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, 2000
Commission file number: 000-28449
UNION BANKSHARES, INC.
VERMONT 03-0283552
P.O. BOX 667
MAIN STREET
MORRISVILLE, VT 05661
Registrant's telephone number: 802-888-6600
Former name, former address and former fiscal year, if changed since last
report: Not applicable
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, 2000:
Common Stock, $2 par value 3,029,729 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 Changes in Stockholder's Equity 5
Consolidated Statement of Cash Flows 6
Notes to Financial Statements 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 26
Signatures 27
Union Bankshares, Inc. and Subsidiaries
Statement of Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in Thousands) 2000 1999
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 10,293 $ 11,627
Federal funds sold and overnight deposits 5,411 3,474
-------------------------
Total cash and cash equivalents 15,704 15,101
Interest bearing deposits 2,043 1,957
Securities available-for-sale 55,707 60,441
Federal Home Loan Bank stock 1,016 939
Loans held for sale 8,936 8,102
Loans 216,324 201,525
Unearned loan fees (272) (273)
Allowance for loan losses (2,868) (2,870)
-------------------------
Loans, net 213,184 198,382
-------------------------
Accrued interest receivable 2,405 2,199
Bank premises and equipment, net 3,861 4,040
Other real estate owned, net 137 27
Other assets 4,194 4,288
-------------------------
Total assets $307,187 $295,476
=========================
Liabilities and Stockholders' equity:
Liabilities:
Deposits:
Non-interest bearing $ 34,196 $ 32,989
Interest bearing 224,958 224,604
-------------------------
Total deposits 259,154 257,593
Borrowed funds 10,464 2,872
Accrued interest and other liabilities 3,564 2,791
-------------------------
Total liabilities 273,182 263,256
-------------------------
Stockholders' equity:
Common stock ($2 par value; 5,000,000 shares
authorized; 3,263,689 and 3,263,489 shares
issued at 9/30/00 and 12/31/99) 6,527 6,527
Paid-in capital and surplus 240 238
Retained earnings 29,492 28,180
Treasury stock (233,960 shares at 9/30/00
and 12/31/99) (1,592) (1,592)
Accumulated other comprehensive income (662) (1,133)
-------------------------
Total stockholders' equity 34,005 32,220
-------------------------
Total liabilities and stockholders' equity $307,187 $295,476
=========================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(Dollars in Thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 5,154 $ 4,726 $ 14,803 $ 13,829
Interest and dividends on investment securities 894 911 2,718 2,733
Interest on federal funds sold 95 153 217 309
Interest on interest bearing deposits 31 34 91 95
----------------------------------------------------------
6,174 5,824 17,829 16,966
----------------------------------------------------------
Interest expense:
Interest on deposits 2,415 2,225 6,961 6,560
Interest on federal funds purchased 0 1 4 2
Interest on borrowed funds 178 76 273 237
----------------------------------------------------------
2,593 2,302 7,238 6,799
----------------------------------------------------------
Net interest income 3,581 3,522 10,591 10,167
Provision for loan losses 63 62 188 250
----------------------------------------------------------
Net interest income after provision for
loan losses 3,518 3,460 10,403 9,917
----------------------------------------------------------
Noninterest income:
Trust department income 35 46 111 114
Service fees 563 554 1,718 1,724
Security gains 0 0 34 3
Gain on sale of loans 25 7 34 52
Other (1) (19) 8 (4)
----------------------------------------------------------
622 588 1,905 1,889
----------------------------------------------------------
Noninterest expense:
Salaries and wages 1,121 1,057 3,432 3,145
Pension and other employee benefits 290 264 867 762
Occupancy expense, net 131 134 423 411
Equipment expense 234 264 764 803
Other operating expense 618 731 2,053 2,181
----------------------------------------------------------
2,394 2,450 7,539 7,302
----------------------------------------------------------
Income before income tax expense 1,746 1,598 4,769 4,504
Income tax expense 499 464 1,276 1,354
----------------------------------------------------------
Net income $ 1,247 $ 1,134 $ 3,493 $ 3,150
==========================================================
Earnings per common share $ 0.41 $ 0.38 $ 1.15 $ 1.04
==========================================================
Weighted average number of common shares outstanding 3,029,718 3,029,438 3,029,593 3,028,134
==========================================================
Dividends declared per share $ 0.24 $ 0.22 $ 0.72 $ 0.66
==========================================================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Paid-in Capital Retained Treasury Comprehensive Stockholders'
Stock & Surplus Earnings Stock Income (Loss) Equity
------ --------------- -------- -------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $6,527 $238 $28,180 $(1,592) $(1,133) $32,220
Net income 3,493 3,493
Net unrealized holding gain on
securities available-for-sale,
net of tax 471 471
-------
Comprehensive income 3,964
-------
Cash dividends declared (2,181) (2,181)
Treasury stock purchased 0
Exercise of stock option 2 2
-------
Balance September 30, 2000 $6,527 $240 $29,492 $(1,592) $ (662) $34,005
===========================================================================
</TABLE>
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Year to Date
------------------------------
September 30, September 30,
(Dollars in Thousands) 2000 1999
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 3,493 $ 3,150
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 603 624
Provision for loan losses 188 250
Provision (credit) for deferred income taxes (102) 219
Amortization, net 0 101
Write-downs of OREO 8 18
Decrease in unamortized loan fees (1) 80
Increase in loans held for sale (800) (5,849)
Increase in accrued interest receivable (206) (76)
(Increase) decrease in other assets 80 (304)
Increase (decrease) in income taxes payable (101) 61
Increase (decrease) in accrued interest payable 182 (157)
Increase in other liabilities 591 291
Gain on securities (34) (3)
Gain on sale of loans (34) (52)
(Gain) (loss) on sale of OREO (4) 11
------------------------
Net cash provided by operating activities 3,863 (1,636)
------------------------
Cash Flows From Investing Activities
Interest bearing deposits
Maturities and redemptions 1,090 788
Purchases (1,176) (998)
Securities available for sale
Maturities and redemptions 9,370 16,867
Purchases (3,888) (19,947)
Purchase of Federal Home Loan Bank Stock (77) (35)
Decrease in loans, net (15,225) (3,382)
Recoveries of loans charged off 99 63
Purchases of premises and equipment, net (424) (212)
Proceeds from sale of OREO 23 501
Proceeds from sale of Repossessions 0 64
Investment in Ltd Partnerships (26) (373)
------------------------
Net cash used in investing activities (10,234) (6,728)
Cash Flows From Financing Activities
Borrowings, net of repayments 7,592 (2,801)
Proceeds from exercise of stock options 2 31
Net decrease in demand, NOW, Savings,
and money market accounts (1,489) 10,718
Net increase (decrease) in time deposits 3,050 (232)
Dividends paid (2,181) (1,687)
------------------------
Net cash provided by financing activities 6,974 6,029
------------------------
(Decrease) increase in cash and cash equivalents $ 603 $(2,335)
Cash and cash equivalents
Beginning $15,101 $19,196
------------------------
Ending $15,704 $16,861
------------------------
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 7,056 $ 6,956
========================
Income Taxes Paid $ 1,480 $ 1,577
========================
</TABLE>
UNION BANKSHARES, INC.
