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 ending: September 30, 1999
Commission file number:____________________
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 the number of shares outstanding of each of the issuer's classes
of common stock as of September 30, 1999:
Common Stock, $2 par value 2,038,140 shares
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
Financial Statements
Union Bankshares, Inc. Consolidated Balance Sheet 3
Consolidated Statement of Income - Year to Date 4
Consolidated Statement of Income - Quarter 5
Consolidated Statement of Changes in Stockholder's Equity 6
Consolidated Statement of Cash Flows 7
Notes to Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II OTHER INFORMATION
Item 5 INCREASE IN UNION'S AUTHORIZED COMMON STOCK 28
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 28
Signatures 28
Union Bankshares, Inc. and Subsidiary
Statement of Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31 September 30
(Dollars in Thousands) 1999 1998 1998
------------ ----------- ------------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 7,341 $ 6,772 $ 5,878
Federal funds sold and overnight deposits 1,654 4,876 5,232
---------------------------------------
Total cash and cash equivalents 8,995 11,648 11,110
Interest bearing deposits 2,083 1,873 1,889
Securities available-for-sale 39,851 38,411 34,839
Federal Home Loan Bank stock 642 626 626
Loans held for sale 13,301 7,400 5,729
Loans 126,026 126,321 121,362
Unearned loan fees (247) (282) (313)
Allowance for loan losses (1,819) (1,805) (1,864)
---------------------------------------
Loans, net 123,960 124,234 119,185
---------------------------------------
Accrued interest receivable 1,429 1,382 1,215
Bank premises and equipment, net 2,370 2,646 2,630
Other real estate owned, net 34 525 373
Other assets 3,308 2,417 2,386
---------------------------------------
Total assets $195,973 $191,162 $179,982
=======================================
Liabilities and Stockholders' equity:
Liabilities:
Deposits:
Demand, non-interest bearing $ 26,507 $ 24,682 $ 23,087
Now accounts 24,044 25,011 21,438
Money market and savings 66,046 59,337 54,355
Time deposits, $100,000 and over 41,842 43,861 42,789
Other time deposits 11,297 9,626 10,079
---------------------------------------
Total deposits 169,736 162,517 151,748
Borrowed funds 1,906 4,538 4,572
Accrued interest and other liabilities 2,904 2,832 3,011
---------------------------------------
Total liabilities 174,546 169,887 159,331
---------------------------------------
Stockholders' equity:
Common stock, $2 par value; 2,400,000 shares
authorized; 2,272,100 shares issued at 9/30/99,
2,268,100 issued at 12/31/98, and 2.264,100 shares
issued at 9/30/98 4,544 4,536 4,528
Paid-in capital and surplus 878 849 821
Retained earnings 18,021 17,031 16,479
Treasury stock at cost (233,960 shares
at 9/30/99, 12/31/98 and 9/30/98 (1,592) (1,592) (1,592)
Accumulated other comprehensive income (424) 451 415
---------------------------------------
Total stockholders' equity 21,427 21,275 20,651
---------------------------------------
Total liabilities and stockholders' equity $195,973 $191,162 $179,982
=======================================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
(Dollars in Thousands) 1999 1998
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 9,083 $ 9,239
Interest and dividends on investment securities 1,787 1,506
Interest on federal funds sold 153 190
Interest on interest bearing deposits 94 50
-------------------------
11,117 10,985
-------------------------
Interest expense:
Interest on deposits 4,114 4,176
Interest on federal funds purchased 1 0
Interest on borrowed funds 170 154
-------------------------
4,285 4,330
-------------------------
Net interest income 6,832 6,655
Provision for loan losses 63 100
-------------------------
Net interest income after provision for loan losses 6,769 6,555
Noninterest income:
Trust department income 7 6
Service fees 1,292 1,236
Security gains 0 21
Gain on sale of loans 52 191
Other (5) 28
-------------------------
1,346 1,482
-------------------------
Noninterest expense:
Salaries and wages 2,162 2,073
Pension and other employee benefits 475 539
Occupancy expense, net 282 274
Equipment expense 502 433
Other operating expense 1,459 1,233
-------------------------
4,880 4,552
-------------------------
Income before income tax expense 3,235 3,485
Income tax expense 900 1,034
-------------------------
Net income $ 2,335 $ 2,451
=========================
Earnings per common share $ 1.15 $ 1.21
=========================
Weighted average number of common
shares outstanding 2,036,851 2,031,091
=========================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Third Quarter Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
(Dollars in Thousands) 1999 1998
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,125 $ 3,363
Interest and dividends on investment securities 589 201
Interest on federal funds sold 66 83
Interest on interest bearing deposits 34 20
-------------------------
3,814 3,667
-------------------------
Interest expense:
Interest on deposits 1,408 1,348
Interest on federal funds purchased 0 0
Interest on borrowed funds 54 68
-------------------------
1,462 1,416
-------------------------
Net interest income 2,352 2,251
Provision for loan losses 0 25
-------------------------
Net interest income after provision for loan losses 2,352 2,226
Noninterest income:
Trust department income 0 0
Service fees 446 395
Security gains 0 65
Gain on sale of loans 7 53
Other (39) 7
-------------------------
414 520
-------------------------
Noninterest expense:
Salaries and wages 733 713
Pension and other employee benefits 166 144
Occupancy expense, net 98 84
Equipment expense 154 156
Other operating expense 507 453
-------------------------
1,658 1,550
-------------------------
Income before income tax expense 1,108 1,196
Income tax expense 302 367
-------------------------
Net income $ 806 $ 829
=========================
Earnings per common share $ 0.40 $ 0.41
=========================
Weighted average number of common
shares outstanding 2,038,140 2,030,586
=========================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Paid-in Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
(Dollars in Thousands) Stock & Surplus Earnings Stock Income (Loss) Equity
------ --------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $4,528 $820 $15,247 $(1,548) $ 321 $19,368
Net income 2,451 2,451
Net unrealized holding gain on
securities available-for-sale,
net of tax 94 94
Comprehensive income 2,545
-------
Cash dividends declared 0 0 (1,219) 0 0 (1,219)
Treasury stock purchased 0 0 0 (44) 0 (44)
Exercise of stock option 0 1 0 0 0 1
--------------------------------------------------------------------------
Balance, September 30, 1998 $4,528 $821 $16,479 $(1,592) $ 415 $20,651
==========================================================================
Balance, December 31, 1998 $4,536 $849 $17,031 $(1,592) $ 451 $21,275
Net income 2,335 2,335
Net unrealized holding gain on
securities available-for-sale,
net of tax (875) (875)
Comprehensive income 1,460
-------
Cash dividends declared 0 0 (1,345) 0 0 (1,345)
