-03 7.75 18,596 14.13 7,024 1.99 17.71 11.61 4.75 16,294 0.00 5,495 1.56 14.10 11.22 1.75 13,312 (18.31) 3,516 1.00 9.24 10.71
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 and loans available-for-sale, and earnings and funds provided from operations. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company's exposure to roll over risk on deposits and limits reliance on volatile short-term purchased funds. Short-term funding needs arise from declines in deposits or other funding sources, funding of loan commitments and request for new loans. The Company's strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds. In addition, as members of the FHLB, Union's subsidiaries have access to preapproved lines of credit up to 17.5% of total assets and maintain Federal Fund lines of credit with upstream correspondent banks and repurchase agreement lines with selected brokerage houses. 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 subsidiaries' 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. 25 Union's management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Although approximately 79% of Union's certificates of deposit will mature within twelve months, management believes, based upon past experience, that Union will retain a substantial portion of these deposits. Management will continue to offer a competitive but prudent pricing strategy to facilitate retention of such deposits. Any reduction in total deposits could be offset by purchases of federal funds, short-term FHLB borrowings, or liquidation of investment securities 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. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. Capital Resources. The total dollar value of Union's shareholders' equity was $38.5 million at September 30, 2002, reflecting net income of $3.6 million for the first nine months of 2002, less dividends paid of $2.5 million, compared to $37.2 at year end 2001. Union has 5 million shares of $2.00 par value common stock authorized. As of September 30, 2002, Union had 3,268,189 shares issued, of which 3,027,557 were outstanding and 240,632 were held in Treasury. Also as of September 30, 2002, there were outstanding employee incentive stock options with respect to 10,200 shares of Union's common stock, granted pursuant to Union's 1998 Incentive Stock Option Plan and a predecessor plan. Of the 50,000 shares authorized for issuance under the 1998 Plan, 42,000 shares remain available for future option grants. On October 17, 2001, the Company announced a stock repurchase plan. The Board of Directors has authorized the repurchase of up to 100,000 shares of common stock, or approximately 3.3% of the Company's outstanding shares. Shares are repurchased from time to time in the open market or in negotiated transactions as, in the judgment of management, market conditions warrant. The repurchase program is open for an unspecified period of time. To date we have repurchased 6,672 shares under this program, for a total cost of $129.5 thousand. Union Bank and Citizens (the Banks) are subject to various regulatory capital requirements administered by the federal banking agencies. Management believes, as of September 30, 2002 that the Banks meet all capital adequacy requirements to which they are subject. As of September 30, 2002, 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 below. There are no conditions or events since the notification that management believes have changed either Bank's category. The Banks' and the Company's actual capital amounts and ratios are presented in the table:
Minimums To Be Well Minimums Capitalized Under For Capital Prompt Corrective Actual Requirements Action Provisions ------------------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (dollars in thousands) As of September 30, 2002: Total capital to risk weighted assets Union Bank $28,170 17.18% $13,118 8.0% $16,397 10.0% Citizens 11,765 16.68% 5,643 8.0% 7,053 10.0% Consolidated 40,761 17.33% 18,816 8.0% 23,520 10.0% Tier I capital to risk weighted assets Union Bank $26,346 16.07% $ 6,558 4.0% $ 9,837 6.0% Citizens 10,881 15.43% 2,821 4.0% 4,231 6.0% Consolidated 37,815 16.08% 9,407 4.0% 14,110 6.0% 26 Tier I capital to average assets Union Bank $26,346 11.25% $ 9,367 4.0% $11,709 5.0% Citizens 10,881 10.18% 4,275 4.0% 5,344 5.0% Consolidated 37,815 11.07% 13,664 4.0% 17,080 5.0%
Critical Accounting Policies. The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and changes in delinquent, nonperforming or impaired loans. Changes in these factors may cause management's estimate of the allowance to increase or decrease and result in adjustments to the Company's provision for loan losses. Impact of Inflation and Changing Prices. Union's consolidated financial statements, included in this document, have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurements of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature, and their general and 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Information called for by this item is incorporated by reference in Management's Discussion and Analysis of Financial Condition and Results of Operations under the titlement "Other Financial Considerations" on pages 22 through 27 in this Form 10-Q. Item 4. Controls and Procedures. The Company's chief executive officer and chief financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of a date within 90 days of the filing of this report and concluded that those disclosure controls and procedures are effective in alerting them in a timely manner to material information about the Company and its consolidated subsidiaries required to be disclosed in the Company's periodic reports filed with the Securities and Exchange Commission. There have been no changes in the Company's internal controls or in other factors known to the Company that could significantly affect these controls subsequent to their evaluation. While the Company believes that its existing disclosure controls and procedures have been effective to accomplish these 27 objectives, the Company intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area. PART II OTHER INFORMATION Item 1. Legal Proceedings. In the normal course of business, the Company's bank subsidiaries are involved in various legal proceedings incidental to their business, none of which management deems to be material to the Company's financial position. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of the Chief Executive Officer 99.2 Certification of the Chief Financial Officer (b) Current Reports on Form 8-K 1. Report to Shareholders on Third Quarter Results filed on October 18, 2002 2. Press Releases announcing dividend declaration and third quarter earnings filed on October 8, 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. November 14, 2002 Union Bankshares, Inc. s/ Kenneth D. Gibbons --------------------- Kenneth D. Gibbons Director and Chief Executive Officer s/ Marsha A. Mongeon -------------------- Marsha A. Mongeon Chief Financial Officer and Treasurer (Principal Accounting Officer) 28 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER I, Kenneth D. Gibbons, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 - ------------------------- [Signature] President and Chief Executive Officer 29 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER I, Marsha Mongeon, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 - ------------------------- [Signature] Treasurer and Chief Financial Officer 30 EXHIBIT INDEX 99.1 Certification of the Chief Executive Officer 99.2 Certification of the Chief Financial Officer 31 EX-99 3 uni3-991.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Union Bankshares, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer of the company hereby certifies, pursuant to 18 U.S.C. [SECTION]1350, as adopted pursuant to [SECTION]906 of the Sarbanes-Oxley Act of 2002 that 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. - ------------------------- Kenneth D. Gibbons Chief Executive Officer November 14, 2002 32 EX-99 4 uni3-992.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Union Bankshares, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial Officer of the company hereby certifies, pursuant to 18 U.S.C. [SECTION]1350, as adopted pursuant to [SECTION]906 of the Sarbanes-Oxley Act of 2002 that 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. - ------------------------- Marsha A. Mongeon Chief Financial Officer November 14, 2002 33 -----END PRIVACY-ENHANCED MESSAGE-----