NOTES TO FINANCIAL STATEMENTS:
Note 1. The accompanying interim consolidated financial statements of
Union Bankshares, Inc. (the Company) for the interim period ended September
30, 2000 and 1999 and for the quarters then ended have been prepared in
accordance with the accounting policies described in the company's annual
report to shareholders and Form 10K which 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 1999 Annual report, Form S-4, and Form 8K.
Note 2. Acquisition
Effective November 30, 1999, following the receipt of all required
stockholder, state and federal regulatory approvals, Union Bankshares, Inc.
acquired Citizens Saving Bank and Trust Co. This makes Union a two bank
holding company. The accompanying consolidated financial statements
reflect the merger accounted for in a tax-free transaction as a pooling of
interests and are presented as if the companies were combined as of the
earliest period presented. However, the financial information is not
necessarily indicative of the results of operations, financial position or
cash flows that would have occurred had the acquisition been consumated for
the periods for which it is given effect, nor is it necessarily indicative
of future results of operations, financial position, or cash flows. The
financial statements reflect the conversion of each outstanding share of
Citizens common stock into 6.5217 shares of Union common stock, with the
exchange of 991,089 shares (net of 196 fractional shares redeemed for
approximately $4,516) of newly-issued Company common stock.
Note 3. 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 4 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 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 reconciliation of such
information to the consolidated financial statements as of and for the
period ended September 30, follows:
<TABLE>
<CAPTION>
Intersegment Consolidated
2000 Union Citizens Elimination Other Totals
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 12,008 $ 5,821 $ 0 $ 0 $ 17,829
Interest expense 4,652 2,585 0 1 7,238
Provision for loan loss 0 188 0 0 188
Service fee income 1,355 363 0 0 1,718
Income tax expense (benefit) 999 334 0 (57) 1,276
Net income (loss) 2,921 675 0 (103) 3,493
Assets 205,104 101,622 (17) 478 307,187
<CAPTION>
Intersegment Consolidated
1999 Union Citizens Elimination Other Totals
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 11,117 $ 5,849 $ 0 $ 0 $ 16,966
Interest expense 4,284 2,514 0 1 6,799
Provision for loan loss 63 187 0 0 250
Service fee income 1,292 432 0 0 1,724
Income tax expense (benefit) 910 454 0 (10) 1,354
Net income (loss) 2,563 815 0 (228) 3,150
Assets 195,598 102,206 0 370 298,174
</TABLE>
Amounts in the "Other" column encompass activity in Union Bankshares, Inc.,
the "parent company." Holding company assets are stated after intercompany
eliminations.
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, 2000
and as of December 31, 1999, and its results of operations for the three
and nine months ended September 30, 2000 and 1999. 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 the interim period. Management is not aware of the occurrence of any
events after September 30, 2000, which would materially affect the
information presented below.
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 10, 2000 at
$17.75.
The millennium change was basically a non-event as far as problems and both
banks completed their year-end processing on schedule.
On February 4, 2000, Citizens upgraded their main application software from
Jack Henry 20/20 to Jack Henry Silverlake. On that day, Union Bank became
the Electronic Data Processing Server for Citizens. Therefore, both of
Union's subsidiaries are processed on Union Bank's IBM AS400 located in
Morrisville, Vermont. The transition was planned to be as transparent as
possible to customers and line staff of Citizens. Citizens reimburses
Union for costs incurred under a data processing agreement between the
banks. Intercompany revenues and costs have been eliminated in
consolidation. Only a few other, non-material operational changes have
resulted from the switch and internal controls have been maintained.
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:
* uses of monetary, fiscal and tax policy by various governments
* political, legislative or regulatory developments in Vermont or the
United States including changes in laws concerning taxes, banking and
other aspects of the financial services industry
* developments in general economic or business conditions, including
interest rate fluctuations, market fluctuations and perceptions, and
inflation
* changes in the competitive environment for financial services
organizations
* the Company's ability to retain key personnel
* changes in technology including demands for greater automation
* 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, 2000 was $1.2
million, compared with net income of $1.1 million for the third quarter of
1999. Net income per share was $.41 for the third quarter of 2000 compared
to $.38 for the same quarter of 1999. Net income for the first nine
months of 2000 was $3.5 million, compared with $3.1 million for the same
period in 1999. Net income per share was $1.15 for the first nine months
of 2000 compared to $1.04 for the comparable period in 1999.