Treasury stock purchased 0 0 0 0 0 0
Exercise of stock option 8 29 0 0 0 37
--------------------------------------------------------------------------
Balance, September 30, 1999 $4,544 $878 $18,021 $(1,592) $(424) $21,427
==========================================================================
</TABLE>
Union Bankshares, Inc. and Subsidiary
Consolidated Statement of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 September 30
(Dollars in Thousands) 1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income 2,335 2,451
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 406 354
Provision for loan losses 63 100
Provision (credit) for deferred income taxes 19 (60)
Amortization, net 74 61
Write-downs of OREO 18 21
Decrease in unamortized loan fees (35) (6)
(Increase) decrease in loans held for sale (5,849) 657
(Decrease) increase in accrued interest receivable (47) 121
Increase in other assets (109) (200)
Increase (decrease) in income taxes payable 61 (10)
Increase (decrease) in accrued interest payable (149) 39
Increase in other liabilities 183 227
Gain on securities 0 (21)
Gain on sale of loans (52) (191)
Gain (loss) on sale of OREO 3 (35)
------------------------
Net cash provided by operating activities (3,079) 3,508
Cash Flows From Investing Activities
Interest bearing deposits
Maturities and redemptions 788 297
Purchases (998) (2,186)
Securities available for sale
Maturities and redemptions 11,046 7,113
Purchases (13,886) (13,836)
Purchase of Federal Home Loan Bank Stock (16) (32)
Decrease in loans, net 193 6,607
Recoveries of loans charged off 34 60
Purchases of premises and equipment, net (130) (473)
Proceeds from sale of OREO 489 404
Investment in Ltd Partnerships (373) (25)
------------------------
Net cash used in investing activities (2,853) (2,071)
Cash Flows From Financing Activities
Borrowings, net of repayments (2,632) 2,936
Proceeds from exercise of stock options 37 1
Net decrease in demand, NOW, savings,
and money market accounts 7,567 6,584
Net decrease in time deposits (348) (11,633)
Purchase of treasury stock 0 (44)
Dividends paid (1,345) (1,219)
------------------------
Net cash provided by financing activities 3,279 (3,375)
Decrease in cash and cash equivalents (2,653) (1,938)
Cash and cash equivalents
Beginning 11,648 13,048
Ending 8,995 11,110
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 4,434 4,291
========================
Income Taxes Paid $ 1,102 $ 820
========================
</TABLE>
UNION BANKSHARES, INC.
NOTES TO FINANCIAL STATEMENTS:
Note 1.
The accompanying interim consolidated financial statements of Union
Bankshares, Inc. (the Company) are unaudited. 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 1998 Annual report and Form S-4.
Note 2. Merger Agreement
In February 1999, the Company entered into an Affiliation Agreement with
Citizens Savings Bank and Trust Company (Citizens), a Vermont commercial
bank based in St. Johnsbury with assets of $102 million at September 30,
1999. A combination in which Citizens will become a subsidiary of Union,
but will keep its separate name and banking franchise is proposed. Union
will become a two-bank holding company that will own all the stock of
Citizens and of Union Bank. On the closing date of the merger, each share
of common stock of Citizens outstanding immediately prior to the merger
will be converted into the right to receive 6.5217 shares of Union common
stock. The proposed affiliation does not affect the rights and privileges
of the Company's stockholders and has no affect on outstanding stock
options. However, certain directors and officers of Union and Citizens
have interests in connection with the merger that are different from the
interests of the shareholders generally and this is detailed in the joint
Proxy statement/prospectus dated October 13, 1999.
The merger is expected to be accounted for as a pooling of interests. The
Company expects to close the merger, which is subject to stockholder and
regulatory approvals, in the last two months of 1999. The combined entity
will record non-deductible merger charges of approximately $325 to $400
thousand on a pre-tax basis in connection with the merger. Union has
recorded $191 thousand year-to-date in 1999 and $24 thousand for the year
1998.
Note 3. Investment Securities
Investment securities available-for-sale consist of the following at:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
U.S. Government, Agency
and Corporation securities $23,895,631 $23,604,972 $23,840,131 $24,027,417
State and Political Subdivisions 5,116,557 4,876,609 3,654,676 3,654,761
Corporate debt securities 10,923,991 10,592,176 9,675,549 9,791,328
Marketable Equity securities 558,125 777,897 558,125 937,591
--------------------------------------------------------
$40,494,304 $39,851,654 $37,728,481 $38,411,097
========================================================
</TABLE>
Included in the caption "U.S. Government, Agency and Corporation
securities" are mortgage-backed securities with a carrying amount of
$6,057,221 and $5,182,188 at September 30, 1999 and December 31, 1998,
respectively.
Note 4. Loans
The following table shows information on the composition of Union's loan
portfolio, including loans held for sale, as of September 30, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
Loan Type 1999 1998
- --------- ------------- ------------
(dollars in thousands)
<S> <C> <C>
Real Estate
Residential $ 56,612 $ 53,913
Commercial 48,802 47,477
Construction 7,419 6,790
Other Commercial 7,770 8,822
Consumer installment 5,903 5,813
Home equity loans - Open ended 2,734 3,201
Term Federal Funds Sold -0- 1,000
Municipal and other 10,087 6,705
-------------------------
Total loans 139,327 133,721
Less: Unearned income (247) (282)
Allowance for loan losses (1,819) (1,805)
-------------------------
Loans, net $137,261 $131,634
=========================
</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 $52,541,670 and $54,917,137 at
September 30, 1999 and December 31, 1998, respectively.
Note 5. Borrowed Funds
Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the period
ended September 30, 1999 and the year ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Community Investment Program
6.10% note payable in monthly installments
of $8,727, including interest, through
January 24, 2014 $ -0- $1,028,569
6.10% note payable in monthly installments
of $4,636, including interest, through
January 24, 2014 -0- 546,427
Option Advances
6.06% note payable in monthly installments
of $11,178 including interest, through
May 6, 2008 905,935 963,273
Community Investment Program "Plus"
5.01% term borrowing maturing June 25, 2008 1,000,000 1,000,000
5.66% term borrowing maturing February 4, 2003 -0- 1,000,000
------------------------
$1,905,935 $4,538,269
========================
</TABLE>
Principal maturities of borrowed funds as of September 30, 1999 are as
follows:
<TABLE>
<S> <C>
1999 $ 26,362
2000 81,813
2001 86,896
2002 92,782
2003 98,601
Thereafter 1,519,481
----------
$1,905,935
==========
</TABLE>
Note 6. 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 7 Nonowner Changes in Equity
The Company reports nonowner changes in equity in accordance with SFAS No.