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>
Three months ended September 30,
----------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
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 $ 5,978 $ 95 6.36% $ 12,061 $ 153 5.07%
Interest bearing deposits 2,010 31 6.17% 2,374 34 5.73%
Investments (1) (2) 58,275 894 6.33% 59,933 911 6.26%
Loans, net (1), (3) 223,429 5,154 9.39% 208,120 4,726 9.18%
-------------------------------------------------------------------
Total interest-earning assets (1) 289,692 6,174 8.68% 282,488 5,824 8.36%
Cash and due from banks 9,288 9,007
Premises and equipment 3,950 4,244
Other assets 4,531 2,389
-------- --------
Total assets $307,461 $298,128
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 34,177 $ 163 1.91% $ 34,440 $ 159 1.85%
Savings and money market accounts 90,397 851 3.77% 89,778 796 3.55%
Certificates of deposit 100,310 1,401 5.59% 99,840 1,270 5.09%
Borrowed funds 10,522 178 6.77% 4,063 77 7.58%
-------------------------------------------------------------------
Total interest-bearing
Liabilities 235,406 2,593 4.41% 228,121 2,302 4.04%
Non-interest bearing deposits 33,650 33,305
Other liabilities 5,103 4,660
-------- --------
Total liabilities 274,159 266,086
Shareholders' equity 33,302 32,042
-------- --------
Total liabilities and
shareholders' equity $307,461 $298,128
======== ========
Net interest income (1) $3,581 $3,522
====== ======
Net interest spread (1) 4.27% 4.32%
==== ====
Net interest margin (1) 5.11% 5.11%
==== ====
<CAPTION>
Nine months ended September 30,
----------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
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 $ 4,808 $ 217 6.02% $ 8,559 $ 309 4.80%
Interest bearing deposits 2,020 91 6.01% 2,279 95 5.54%
Investments (1) (2) 57,216 2,718 6.53% 60,626 2,733 6.21%
Loans, net (1), (3) 213,162 14,803 9.39% 202,174 13,829 9.21%
-------------------------------------------------------------------
Total interest-earning assets (1) 277,206 17,829 8.72% 273,638 16,966 8.37%
Cash and due from banks 8,844 9,009
Premises and equipment 4,013 4,386
Other assets 5,993 5,413
-------- --------
Total assets $296,056 $292,446
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 32,779 $ 481 1.96% $ 33,415 $ 473 1.89%
Savings and money market accounts 90,216 2,509 3.71% 85,881 2,247 3.49%
Certificates of deposit 99,628 3,971 5.31% 99,566 3,840 5.14%
Borrowed funds 5,587 277 6.61% 5,459 239 5.84%
-------------------------------------------------------------------
Total interest-bearing
Liabilities 228,210 7,238 4.23% 224,321 6,799 4.03%
Non-interest bearing deposits 32,688 31,921
Other liabilities 2,874 4,383
-------- --------
Total liabilities 263,772 260,625
Shareholders' equity 32,284 31,821
-------- --------
Total liabilities and
shareholders' equity $296,056 $292,446
======== ========
Net interest income (1) $10,591 $10,167
======= =======
Net interest spread (1) 4.49% 4.34%
==== ====
Net interest margin (1) 5.23% 5.07%
==== ====
<FN>
(1) Average yield reported on a tax-equivalent basis.
(2) The average balance of investments is calculated using the amortized
cost basis.
(3) Net of unearned income and allowance for loan loss.
</FN>
</TABLE>
Union's net interest income increased by $59 thousand, or 1.7%, to $3.6
million for the three months ended September 30, 2000, from $3.5 million
for the three months ended September 30, 1999. This increase was due to the
spread between yields earned on assets versus paid on liabilities. The net
interest spread decreased by 5 basis points to 4.27% for the three months ended
September 30, 2000, from 4.32% for the three months ended September 30, 1999
as interest rates paid on deposits have begun to move upward in response to
the earlier increase in the prime rate. The net interest margin for the
2000 period remained unchanged from the 1999 period at 5.11%.
Union's net interest income year to date was $10.6 million compared to the
prior year of $10.2 million or an increase of 4.2% between the two years.
The net interest spread increased by 15 basis points to 4.49% for the nine
months ended September 30, 2000 from 4.34% for the nine months ended
September 30, 1999. This increase was fueled by the six increases in the
prime rate since June 30, 1999 which has taken it from 7.75% to 9.50%. The
net interest margin for the 2000 period increased to 5.23% from 5.07% for
the 1999 period or an increase of 16 basis points.
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.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Compared
to Three Months Ended September 30, 1999
Increase/(Decrease) Due to Change In
----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (77) $ 19 $ (58)
Interest bearing deposits (5) 2 (3)
Investments (26) 9 (17)
Loans, net 321 107 428
----------------------------
Total interest-earning assets 213 137 350
Interest-bearing liabilities:
NOW accounts (1) 5 4
Savings and money market accounts 5 50 55
Certificates of deposit 6 125 131
Borrowed funds 122 (21) 101
----------------------------
Total interest-bearing liabilities 132 159 291
----------------------------
Net change in net interest income $ 81 $ (22) $ 59
============================
<CAPTION>
Nine Months Ended September 30, 2000 Compared
to Nine Months Ended September 30, 1999
Increase/(Decrease) Due to Change In
----------------------------------------------
Volume Rate Net
------ ---- ---
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $(135) $ 43 $ (92)
Interest bearing deposits (11) 7 (4)
Investments (159) 144 (15)
Loans, net 706 268 974
----------------------------
Total interest-earning assets 401 462 863
Interest-bearing liabilities:
NOW accounts (9) 17 8
Savings and money market accounts 113 149 262
Certificates of deposit 2 129 131
Borrowed funds 6 32 38
----------------------------
Total interest-bearing liabilities 112 327 439
----------------------------
Net change in net interest income $ 289 $ 135 $ 424
============================
</TABLE>
Quarter Ended September 30, 2000 compared to Quarter Ended September 30,
1999.
Interest and Dividend Income. Union's interest and dividend income
increased by $354,000, or 6.08%, to $6.2 million for the three months ended
September 30, 2000, from $5.8 million for the three months ended September
30, 1999. Average earning assets increased by $7.2 million, or 2.5%, to
$289.7 million for the three months ended September 30, 2000, from $289.7
million for the three months ended September 30, 1999. Average loans
approximated $223.4 million for the three months ended September 30, 2000
up from $208.1 million for the three months ended September 30, 1999.
Increases in construction loans and residential real estate secured loans
of $6.8 million or 6.6%, the $10.1 million or 14.0% increase in commercial
loans, and the $2.9 million or 27.4% increase in loans to municipalities
was partially offset by the $4.5 million or 23.4% decrease in personal
loans. Construction Lending was strong throughout 1999 and to date through
2000. A conscious decision to retain loans packaged for sale in our
portfolio in mid 1999 through mid 2000 accounts for the majority of the
increase in both the residential real estate and commercial loan
portfolios. The decrease in personal loans is due to a late 1998 decision
to exit the Dealer floorplan business at Citizens.
The average balance of investment securities (including mortgage-backed
securities) decreased by $1.7 million, or 2.8%, to $58.3 million for the
three months ended September 30, 2000, from $59.9 million for the three
months ended September 30, 1999. The average balance in Interest Bearing
Deposits decreased by $364,000 to $2.0 million from $2.3 million or 15.3%.
The average level of federal funds sold decreased by $6.1 million or 50.8%,
to $5.9 million for the three months ended September 30, 2000, from $12.0
million for the three months ended September 30, 1999. The decrease in the
investment portfolio, in Federal Funds Sold and in Interest Bearing
Deposits in 2000 reflects the closer attention to cash management since Y2
passed with no liquidity crisis and the continuing growth in our loan
portfolio. Interest Income on non-loans was $1 million for 2000 compared
to $1.1 million for 1999 reflecting the increase in yields offset by the
decrease in volume.
Interest Expense. Union's interest expense increased by $291 thousand, or
12.64%, to $2.6 million for the three months ended September 30, 2000 from
$2.3 million for the three months ended September 30, 1999. Average
interest-bearing liabilities increased by $7.3 million, or 3.2% to $235.4
million for the three months ended September 30, 2000, from $228.1 million
for the three months ended September 30, 1999. Average time deposits
increased $.5 million, or .5%, to $100.3 million for the three months ended
September 30, 2000, from $99.8 million for the three months ended September
30, 1999, while the average balances for money market and saving accounts
increased by $.6 million to $90.4 million for the three months ended
September 30, 2000, from $89.8 million for the three months ended September
30, 1999. Customers have maintained very liquid positions during the last
9 months as they anticipate the interest rates paid on all deposit
instruments will continue to rise.
The average balance on funds borrowed has increased from $4.1 million on
average in 1999 to $10.5 million in 2000 as Union borrowed from the Federal
Home Loan Bank of Boston for liquidity funding and to match some long-term
commercial loan commitments.
Noninterest Income. Union's noninterest income increased $34,000, or 5.8%,
to $622 thousand for the three months ended September 30, 2000, from $588
thousand for the three months ended September 30, 1999. Trust department
income fell to $35 thousand in the third quarter of 2000 from $46 thousand
in the same period of 1999 or a 23.9% decrease. There was a $25,000 gain
on Sale of Loans for 2000 and $7 thousand for 1999. Other noninterest
income and service fees (sources of which include deposit and loan
servicing fees, ATM fees, and safe deposit fees) increased by $9 thousand,
or 1.6%, to $563 thousand for the three months ended September 30, 2000,
from $554 thousand for the three months ended September 30, 1999.
Noninterest Expense. Union's noninterest expense decreased $56 thousand,
or 2.3%, to $2.4 million for the three months ended September 30, 2000,
from $2.5 million for the three months ended September 30, 1999. Salaries
increased $64,000, or 6%, to $1.1 million for the three months ended
September 30, 2000, from $1.0 million for the three months ended September
30, 1999, reflecting normal salary activity. Pension and employee benefits
increased $26 thousand or 9.8% to $290 thousand for the three months ended
September 30, 2000, from $264 thousand for the three months ended September
30, 1999 mainly due to a $30,000 increase in retirement plans expense.
Equipment expense decreased $30 thousand to $234 thousand for the three
months ended September 30, 2000, from $264 thousand for the same period in
1999 resulting from decreased depreciation cost on computer equipment and
software which are depreciated as an expense over a time period of three to
five years, a decrease in equipment repair expense and a decrease in the
cost of maintenance contracts. Other operating expense for the quarter was
$618 thousand down from $731 thousand for the same quarter in 1999. The
decrease of $113 thousand, or 15.4%, is mainly due to the non-recurring
Year 200 and merger related expenses during the third quarter of 1999.
Income Tax Expense. Union's income tax expense increased by $35,000, or
7.5%, to $499,000 for the three months ended September 30, 2000, from $463
thousand for the comparable period of 1999 because of our increased income.
Year to Date September 30, 2000 compared to Year to Date September 30,
1999.
Interest and Dividend Income. Union's interest and dividend income
increased by $863,000, or 5.1%, to $17.8 million for the nine months ended
September 30, 2000, from $17 million for the nine months ended September
30, 1999. Average earning assets increased by $3.6 million, or 1.3%, to
$277.2 million for the nine months ended September 30, 2000, from $273.6
million for the nine months ended September 30, 1999. Average loans
approximated $213.2 million for the nine months ended September 30, 2000 up
from $202.2 million for the nine months ended September 30, 1999.