130, "Reporting Comprehensive Income." Nonowner changes in equity consist
of net income and of unrealized gains and losses on securities available
for sale. The Company has reported nonowner changes in equity for the nine
months ended September 30, 1999 and 1998 in the accompanying consolidated
statement of changes in stockholder's equity on a net-of-tax basis. The
changes in unrealized gain (loss) on securities available for sale have
been presented net of reclassification adjustments related to net
securities gains (losses) that were realized from sales of such securities
during the respective periods. These unrealized gains (losses), on an
after-tax basis, amounted to ($874,675) and $95,058 for the nine months
ended September 30, 1999 and 1998, respectively. Tax provisions (benefits)
related to these unrealized gains (losses) were ($450,590) and $48,969 for
the nine months ended September 30, 1999 and 1998, respectively.
Note 8 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.
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) financial position as of September 30, 1999
and 1998, and as of December 31, 1998, and its results of operations for
the quarters and the nine months ended September 30, 1999 and 1998. 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 unaudited interim data reflect all adjustments,
consisting only of normal recurring adjustments, necessary to fairly
present Union's consolidated financial position and results of operations
to be expected for a full fiscal year. Management is not aware of the
occurrence of any events after September 30, 1999, which would materially
affect the information presented below. This discussion and analysis
updates, and should be read in conjunction with Management's Discussion and
Analysis included in the October 13, 1999 joint Proxy statement/prospectus
to Stockholders of Union Bankshares, Inc. (the Company).
On February 16, 1999 the Company and Citizens Savings Bank & Trust Co.
(Citizens) entered into an Affiliation Agreement pursuant to which Union
Bankshares, Inc will acquire Citizens. Under the terms of this agreement,
each outstanding share of Citizens common stock will be converted into the
right to receive 6.5217 shares of the Company's stock. The merger is
intended to constitute a tax-free reorganization for federal income tax
purposes and to be accounted for as a pooling of interest. At September
30, 1999, Citizens had total assets of $102 million and total stockholder's
equity of $10.9 million. The transaction, which is subject to stockholder
and regulatory approval, is expected to be completed in the last two months
of 1999. Additional information with respect to this merger can be found
in Note 2 to the Financial Statements and in the joint Proxy
statement/prospectus of October 13, 1999.
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 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:
* anticipated merger with Citizens does not occur
* 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 efforts to address the Year 2000 issue,
demands for greater automation and systems integration of Citizens
* timely integration of Citizens after the merger, unanticipated lower
revenues, higher merger-related charges, 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.
RESULTS OF OPERATIONS
The Company's net income for the quarter ended September 30, 1999 was $806
thousand, compared with net income of $829 thousand for the third quarter
of 1998. Net income per share was $.40 for the third quarter of 1999
compared to $.41 for the same quarter of 1998.
Net income for the first nine months of 1999 was $2.335 million, compared
with $2.451 million for the same period in 1998. Net income per share was
$1.15 for the first nine months of 1999 compared to $1.21 for the
comparable period in 1998.
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 income or expense item for the period by the
average balances of the appropriate balance sheet item during the period.
Net interest margin is net interest income divided by average interest-
earning assets. Nonaccrual loans are included in asset balances for the
appropriate periods, but recognition of interest on such loans is
discontinued and any remaining accrued interest receivable is reversed, in
conformity with federal regulations. The yields and net interest margins
appearing in the following tables have been calculated on a pre-tax basis:
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold $ 4,275 $ 153 4.76% $ 4,706 $ 190 5.37%
Interest bearing deposits 2,251 94 5.55% 1,269 50 5.24%
Investments (1) (2) 40,819 1,787 6.12% 31,984 1,506 6.40%
Loans, net (1), (3) 132,306 9,083 9.28% 128,903 9,239 9.76%
----------------------------------------------------------------
Total interest-earning assets (1) $179,651 $11,117 8.41% $166,862 $10,985 8.96%
Cash and due from banks 6,141 5,563
Premises and equipment 2,505 2,593
Other assets 3,415 2,041
-------- --------
Total assets $191,712 $177,059
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 22,693 $ 370 2.17% $ 19,679 $ 349 2.36%
Savings and money market accounts 62,652 1,674 3.55% 52,066 1,427 3.65%
Certificates of deposit 54,705 2,070 5.03% 59,114 2,400 5.40%
Borrowed funds 4,006 171 5.68% 3,434 154 5.96%
----------------------------------------------------------------
Total interest-bearing liabilities $144,056 $ 4,285 3.96% $134,293 $ 4,330 4.29%
Non-interest bearing deposits 23,462 20,618
Other liabilities 2,928 2,276
-------- --------
Total liabilities 170,446 157,187
Shareholders' equity 21,266 19,872
-------- --------
Total liabilities and
shareholders' equity $191,712 $177,059
======== ========
Net interest income (1) $ 6,832 $ 6,655
Net interest spread (1) 4.45% 4.67%
Net interest margin (1) 5.24% 5.51%
<FN>
- --------------------
<F1> Average yield reported on a tax-equivalent basis.
<F2> The average balance of investments is calculated using the amortized
cost basis.
<F3> Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
Union's net interest income increased by $177 thousand, or 2.66%, to $6.83
million for the nine months ended September 30, 1999, from $6.65 million
for the nine months ended September 30, 1998. This increase was primarily
due to the lower cost of interest-bearing liabilities as a result of lower
interest rates paid on deposits and an increase in investment assets. The
net interest spread decreased by 22 basis points to 4.45% for the nine
months ended September 30, 1999, from 4.67% for the nine months ended
September 30, 1998. The net interest margin for the 1999 period decreased
by 27 basis points to 5.24% from 5.51% for the 1998 period. This is an
improvement of 4 basis points on a year-to-date basis since the end of the
second quarter and is mainly due to retaining loans held for sale in our
portfolio and the payoff of some long term borrowings with Federal Home
Loan Bank of Boston.
Rate/Volume Analysis. The following tables describe the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected Union's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
* changes in volume (change in volume multiplied by prior rate);
* changes in rate (change in rate multiplied by prior volume); and
* total change in rate and volume.
Changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 Compared
to Nine Months Ended September 30, 1998
---------------------------------------------
Increase/(Decrease) Due to Change In
Volume Rate Net
------ ---- ---
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (17) $ (20) $ (37)
Interest bearing deposits 39 5 44
Investments 335 (54) 281
Loans, net 319 (475) (156)
-----------------------------
Total interest-earning assets 676 (544) 132
-----------------------------
Interest-bearing liabilities:
NOW accounts $ 53 $ (32) $ 21
Savings and money market accounts 290 (43) 247
Certificates of deposit (179) (151) (330)
Borrowed funds 26 (9) 17
-----------------------------
Total interest-bearing liabilities 190 (235) (45)
-----------------------------
Net change in net interest income $ 486 $(309) $ 177
=============================
</TABLE>
Interest and Dividend Income. Union's interest and dividend income
increased by $132,000, or 1.20%, to $11.1 million for the nine months ended
September 30, 1999, from $11.0 million for the nine months ended September
30, 1998. Average earning assets increased by $12.8 million, or 7.66%, to
$179.7 million for the nine months ended September 30, 1999, from $166.9
million for the nine months ended September 30, 1998. Average loans
approximated $132.3 million for the nine months ended September 30, 1999 up
from $128.9 million for the nine months ended September 30, 1998.
Increases in construction and real estate secured loans were offset by a
decrease in average municipal loans. Decreases in loan interest rates and
the volume of municipal loans mainly accounted for the decrease in loan
interest income of $156,000 or 1.7%.
The average balance of investment securities (including mortgage-backed
securities) increased by $8.8 million, or 27.6%, to $40.8 million for the
nine months ended September 30, 1999, from $32.0 million for the nine
months ended September 30, 1998. The average level of federal funds sold
and interest bearing deposits increased by $549,000, or 9.2%, to $6.5
million for the nine months ended September 30, 1999, from $6.0 million for
the nine months ended September 30, 1998. This increase in the average
balances of investment securities, federal funds sold, and interest bearing
deposits resulted in an increase in interest income on these interest-
earning assets of $234,000 or 13%, and reflects increased investment
activity due largely to an increase in average deposits combined with lower
loan demand and a lower interest rate environment which means we keep the
average life of investments purchased shorter.
Interest Expense. Union's interest expense decreased by $45,000, or 1.0%,
to $4.29 million for the nine months ended September 30, 1999, from $4.33
million for the nine months ended September 30, 1998. Average interest-
bearing liabilities increased by $9.8 million, or 7.3% to $144.1 million
for the nine months ended September 30, 1999, from $134.3 million for the
nine months ended September 30, 1998. Average time deposits decreased $4.4
million, or 7.5%, to $54.7 million for the nine months ended September 30,
1999, from $59.1 million for the nine months ended September 30, 1998,
while the average balances for NOW, money markets, and savings accounts
increased by $13.6 million to $85.3 million for the nine months ended
September 30, 1999, from $71.7 million for the nine months ended September
30, 1998. Lower interest rates prevailed for all deposit types for the
current year.
Noninterest Income. Union's noninterest income decreased $136,000, or
9.2%, to $1.35 million for the nine months ended September 30, 1999, from
$1.48 million for the nine months ended September 30, 1998. The results
for the period reflected a net gain of $52.2 thousand from the sale of
loans and securities compared to a net gain of $211.9 thousand from these
sales during the first nine months of 1998. This change 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 and loan fees, ATM fees,
and safe deposit fees) increased by $56,000, or 4.5%, to $1.29 million for
the nine months ended September 30, 1999, from $1.24 million for the nine
months ended September 30, 1998. Trust income was relatively unchanged
between the first nine months of 1999, compared to 1998, at $7,000 and
$6,000, respectively.
Noninterest Expense. Union's noninterest expense increased $328,000, or
7.2%, to $4.9 million for the nine months ended September 30, 1999, from
$4.6 million for the nine months ended September 30, 1998. Salaries
increased $89,000, or .4.3%, to $2.16 million for the nine months ended
September 30, 1999, from $2.07 million for the nine months ended September
30, 1998, reflecting normal salary activity. Pension and employee benefits
decreased $64 thousand or 11.9% to $475 thousand for the nine months ended
September 30, 1999, from $539 thousand for the nine months ended September
30, 1998 mainly due to the maturing of the non-qualified deferred
compensation agreements. Office occupancy increased $8 thousand, or 2.9%,
to $282,000 for the nine months ended September 30, 1999, from $274,000 for
the nine months ended September 30, 1998. Equipment expense increased $69
thousand to $502 thousand for the nine months ended September 30, 1999,
from $433 thousand for the same period in 1998 primarily resulting from
increased depreciation cost on computer equipment and software purchases
which are depreciated as an expense over a time period of three to five
years.
During the nine months ended September 30, 1999, Union incurred
approximately $191 thousand of expenses related to the merger, including
legal and advisory fees compared to $9 thousand during the three quarters
of 1998.
Income Tax Expense. Union's income tax expense decreased by $134,000, or
13.0%, to $900,000 for the nine months ended September 30, 1999, from $1.03
million for the comparable period of 1998 because of the low income housing
and historic rehabilitation credits that are available to us for the 1999
tax year due to our partnership investment in a low income housing project
sponsored by Housing Vermont in our market area.
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30,
1998. Interest and Dividend Income. Union's interest and dividend income
increased by $14,000, or 4.0%, to $3.8 million for the quarter ended
September 30, 1999, from $3.7 million for the quarter ended September 30,
1998. Average earning assets increased by $19.1 million, or 11.4%, to
$186.4 million for the quarter ended September 30, 1999, from $167.4
million for the quarter ended September 30, 1998. Average loans increased
by $14 million, or 11.2%, to $138.7 million for the quarter ended September
30, 1999, from $124.7 million for the quarter ended September 30, 1998.
The change was attributable to increases in residential loans, $3.8 million
or 7.6% to $53.6 million from $48.8 million, commercial loans, $4.4 million
or 7.5% to $62.8 million from $58.4 million, construction loans, $3.9
million or 149% to $6.6 million from $2.7 million, and municipal loans,
$1.7 million or 26.7% to $9.5 million from $7.8 million. The average
balance of investment securities (including mortgage-backed securities)
increased by $11.5 million, or 32.9%, to $46.4 million for the quarter
ended September 30, 1999, from $34.9 million for the quarter ended
September 30, 1998. The average level of federal funds sold and interest
bearing deposits for the quarter ended September 30, 1999, decreased by
$159 thousand, or 2.1%, to $7.5 million, from $7.7 million for the quarter
ended September 30, 1998. The increase between the quarters continues to
reflect the strong economic conditions of the area and our continuing
deposit growth.