Increases in construction loans of $949 thousand or 16.7%, the $5.1 million
or 6.3% increase in residential real estate secured loans, the $9.2 million
or 10.7% increase in commercial loans, and the $1.7 million or 17.9%
increase in loans to municipalities was partially offset by the $4.7
million or 21.6% decrease in personal loans. Construction Lending was
strong throughout 1999 and to date through 2000. A conscious decision to
retain loans packaged for sale in our portfolio in mid 1999 through mid
2000 accounts for the majority of the increase in both the residential real
estate and commercial loan portfolios. The decrease in personal loans is
due to a late 1998 decision to exit the Dealer floorplan business at
Citizens.
The average balance of investment securities (including mortgage-backed
securities) decreased by $3.4 million, or 5.6%, to $57.2 million for the
nine months ended September 30, 2000, from $60.6 million for the nine
months ended September 30, 1999. The average level of federal funds sold
decreased by $3.8 million or 43.8%, to $4.8 million for the nine months
ended September 30, 2000, from $8.6 million for the nine months ended
September 30, 1999. The average balance in Interest Bearing Deposits
decreased by $259,000 to $2.0 million from $2.3 million or 11.3%. The
decrease in the investment portfolio, Federal Funds Sold and Interest
Bearing Deposits in 2000 reflects the closer attention to cash management
since Y2K passed with no liquidity crises and the continuing growth in our
loan portfolio. Interest Income on non-loans was $3 million for 2000 and
$3.1 million for 1999 reflecting the increase in yields offset by the
overall decrease in volume.
Interest Expense. Union's interest expense increased by $439 thousand, or
6.5%, to $7.2 million for the nine months ended September 30, 2000 from
$6.8 million for the nine months ended September 30, 1999. Average
interest-bearing liabilities increased by $3.9 million, or 1.7%, to $228.2
million for the nine months ended September 30, 2000, from $224.3 million
for the nine months ended September 30, 1999. Average time deposits
remained unchanged at $99.6 million for the nine months ended September 30,
2000 and for the nine months ended September 30, 1999, while the average
balances for money market and savings accounts increased by $4.3 million to
$90.2 million for the nine months ended September 30, 2000, from $85.9
million for the nine months ended September 30, 1999. The 5.0% increase in
balances was all in money market accounts as the rate structure was tiered
to remain competitive with other financial institutions. Customers have
maintained very liquid positions during the last 9 months as they
anticipate the interest rates paid on all deposit instruments will continue
to rise.
The average balance on funds borrowed increased from $5.5 million on
average in 1999 to $5.6 million in 2000.
Noninterest Income. Union's noninterest income increased $16,000, or .8%,
to $1.9 million for the nine months ended September 30, 2000. The results
for the period reflected a net gain of $34 thousand from the sale of
securities compared to a $3,000 gain from sales during 1999. Trust
department income decreased to $111,000 in the nine months of 2000 from
$114,000 in the same period of 1999 or a 2.6% decrease. Gain on Sale of
Loans dropped $18,000 to $34,000 for 2000 from $52,000 for 1999. This
change can be explained by management's decision to retain in portfolio a
higher percentage of loans that could be sold due to the interest rate
environment and other reinvestment rates available. Other noninterest
income and service fees (sources of which include deposit and loan fees,
ATM fees, and safe deposit fees) decreased by $6,000, or .3%, to $1.7
million for the nine months ended September 30, 2000, and for the nine
months ended September 30, 1999
Noninterest Expense. Union's noninterest expense increased $237,000, or
3.2%, to $7.5 million for the nine months ended September 30, 2000, from
$7.3 million for the nine months ended September 30, 1999. Salaries
increased $287,000, or 9.1%, to $3.4 million for the nine months ended
September 30, 2000, from $3.1 million for the nine months ended September
30, 1999, reflecting normal salary activity, pay for overtime during the
first quarter of 2000 related to a Systems Conversion at Citizens, and
severance pay for three employees whose positions were eliminated at
Citizens due to the consolidation of certain operations within the
organization. Pension and employee benefits increased $105 thousand, or
13.8%, to $867 thousand for the nine months ended September 30, 2000, from
$762 thousand for the nine months ended September 30, 1999 mainly due to a
$12,600 increase in health insurance costs, a $74,500 increase in
retirement plans expense, and a $17,600 increase in payroll taxes. Net
occupancy expense increased $12 thousand, or 2.9%, to $423,000 for the nine
months ended September 30, 2000, from $411,000 for the nine months ended
September 30, 1999 due mainly to the increase in fuel costs and property
tax expense. Equipment expense decreased $39 thousand or 4.9% to $764
thousand for the nine months ended September 30, 2000, from $803 thousand
for the same period in 1999 primarily resulting from decreased equipment
repair expense and depreciation expense.
Other operating expenses were $2.0 million for the first nine months of
2000 compared to $2.2 million for the same period in 1999. Year 2000
expenses were $1.5 thousand during 2000 compared to $57 thousand in 1999.
During the period ended September 30, 2000, Union incurred approximately $1
thousand of expenses related to the merger, including legal and advisory
fees compared to $279 thousand during the same period of 1999. Union
incurred a net one-time listing fee in 2000 of $11,250 from the American Stock
Exchange and a pro-rated annual fee of $4,500. Other large variance
categories were Charitable Contributions up $42,300 from $25,600 through
September 30, 1999 to $67,900 in 2000. Printing costs were up $26,800
between years from $31,800 to $58,600 due to the expense of a professional
annual report, proxy and Form 10-K. State Franchise taxes were up $12,000
between years due to the increase in our deposit base. FDIC assessment was
up $17,800 due to increased deposit base and the increased assessment rate.
Advertising and public relations expenses were up $18,100 as media exposure
was expanded at Citizens.
Income Tax Expense. Union's income tax expense decreased by $78,000, or
5.76%, to $1.276 million for the nine months ended September 30, 2000, from
$1.354 million for the comparable period of 1999 because of our $114,000
historic rehabilitation credit and low income housing credits that were
available to us for the 2000 tax year due to our partnership investment in
low income housing projects sponsored by Housing Vermont in our market area
and our increased volume of municipal lending.
FINANCIAL CONDITION
At September 30, 2000, Union had total consolidated assets of $307.2
million, including net loans and loans held for sale of $222.1 million,
deposits of $259.2 million and shareholders' equity of $34.0 million.
Based on the most recent information published by the Vermont Banking
Commissioner, in terms of total assets at December 31, 1999, Union Bank
ranked as the 11th largest institution of the 26 commercial banks and
savings institutions headquartered in Vermont, and Citizens ranked as the
20th.
Union's total assets increased by $11.7 million or 4.0% to $307.2 million
at September 30, 2000 from $295.5 million at December 31, 1999. Total net
loans and loans held for sale increased by $15.6 million or 7.6% to $222.1
million or 72.3% of total assets at September 30, 2000 as compared to
$206.5 million or 69.9% of total assets at December 31, 1999. Cash and
cash equivalents, including Federal funds sold, increased approximately $.5
million or 3.3% to $15.6 million at September 30, 2000 from $15.1 million
at December 31, 1999.
Securities available for sale decreased from $60.4 million at December 31,
1999 to $55.7 million at September 30, 2000, a $4.7 million or 7.8%
decrease. Securities maturing have not been replaced dollar for dollar and
some securities have been sold in order to fund the increasing loan demand
and our decision to hold in portfolio loans available for sale.
Deposits increased $1.6 million or .62% to $259.2 million at September 30,
2000 from $257.6 million at December 31, 1999. Total borrowings increased
$7.6 million to $10.5 million at September 30, 2000 from $2.9 million at
December 31, 1999. The increase was in 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, 2000, Union's loan portfolio totaled $225.3 million, or
73.3%, of assets, of which $108.7 million, or 48.3% of gross loans,
consisted of residential mortgages and construction loans, and $67.1
million, or 29.8%, of total loans consisted of commercial real estate
loans. As of such date, Union's loan portfolio also included $19.9 million
of commercial loans, $14.1 million of municipal loans, and $15.5 million of
consumer loans representing, in order, 8.8%, 6.3% and 6.9% of total loans
outstanding on September 30, 2000.
The following table shows information on the composition of Union's loan
portfolio as of September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
Loan Type 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Real Estate $ 99,742 $ 87,154
Commercial real estate 67,126 69,807
Commercial 19,870 16,246
Consumer 15,507 18,661
Municipal loans 14,079 9,657
Loans held for sale 8,936 8,102
--------------------------
Total loans 225,260 209,627
Deduct:
Allowance for loan losses 2,868 2,870
Net deferred loan fees, premiums
& discounts 272 273
--------------------------
3,140 3,143
$222,120 $206,484
==========================
</TABLE>
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 $152.1 million residential mortgage portfolio,
approximately $48.4 million of which is serviced for unaffiliated third
parties at September 30, 2000. 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. As of September 30, 2000,
Union serviced $9.4 million of commercial and commercial real estate loans
for unaffiliated third parties.
An increase of $12.6 million or 14.4% in residential real estate loans and
an increase of $3.6 million or 22.3% in commercial loans was partially
offset by a $2.7 million or 3.8% decrease in commercial real estate loans
and a $3.1 million or 16.9% decrease in consumer loans. There were also
increases in municipal loans outstanding of $4.4 million or 45.8% and in
loans held for sale of $834 thousand or 10.3%.
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 $1.5 million at September 30,
2000, $951,000 at December 31, 1999 and $912,000 at September 30, 1999.
The increase in non-accrual loans between year-end and September 30, 2000
is mainly due to three commercial loan customers whose properties are in the
process of foreclosure by Union.. Interest income not recognized on such
loans amounted to approximately $228 thousand and $183 thousand as of
September 30, 2000 and 1999, respectively and $183 thousand as of December
31, 1999.
Union had $3.14 million and $3.17 million in loans past due 90 days or more
and still accruing at September 30, 2000 and December 31, 1999,
respectively. At September 30, 2000, Union had internally classified
certain loans totaling $1.2 million. In management's view, such loans
represent a higher degree of risk and could become nonperforming loans in
the future. While still on a performing status, in accordance with Union's
credit policy, loans are internally classified when a review indicates any
of the following conditions making the likelihood of collection highly
questionable:
* the financial condition of the borrower is unsatisfactory;
* repayment terms have not been met;
* the borrower has sustained losses that are sizable, either in
absolute terms or relative to net worth;
* confidence is diminished;
* loan covenants have been violated;
* collateral is inadequate; or
* other unfavorable factors are present.
At September 30, 2000, Union had acquired by foreclosure or through
repossession real estate worth $137,000, consisting of commercial property,
undeveloped land and two residential homes.
Allowance for Loan Losses. Some of Union's loan customers ultimately do
not make all of their contractually scheduled payments, requiring Union to
charge off the remaining principal balance due. Union maintains an
allowance for loan losses to absorb such losses. The allowance for loan
losses is maintained at a level which, in management's judgment, is
adequate to absorb credit losses inherent in the loan portfolio. The
amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs,
net of recoveries. While Union allocates the allowance for loan losses
based on the percentage category to total loans, the portion of the
allowance for loan losses allocated to each category does not represent the
total available for future losses which may occur within the loan category
since the total allowance for possible loan losses is a valuation reserve
applicable to the entire portfolio.