Interest Expense. Union's interest expense increased by $46,000, or 3.2%,
to $1.46 million for the quarter ended September 30, 1999 from $1.41
million for the comparable quarter in 1998. Average interest-bearing
liabilities increased by $17.4 million or 11.3% to $171.6 million for the
quarter ended September 30, 1999, from $154.1 million for the quarter ended
September 30, 1998. Average time deposits increased $701 thousand, or
1.3%, to $55.1 million for the quarter ended September 30, 1999, from $54.4
million for the quarter ended September 30, 1998, while the average
balances for NOW, money markets, and savings accounts increased by $14.7
million, or 20.0%, to $88.1 million for the quarter ended September 30,
1999, from $73.4 million for the quarter ended September 30, 1998. The
average rates paid on interest-bearing liabilities dropped an average of 50
basis points on time deposits and 25 basis points on non-time deposits
between the periods which was offset by the large growth in total deposits.
Noninterest Income. Noninterest income decreased $106,000, or 20.4%, to
$414,000 for the quarter ended September 30, 1999, from $520,000 for the
quarter ended September 30, 1998. The third quarter results for 1998
reflected net gains of $65,000 from the sale of securities versus $0 for
1999. Additionally, gains on sales of loans for the quarter decreased
approximately $46,000 to $7,000 during 1999 as compared to $53,000 during
1998 due to Management's decision to retain a greater portion of Loans Held
for Sale in our portfolio for the time being. Service fees rose $31,000 or
7.8% for the quarter ending September 30, 1999 to $446,000 from $395,000
for the comparable period in 1998. The net loss on sale or writedown of
OREO properties was $15,000 for the third quarter of 1999 compared to a net
gain of $4,500 in the same quarter of 1998. Trust income was relatively
unchanged.
Noninterest Expense. Noninterest expense increased $108,000, or 7.0%, to
$1.7 million for the quarter ended September 30, 1999, from $1.55 million
for the quarter ended September 30, 1998. Salaries and employee benefits
increased $42,000, or 4.9%, to $899,000 for the quarter ended September 30,
1998, from $857,000 for the comparable quarter of 1998, reflecting a slight
increase in normal salary and benefit costs. Office occupancy and
equipment expense increased $12,000, or 5.0%, to $252,000 for the quarter
ended September 31, 1999, from $240,000 for the quarter ended September 30,
1998. This increase was due primarily to a decrease in rental income
offsetting our occupancy expense. Depreciation and maintenance contract
expense on computers and software increased as a result of purchases made
during the last twelve months. Other operating expenses increased by
$54,000, or 11.9%, to $507,000 for the quarter ended September 30, 1999,
from $453,000 for the quarter ended September 30, 1998, as a result of
increases in supply costs, ATM expenses, debit card costs, Business Manager
program costs and Vermont franchise taxes.
Income Tax Expense. Income tax expense decreased by $65,000, or 17.7%, to
$302,000 for the quarter ended September 30, 1999, from $367,000 for the
comparable quarter in 1998. This decrease reflects the low-income housing
and historic rehabilitation tax credit anticipated in 1999 of $54,000
offset by. the decrease in the amount of Union's taxable income which was
minimal due to non-deductible merger expenses of $82,000.
FINANCIAL CONDITION
At September 30, 1999, Union had total consolidated assets of $196 million,
including net loans and loans held for sale of $137 million, deposits of
$170 million and shareholders' equity of $21.4 million. Based on the most
recent information published by the Vermont Banking Commissioner, in terms
of total assets at December 31, 1998, Union Bank ranked as the 10th largest
institution of the 26 commercial banks and savings institutions
headquartered in Vermont.
Union's total assets increased by $4.8 million or 2.5% to $196.0 million at
September 30, 1999 from $191.2 million at December 31, 1998. Total net
loans and loans held for sale increased by $5.6 million or 4.3% to $137.3
million or 70% of total assets at September 30, 1999 as compared to $131.6
million or 68.9% of total assets at December 31, 1998, due to increases of
$2.4 million in municipal loans, $1.2 million increase in construction
loans, $1.0 million decrease in term federal funds sold, $2.4 million
increase in loans secured by real estate. Cash and cash equivalents,
including Federal funds sold, decreased approximately $2.6 million or 28.9%
to $9.0 million at September 30, 1999 from $11.6 million at December 31,
1998, which was primarily attributable to an increase in loans held for
sale. Total deposits increased $7.2 million or 4.4% to $169.7 million at
September 30, 1999 from $162.5 million at December 31, 1998. A $6.7
million or 11.3% increase in money markets and savings accounts to $66.0
million from $59.3 million accounted for the majority of the increase.
Total borrowings decreased approximately $2.6 million to $1.9 million at
September 30, 1999 from $4.5 million at December 31, 1998.
Total equity increased by $152,000 or 0.7% to $21.43 million at September
30, 1999 from $21.27 million at December 31, 1998 as a result of an
increase of $875,000 in the net unrealized holding loss on securities
available-for-sale and dividend payments of $1,345,000 which were offset
with net income of $2,335,000 and the exercise of employee stock options
for $37,000.
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 September 30, 1999, Union's
loan portfolio totaled $139.3 million, or 71.1%, of assets, of which $59.3
million, or 42.6% of gross loans, consisted of residential mortgages, and
$48.8 million, or 35.0%, of total loans consisted of commercial real estate
loans. As of such date, Union's loan portfolio also included $7.4 million
of real estate construction loans, $7.8 million of commercial loans, $10.1
million of municipal loans, and $5.9 million of consumer loans
representing, in order, 5.3%, 5.6%, 7.2%, and 4.2% of total loans
outstanding on September 30, 1999. (See Footnote 4 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 $99.1 million residential mortgage portfolio,
approximately $39.7 million of which is serviced for unaffiliated third
parties at September 30, 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.
Total loans have increased $5.6 million or 4.3% since December 31, 1998.
Approximately 60% 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
remainder of the increase is due to the higher volume of municipal loans as
a result of increased demand and extension of our market area in this
particular type of loan.
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 nonaccrual status totaling $383,000 at September 30,
1999, $117,000 at December 31, 1998 and $233,000 at September 30, 1998.
Interest income not recognized on such loans amounted to approximately $79
thousand and $54 thousand for the nine months ended September 30, 1999 and
1998, respectively and $43,000 for the year ended December 31, 1998.
Union had $1.76 million and $1.28 million in loans past due 90 days or more
and still accruing at September 30, 1999 and December 31, 1998,
respectively. At September 30, 1999, Union had internally classified
certain loans totaling $3,169,074. In management's view, such loans
represent a higher degree of risk and could become nonperforming loans in
the future. While still on a performing status, in accordance with Union's
credit policy, loans are internally classified when a review indicates any
of the following conditions making the likelihood of collection highly
questionable:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in absolute
terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
At September 30, 1999, Union had acquired by foreclosure or through
repossession real estate worth $34,000, consisting of commercial property,
undeveloped land and a 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 the remaining principal balance due. Union maintains an
allowance for loan losses to absorb such losses. The allowance for loan
losses is maintained at a level which, in management's judgment, is
adequate to absorb credit losses inherent in the loan portfolio. The
amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs,
net of recoveries. While Union allocates the allowance for loan losses
based on the percentage category to total loans, the portion of the
allowance for loan losses allocated to each category does not represent the
total available for future losses which may occur within the loan category
since the total allowance for possible loan losses is a valuation reserve
applicable to the entire portfolio.
The following table reflects activity in the allowance for loan losses for
the nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended,
September 30
----------------------
1999 1998
---- ----
(dollars in thousands)
<S> <C> <C>
Balance at the beginning of period $1,805 $1,794
Charge-offs:
Real Estate 8 15
Commercial 26 30
Consumer and other 49 45
---------------------
Total charge-offs 83 90
---------------------
Recoveries:
Real Estate 2 -0-
Commercial 9 31
Consumer and other 23 29
---------------------
Total recoveries 34 60
---------------------
Net charge-offs (49) (30)
Provision for loan losses 63 100
---------------------
Balance at end of period $1,819 $1,864
=====================
</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>
September 30, December 31,
1999 1998
----------------- -----------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate
Residential $ 422 23.2% $ 305 16.9%
Commercial 722 39.7% 733 40.6%
Construction 74 4.1% 68 3.8%
Other Loans
Commercial 139 7.6% 133 7.4%
Consumer installment 91 5.0% 87 4.8%
Home equity loans 20 1.1% 24 1.3%
Municipal, Other and Unallocated 351 19.3% 455 25.2%
------------------------------------
Total $1,819 100.0% $1,805 100.0%
====================================
Ratio of Net Charge Offs to Average Loans (1) 0.05% 0.06%
---- ----
Ratio of Allowance for Loan Losses to Loans 1.37% 1.35%
---- ----
<FN>
- --------------------
<F1> Annualized
</FN>
</TABLE>
Investment Activities At September 30, 1999, the reported value of
investment securities available-for-sale was $39.9 million or 20.3% 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, 1999, reflects a negative valuation adjustment of $642,650.
The offset of this adjustment, net of income tax effect, was a $424,150
decrease in Union's other comprehensive income component of shareholders'
equity and an increase in net deferred tax assets of $218,500.
The following table shows, as of September 30, 1999, the amortized cost of
Union's debt obligations maturing within the stated period.
<TABLE>
<CAPTION>
At September 30, 1999
Maturities
----------------------------------------------------------
Within One to Five to Over Total
One Year Five Years Ten Years Ten Years Cost
-------- ---------- --------- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government, Agency
and Corporation securities $6,505 $ 8,238 $ 3,000 $ -0- $17,743
Mortgage-backed securities -0- 2,318 1,867 1,968 6,153
State and political subdivisions 25 61 3,527 1,503 5,116
Corporate debt securities -0- 5,479 3,300 2,145 10,924
Marketable equity securities -0- -0- -0- 558 558
----------------------------------------------------------
Total investment securities $6,530 $16,096 $11,694 $6,174 $40,494
==========================================================
Fair Value $6,536 $15,985 $11,201 $6,129 $39,851
==========================================================
</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 September 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
Nine Months Ended, September 30 Year Ended December 31,
1999 1998
------------------------------- ------------------------------
(dollars in thousands)
Percent Percent
Average of Total Average Average of Total Average
Amount Deposits Rate Amount Deposits Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Non-certificate deposits:
Demand deposits $ 23,462 14.35% $ 21,289 13.91%
Now accounts 22,693 13.88% 2.17% 20,680 13.51% 2.38%
Money Markets 38,243 23.39% 4.23% 29,084 19.01% 4.44%
Savings and other 24,409 14.93% 2.49% 24,428 15.96% 2.72%
------------------ ------------------
Total non-certificate deposits 108,807 66.55% 95,481 62.39%
------------------ ------------------
Certificates of deposit:
Less than $100,000 43,665 26.70% 4.99% 43,958 28.73% 5.34%
$100,000 and over 11,040 6.75% 5.19% 13,590 8.88% 5.70%
------------------ ------------------
Total certificates of deposit 54,705 33.45% 57,548 37.61%
------------------ ------------------
Total deposits $163,512 100.00% 3.35% 153,029 100.00% 3.64%
===============================================================
</TABLE>
The following table sets forth information regarding the amounts of Union's
certificates of deposit in amounts of $100,000 or more at September 30,1999
and December 31, 1998 that mature during the periods indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(dollars in thousands)
<S> <C> <C>
Within 3 months $ 2,539 $1,169
3 to 6 months 1,064 5,715
6 to 12 months 7,185 1,435
Over 12 months 509 1,307
------- ------
$11,297 $9,626
======= ======
</TABLE>
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $4.5
million at December 31, 1998 at a weighted average rate of 5.75%. 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 combination of the low
point in our normal liquidity cycle and paying off these long-term notes
combined to result in short term liquidity borrowing during the third
quarter of 1999. These new borrowings were all repaid prior to the close
of the third quarter 1999. The remaining long-term notes totaling $1.9
million at September 30, 1999 have a weighted average rate of 5.51%. (See
Footnote 5 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 decision, 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 $6.836 million
for the first nine months of 1999 compared to actual results of $6.768
million or a .1% difference. Net income was projected to be $2.681 million
compared to actual results of $2.334 million. Of the $347 thousand
difference, $191 thousand is merger-related expense at the holding company
level, 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 available for sale within our
portfolio, thus decreasing loan servicing fees and gains on sale of loans
during the first nine months of the year, resulting in lower Other Income
than anticipated. Our salary expense is up 1.54% or $33 thousand above
budget and our health insurance costs are up 10% or $13 thousand. We also
incurred higher than anticipated administrative costs for supply and
printing expenses. Return on Assets was projected to be 1.85% and actual
results were 1.63%. Return on Equity was projected to be 17.01% compared
to actual of 14.68%. The lower results of these two ratios is 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. As of September 30, 1999, the
contract or notional amount of financial instruments whose contract amount
represents credit risk were as follows:
<TABLE>
<S> <C>
Commitments to extend credit $18,092,440
-----------
Standby letters of credit and commercial letters of credit $ 841,338
-----------
Credit Card arrangements $ 1,232,365
-----------
Home Equity Lines of Credit $ 2,687,341
-----------
</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.