The following table reflects activity in the allowance for loan losses for
the quarter and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended, September 30, 9 Months Ended, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at the beginning of period $2,934 $2,890 $2,870 $2,845
Charge-offs:
Real Estate 0 8 0 24
Commercial 110 0 126 30
Consumer and other 39 56 163 193
--------------------------------------------------
Total charge-offs 149 64 289 247
--------------------------------------------------
Recoveries:
Real Estate 0 1 1 2
Commercial 3 4 32 9
Consumer and other 17 18 66 52
--------------------------------------------------
Total recoveries 20 23 99 63
--------------------------------------------------
Net charge-offs (129) (41) (190) (184)
Provision for loan losses 63 62 188 250
--------------------------------------------------
Balance at end of period $2,868 $2,911 $2,868 $2,911
==================================================
</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,
2000 1999
------------------- --------------------
(dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate
Residential $ 597 40.1% $ 557 42.3%
Commercial 1,104 31.7% 1,014 30.6%
Construction 95 4.2% 77 3.7%
Other Loans
Commercial 518 9.2% 416 8.1%
Consumer installment 357 6.7% 448 8.6%
Home equity loans 30 1.7% 28 1.8%
Municipal, Other and Unallocated 167 6.4% 330 4.9%
-------------------------------------------
Total $2,868 100.0% $2,870 100.0%
===========================================
Ratio of Net Charge Offs to
Average Loans (1) 0.07% 0.16%
----- -----
Ratio of Allowance for Loan
Losses to Average Loans 1.35% 1.42%
----- -----
<FN>
(1) Annualized
</FN>
</TABLE>
Investment Activities At September 30, 2000, the reported value of
investment securities available-for-sale was $55.7 million or 18.1% 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, 2000, reflects a negative valuation adjustment of $1 million.
The offset of this adjustment, net of income tax effect, was a $662
thousand decrease in Union's other comprehensive income component of
shareholders' equity and an increase in net deferred tax assets of
$341,000.
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, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
Nine Months Ended, September 30 Year Ended December 31,
2000 1999
------------------------------- -------------------------------
(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 $ 32,688 12.80% $ 32,505 12.83%
Now accounts 32,779 12.84% 1.96% 34,654 13.67% 1.95%
Money Markets 53,788 21.07% 4.41% 49,296 19.45% 4.14%
Savings 36,428 14.27% 2.71% 38,064 15.02% 2.71%
------------------- -------------------
Total non-certificate deposits: 155,683 60.98% 154,519 60.97%
------------------- -------------------
Certificates of deposit:
Less than $100,000 76,783 30.07% 5.17% 78,030 30.79% 5.05%
$100,000 and over 22,845 8.95% 5.80% 20,870 8.24% 5.48%
------------------- -------------------
Total certificates of deposit 99,628 39.02% 98,900 39.03%
------------------- -------------------
Total deposits $255,311 100.00% 3.64% $253,419 100.00% 3.49%
===================================================================
</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,
2000 and December 31, 1999 that mature during the periods indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(dollars in thousands)
<S> <C> <C>
Within 3 months $ 6,138 $ 2,301
3 to 6 months 4,651 11,872
6 to 12 months 8,048 3,751
Over 12 months 4,771 3,491
------------------------------
$23,608 $21,415
==============================
</TABLE>
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $10.5
million at September 30, 2000 at a weighted average rate of 6.75%.
Borrowings from the Federal Home Loan Bank of Boston were $2.9 million at
December 31, 1999 at a weighted average rate of 5.94%. The change between
year end 1999 and the end of the third quarter of 2000 is a net increase of
$7.6 million in borrowing to fund loan demand.
Other Financial Considerations
Market Risk and Asset and Liability Management. Market risk is the risk of
loss in a financial instrument arising from adverse changes in market
prices and rates, foreign currency exchange rates, commodity prices and
equity prices. Union's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure.
Union does not have any market risk sensitive instruments acquired for
trading purposes. Union attempts to structure its balance sheet to
maximize net interest income while controlling its exposure to interest
rate risk. Union's Asset/Liability Committee formulates strategies to
manage interest rate risk by evaluating the impact on earnings and capital
of such factors as current interest rate forecasts and economic indicators,
potential changes in such forecasts and indicators, liquidity, and various
business strategies. Union's Asset/Liability Committee's methods for
evaluating interest rate risk include an analysis of Union's interest-rate
sensitivity "gap", which provides a static analysis of the maturity and
repricing characteristics of Union's entire balance sheet, and a simulation
analysis, which calculates projected net interest income based on
alternative balance sheet and interest rate scenarios, including "rate
shock" scenarios involving immediate substantial increases or decreases in
market rates of interest.
Union's Asset/Liability Committee meets at least weekly to set loan and
deposit rates, make investment decisions, monitor liquidity and evaluate
the loan demand pipeline. Deposit runoff is monitored daily and loan
prepayments evaluated monthly. Union historically has maintained a
substantial portion of its loan portfolio on a variable rate basis and
plans to continue this ALM strategy in the future. The investment
portfolio is classified as available for sale and the modified duration is
relatively short. Union does not utilize any derivative products or invest
in any "high risk" instruments.