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 September
30, 1999:
<TABLE>
<CAPTION>
September 30, 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 $ 1,654 $ -0- $ -0- $ -0- $ -0- $ 1,654
Interest bearing deposits 324 694 1,065 -0- -0- 2,083
Investments available for sale (1) 1,666 5,410 10,110 5,731 16,156 39,073
FHLB Stock -0- -0- -0- -0- 642 642
Loans (fixed and adjustable rate) 45,026 27,403 12,834 18,510 35,554 139,327
-------------------------------------------------------------------------
Total interest sensitive assets $48,670 $33,507 $24,009 $24,241 $52,352 $182,779
-------------------------------------------------------------------------
Interest sensitive liabilities:
Certificates of deposit $13,076 $31,558 $ 7,713 $ 792 $ -0- $ 53,139
Money markets 30,541 -0- -0- -0- 12,653 43,194
Regular savings 1,188 -0- -0- -0- 21,664 22,852
Now accounts 9,327 -0- -0- -0- 14,717 24,044
Borrowed funds 26 79 212 212 1,377 1,906
-------------------------------------------------------------------------
Total interest sensitive liabilities $54,158 $31,637 $ 7,925 $ 1,004 $50,411 $145,135
-------------------------------------------------------------------------
Net interest rate sensitivity gap (5,488) 1,870 16,084 23,237 1,941 37,644
Cumulative net interest rate
sensitivity gap (5,448) (3,618) 12,466 35,703 37,644
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (2.80)% (1.85)% 6.36% 18.22% 19.21%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets (3.00)% (1.98)% 6.82% 19.53% 20.60%
Cumulative net interest earning
assets as a percentage of
cumulative interest-bearing
liabilities (3.78)% (2.49)% 8.59% 24.60% 25.94%
<FN>
- --------------------
<F1> Investments available for sale exclude marketable equity securities
with a fair value of $778,000 which may be sold by Union at any time.
</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
8.25%, 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
SEPTEMBER 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Return Return
on on
Year Prime Net Interest Change Net Assets Equity Capital Change
Ending Rate Income % Income % % Value %
- ------ ----- ------------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December-99 9.75 8,852 1.19 3,616 1.87 17.03 14,236 (26.06)
8.25 8,748 0.00 3,547 1.83 16.71 19,254 0.00
6.75 8,644 (1.19) 3,477 1.80 16.40 24,835 28.99
December-00 9.75 9,649 5.39 3,979 1.96 17.64 14,652 (24.22)
8.25 9,155 0.00 3,645 1.80 16.33 19,335 0.00
6.75 8,665 (5.35) 3,314 1.64 15.01 24,528 26.85
December-01 9.75 10,429 7.14 4,448 2.10 18.26 14,603 (24.12)
8.25 9,735 0.00 3,978 1.88 16.76 19,244 0.00
6.75 9,053 (7.00) 3,517 1.67 15.23 24,395 26.77
</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 a member of the FHLB, Union has access to
preapproved lines of credit up to 6.89% of total assets. Under the terms
of the Community Investment Program "Plus", the Company has unadvanced
funds available of $10,159,094. This funding commitment expires January
13, 2000.
In addition, the Company maintains an IDEAL Way Line of Credit with the
Federal Home Loan Bank of Boston which approximates 2% of the Bank's
assets. The total line available was $3,356,000 as of September 30, 1999
and December 31, 1998, respectively. Total borrowings against this line of
credit were $-0- at September 30, 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 this line 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 management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 84.4% of Union's certificates of deposit will mature within
twelve months, management believes, based upon past experience, that Union
will retain a substantial portion of these deposits. Management will
continue to offer a competitive but prudent pricing strategy to facilitate
retention of such deposits. Any reduction in total deposits could be
offset by purchases of federal funds, short-term FHLB borrowings, or
liquidation of investment securities 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 September 30, 1999, the most recent
notification from the FDIC categorized Union Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, Union Bank must maintain minimum a total risk-based
capital ratio of 8%and Tier I risk-based capital and minimum Tier I
leverage ratios of 4% each. Union's capital ratios approximate 19.00%,
17.68% and 11.15% as of September 30, 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 Union Bank's regulatory
capital category. The following table shows Union's actual consolidated
capital amounts and ratios against the amounts and ratios required by
applicable capital adequacy guidelines and the amounts and ratios necessary
to be categorized as well-capitalized:
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.
Year 2000
The Problem. The problem relates to computer systems and applications that
currently use two-digit date fields to designate a year. As the century
date change occurs, date-sensitive systems could recognize the year 2000 as
1900 and potentially cause systems to process critical financial and
operational information incorrectly. This would drastically affect
calculations, timetables and even the ability to perform many tasks. Like
other financial institutions, Union relies heavily on computers.
Management and the directors believe it is our responsibility to do
everything in our control to make sure our systems perform properly in the
Year 2000 and beyond.
The Plan. Union has been working on the Year 2000 issues since 1997.
Union organized an internal Year 2000 project team, which consists of
several members of senior management and a member from the Board of
Directors. The committee, which has developed a Year 2000 plan for Union,
meets on a weekly basis and reports to the Board of Directors on critical
steps taken in the Year 2000 process. The plan describes the specific
goals of the Year 2000 project and requires assessment, testing and
remediation for all of our computer programs and equipment driven by
computer chips and establishes a timetable for accomplishing each of the
significant benchmarks. The plan also includes communication, assessment
and testing with third party vendors that are critical to Union's operation
and service. In addition, the plan includes assessment of Union's major
customers and the credit and operational risks associated with those
findings. And finally, the plan contains contingency plans and strategies,
or "workarounds," in the event any important aspect of the century date
change does not transition smoothly. These contingency plans include
components relating to organizational matters, business impact analysis,
method of validation, business resumption, training and education,
liquidity considerations and public relations.