Our interest rate sensitivity analysis (simulation) as of December 1999 for
a flat rate environment projected a Net Interest Income of $10.4 million for
the first nine months of 2000 compared to actual results of $10.6 million
in a rising rate environment, or a 2.3% difference. Union anticipated an
increase in our net interest margin in the rising rate environment but it
was somewhat mitigated by the placement of three commercial loan customers
into non-accrual during the second quarter of 2000. Net income was projected
to be $2.9 million compared to actual results of $3.5 million. The $644
thousand increase in Net Income from projections is mainly due to the increase
in Net Interest Income, the unanticipated $123,000 in tax credits for
rehabilitation snd low income housing taken to date in 2000, the gain on
securities sold, the reduction in equipment expense from what had been
anticipated and higher investments in tax free municipal lending. Return on
Assets was projected to be 1.65% and actual results were 1.57%. Rrturn on
Equity was projected to be 14.54% compared to actual of 14.43%. The results
of these ratios is based on higher net income as explained above offset by
higher average assets and stockholders' equity than had been anticipated.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of September 30, 2000, the
contract or notional amount of financial instruments whose contract amount
represents credit risk were as follows:
<TABLE>
<S> <C>
Commitments to extend credit $15,096,000
Standby letters of credit and commercial letters of credit $ 689,000
Credit Card arrangements $ 2,092,000
Home Equity Lines of Credit $ 3,728,000
</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, 2000:
<TABLE>
<CAPTION>
September 30, 2000
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 $ 5,355 $ -0- $ -0- $ -0- $ -0- $ 5,355
Interest bearing deposits 396 685 771 191 -0- 2,043
Investments available for sale (1) -0- 5,770 17,333 13,761 17,845 54,709
FHLB Stock -0- -0- -0- -0- 1,016 1,016
Loans (fixed and adjustable rate) 57,888 42,657 17,093 26,018 81,604 225,260
------------------------------------------------------------------------------
Total interest sensitive assets $ 63,639 $ 49,112 $ 35,197 $ 39,970 $100,465 $288,383
==============================================================================
Interest sensitive liabilities:
Certificates of deposit $ 27,434 $ 51,713 $ 18,893 $ 863 $ -0- $ 98,903
Money markets 25,705 -0- -0- -0- 29,218 54,923
Regular savings 3,859 -0- -0- -0- 32,996 36,855
Now accounts 17,715 -0- -0- -0- 16,562 34,277
Borrowed funds 4,074 2,225 3,116 639 410 10,464
------------------------------------------------------------------------------
Total interest sensitive liabilities $ 78,787 $ 53,938 $ 22,009 $ 1,502 $ 79,186 $235,422
==============================================================================
Net interest rate sensitivity gap (15,148) (4,826) 13,188 38,468 21,279 52,961
Cumulative net interest rate
Sensitivity gap (15,148) (19,974) (6,786) 31,682 52,961
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (4.93)% (6.50)% (2.21)% 10.31% 17.24%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets (5.25)% (6.93)% (2.35)% 10.99% 18.36%
Cumulative net interest earning
assets as a percentage of
cumulative interest-bearing liabilities (6.43)% (8.48)% (2.88)% 13.46% 22.50%
<FN>
(1) Investments available for sale exclude marketable equity securities
with a fair value of $998,000 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
9.5%, this is the highest internal slope monitored and shows the best and
worse scenarios analyzed. This slope range was determined to be the most
relevant during this economic cycle.
UNION BANKSHARES, INC.
INTEREST RATE SENSITIVITY ANALYSIS MATRIX
SEPTEMBER 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Return on Return 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-00 11.00 14,126 0.68 4,955 1.66 14.59 17,101 (32.03)
9.50 14,030 0.00 4,893 1.63 14.42 25,162 00.00
8.00 13,935 (0.68) 4,830 1.61 14.24 34,101 35.53
December-01 11.00 14,829 2.68 5,559 1.80 15.06 22,226 (23.91)
9.50 14,442 0.00 5,299 1.72 14.43 29,211 00.00
8.00 14,059 (2.65) 5,041 1.63 13.80 36,971 26.57
December-02 11.00 15,183 3.73 5,821 1.82 14.51 26,607 (19.45)
9.50 14,637 0.00 5,449 1.71 13.76 33,034 00.00
8.00 14,102 (3.66) 5,084 1.60 13.10 40,178 21.63
</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 members of the FHLB, Union's subsidiaries have
access to preapproved lines of credit up to 2.15% of total assets or $6.6
million.
In addition, both subsidiaries 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 Board of Directors. Union's
Asset/Liability Committee sets liquidity targets based on Union's financial
condition and existing and projected economic and market conditions. The
committee measures Union's marketable assets and credit available to fund
liquidity requirements and compares the adequacy of that aggregate amount
against the aggregate amount of Union's sensitive or volatile liabilities,
such as core deposits and time deposits in excess of $100,000, term
deposits with short maturities, and credit commitments outstanding. The
committee's primary objective is to manage Union's liquidity position and
funding sources in order to ensure that it has the ability to meet its
ongoing commitment to its depositors, to fund loan commitments, and to
maintain a portfolio of investment securities. Since many of the loan
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Union's management monitors current and projected cash flows and adjusts
positions as necessary to maintain adequate levels of liquidity. Although
approximately 78.3% 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.: 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, 2000
that the Banks meet all capital adequacy requirements to which they are
subject.
As of September 30, 2000, the most recent notification from the FDIC
categorized the Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. There are no conditions
or events since the notification that management believes have changed
either Bank's category.
The Banks' actual capital amounts (000's omitted) and ratios are presented
in the table:
<TABLE>
<CAPTION>
Minimums
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Requirements Action Provisions
------------------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total capital to risk weighted assets
Union Bank $25,204 18.47% $10,917 8.0% $13,646 10.0%
Citizens 11,972 17.67% 5,420 8.0% 6,775 10.0%
Tier I capital to risk weighted assets
Union Bank $23,331 17.10% $ 5,458 4.0% $ 8,186 6.0%
Citizens 11,122 16.41% 2,711 4.0% 4,067 6.0%
Tier I capital to average assets
Union Bank $23,331 11.41% $ 8,179 4.0% $10,224 5.0%
Citizens 11,122 11.07% 4,019 4.0% 5,023 5.0%
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.
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS IN FORM 10-Q
A. Exhibits.
27 - Financial Data Schedule
B. Current Reports on Form 8-K
Report to Shareholders on Third Quarter Results filed on
October 16, 2000
Press Release announcing declaration of a third quarter dividend
filed on October 6, 2000
Press Release announcing an increase in third quarter earnings and a
dividend filed on October 6, 2000
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, 2000 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>