Execution of the Plan as of September 30, 1999. The summer months were
spent accomplishing two primary objectives; creating a task list for the
event weekend as well as identifying key employees who will monitor the
bank's various systems. The goals for the remainder of 1999 include
customer awareness; contingency plans and security training; closely
monitoring liquidity needs; ongoing assessment of commercial borrowers'
preparedness; and assessment and maintenance of hardware and software
systems.
Costs. In 1998, we designated a bank officer to manage the Year 2000
project. In addition, the five other Year 2000 committee members spent a
great deal of time overseeing Union's plan. The effect of this time was
not additional expense, but rather a diversion from other productive
endeavors. Direct Year 2000 capital expenses in 1998 were $13,522 and
extra operating expenses were $12,541. Estimates for 1999 include $10,000
of capital expense and $50,000 of operating expense, of which $35,463 had
been incurred as of September 30, 1999. During the first three quarters of
1999, we did not incur any direct Year 2000 capital expenses. Given our
state of planning and test results to date, we expect our 1999 capital and
operating expense estimates to be reasonably accurate. We do not expect
Year 2000 capital and operating expenses to have a material effect on
Union's financial condition.
Risks. Despite our best efforts and test results, something could go
wrong. This is especially true in an industry such as ours that is so
interconnected and dependent upon information technology and data
transfers. A Year 2000 failure could disrupt Union's banking operations.
The severity would depend on the nature and duration of the problem. If it
concerned a core application or mission critical system, such failure could
have an adverse effect on our operations and financial condition.
Contingencies. Union has studied what could go wrong and has developed its
contingency plans to mitigate these risks and maintain operations given any
number of malfunctions. For example, the operations and data processing
center located at the main office in Morrisville are protected by a power
generator which mitigates the risk of power outages. We have also arranged
for alternative delivery methods with the Federal Reserve Bank for all
electronic activity, including wire transfers and automated clearinghouse
transactions. Staffing needs have been considered and key members will be
located in the processing center throughout the entire weekend in order to
monitor the transition to Year 2000. However, although contingency
planning can help to mitigate the risks of major Year 2000 systems
malfunctions, it cannot eliminate such risks entirely.
Merger Related Issues. In planning for completion of the proposed merger
with Citizens during the fourth quarter of 1999, we have deemed it
advisable to defer the data processing conversion of Citizens and similar
information technology changeovers until the first quarter of 2000. That
timetable will permit us to respond to any Year 2000 problems that may
occur at year end 1999 without the added demands on staff and other
resources that the data processing conversion may entail.
Summary. Year 2000 readiness is a very high priority for Union's
management and Board of Directors. In developing and executing its Year
2000 plan, Union is following the guidelines that were established by the
FDIC and Federal Financial Institutions Examination Council. Our results
to date have been successful. However, we cannot make any certain
representations that our systems and, especially, those of third parties,
will function properly.
PART II OTHER INFORMATION
ITEM 5: INCREASE IN UNION'S AUTHORIZED COMMON STOCK
At the Union special meeting scheduled for November 19, 1999, Union's
shareholders will be asked to approve an amendment to Union's Amended and
Restated Articles of Association to increase the authorized common stock
from 2,400,000 to 5,000,000 shares of $2.00 par value common stock. At a
meeting on February 16, 1999, Union's Board of Directors voted, in
conjunction with its vote to approve the Citizens merger, to recommend the
proposed increase to Union's shareholders. The proposed increase is
necessary to complete the merger, as Union does not have sufficient
authorized but unissued shares available to issue to Citizens' shareholders
at the merger conversion ratio. Therefore, unless Union's shareholders
approve the proposed increase in the common stock, the merger will not be
completed, even if the merger is approved by the Citizens shareholders and
all other conditions to the merger have been satisfied or waived.
Conversely, if the proposed increase in Union's common stock is approved,
it will become effective, even if the merger is terminated or abandoned for
any reason.
Union's Board of Directors believes that the proposed increase in the
common stock is advisable and in the best interests of Union and its
shareholders, in order to permit the merger to be completed and to provide
additional shares for such other corporate purposes as the Union Board may
determine from time to time to be necessary or desirable. Those additional
uses for the authorized shares could include, for example, raising
additional capital, making future acquisitions of banks, branches or
banking related businesses or assets, attracting or retaining valuable
employees through stock options and other stock-based compensation
arrangements, and issuing stock in connection with stock dividends, stock
splits and dividend reinvestment and stock purchase plans. Except for the
shares to be issued in the Citizens merger, and shares reserved for
issuance under Union's 1998 Incentive Stock Option plan (or a similar
earlier plan), at this time Union has no commitments, agreements or
undertakings obligating it to issue any shares to anyone.
ITEM 6: EXHIBITS AND REPORTS IN FORM 8-K
A. Exhibits.
27 - Financial Data Schedule
B. Current Reports on Form 8
None
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.
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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,341
<INT-BEARING-DEPOSITS> 2,083
<FED-FUNDS-SOLD> 1,654
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 39,851
<INVESTMENTS-MARKET> 39,851
<LOANS> 126,026
<ALLOWANCE> (1,819)
<TOTAL-ASSETS> 195,973
<DEPOSITS> 169,736
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,904
<LONG-TERM> 1,906
0
0
<COMMON> 4,544
<OTHER-SE> 16,883
<TOTAL-LIABILITIES-AND-EQUITY> 195,973
<INTEREST-LOAN> 9,083
<INTEREST-INVEST> 1,787
<INTEREST-OTHER> 247
<INTEREST-TOTAL> 11,117
<INTEREST-DEPOSIT> 4,114
<INTEREST-EXPENSE> 171
<INTEREST-INCOME-NET> 6,832
<LOAN-LOSSES> 63
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,880
<INCOME-PRETAX> 3,235
<INCOME-PRE-EXTRAORDINARY> 2,335
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,335
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 6.60
<LOANS-NON> 383
<LOANS-PAST> 1,763
<LOANS-TROUBLED> 53
<LOANS-PROBLEM> 2,199
<ALLOWANCE-OPEN> (1,805)
<CHARGE-OFFS> (83)
<RECOVERIES> 34
<ALLOWANCE-CLOSE> (1,819)
<ALLOWANCE-DOMESTIC> (1,819)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
