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: June 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 June 30, 2000:
Common Stock, $2 par value 3,029,529 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 26
Union Bankshares, Inc. and Subsidiaries
Statement of Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
(Dollars in Thousands) 2000 1999
----------------------
<S> <C> <C>
Assets
Cash and due from banks $ 11,612 $ 11,627
Federal funds sold and overnight deposits 5,183 3,474
----------------------
Total cash and cash equivalents 16,795 15,101
Interest bearing deposits 1,953 1,957
Securities available-for-sale 55,393 60,441
Federal Home Loan Bank stock 1,017 939
Loans held for sale 7,534 8,102
Loans 204,803 201,525
Unearned loan fees (267) (273)
Allowance for loan losses (2,934) (2,870)
----------------------
Loans, net 201,602 198,382
----------------------
Accrued interest receivable 2,222 2,199
Bank premises and equipment, net 3,960 4,040
Other real estate owned, net 99 27
Other assets 4,237 4,288
----------------------
Total assets $294,812 $295,476
======================
Liabilities and Stockholders' equity:
Liabilities:
Deposits:
Non-interest bearing $ 32,990 $ 32,989
Interest bearing 215,542 224,604
----------------------
Total deposits 248,532 257,593
Borrowed funds 10,046 2,872
Accrued interest and other liabilities 3,105 2,791
----------------------
Total liabilities 261,683 263,256
======================
Stockholders' equity:
Common stock, $2 par value; 5,000,000
shares authorized; 3,263,489 shares
issued at 6/30/00 and 12/31/99. 6,527 6,527
Paid-in capital and surplus 238 238
Retained earnings 28,972 28,180
Treasury stock at cost (233,960
shares at 6/30/00 and 12/31/99) (1,592) (1,592)
Accumulated other comprehensive income (1,016) (1,133)
----------------------
Total stockholders' equity 33,129 32,220
----------------------
Total liabilities and
stockholders' equity $294,812 $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 Six Months Ended
------------------------------------------------------
June 30 June 30
(Dollars in Thousands) 2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,908 $ 4,583 $ 9,649 $ 9,103
Interest and dividends on investment
securities 900 920 1,824 1,822
Interest on federal funds sold 73 81 122 156
Interest on interest bearing deposits 31 33 60 61
------------------------------------------------------
5,912 5,617 11,655 11,142
Interest expense:
Interest on deposits 2,319 2,177 4,546 4,335
Interest on federal funds purchased 3 1 4 1
Interest on borrowed funds 57 71 95 161
------------------------------------------------------
2,379 2,249 4,645 4,497
------------------------------------------------------
Net interest income 3,533 3,368 7,010 6,645
Provision for loan losses 63 88 125 188
------------------------------------------------------
Net interest income after provision for
loan losses 3,470 3,280 6,885 6,457
Noninterest income:
Trust department income 34 31 76 68
Service fees 601 607 1,155 1,170
Security gains (losses) (3) 3 34 3
Gain on sale of loans 0 29 9 45
Other 3 8 9 15
------------------------------------------------------
635 678 1,283 1,301
Noninterest expense:
Salaries and wages 1,212 1,054 2,311 2,088
Pension and other employee benefits 279 237 577 498
Occupancy expense, net 135 133 292 277
Equipment expense 230 264 530 539
Other operating expense 763 738 1,435 1,450
------------------------------------------------------
2,619 2,426 5,145 4,852
------------------------------------------------------
Income before income tax expense 1,486 1,532 3,023 2,906
Income tax expense 318 490 777 890
------------------------------------------------------
Net income $ 1,168 $ 1,042 $ 2,246 $ 2,016
======================================================
Earnings per common share $ .38 $ .34 $ .74 $ .66
======================================================
Weighted average number of common
shares outstanding 3,029,529 3,029,438 3,029,529 3,027,471
======================================================
Dividends declared per share $ 0.24 $ 0.22 $ 0.48 $ 0.44
======================================================
</TABLE>
See accompanying notes to unaudited financial statements
Union Bankshares, Inc. and Subsidiaries
Consolidated Statements 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 2,246 2,246
Net unrealized holding loss on securities
available-for-sale, net of tax 117 117
-------
Comprehensive income 2,363
-------
Cash dividends declared (1,454) (1,454)
Treasury stock purchased 0
Exercise of stock option 0
-------
Balance, June 30, 2000 $6,527 $238 $28,972 $(1,592) $(1,016) $33,129
===========================================================================
</TABLE>
Union Bankshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Year To Date
------------------------
June 30 June 30
(Dollars in Thousands) 2000 1999
------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 2,246 $ 2,016
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation 428 426
Provision for loan losses 125 188
Credit for deferred income taxes (42) (18)
Amortization, net Securities 30 2
Amortization, net Limited Partnerships 17 0
Write-downs of Other Real Estate Owned 8 4
Increase (decrease) in unamortized
loan fees (6) 25
(Increase) decrease in loans held
for sale 586 (4,108)
(Increase) decrease in accrued interest 242 56
receivable (23) 111
Decrease in other assets
Increase (decrease) in income taxes
payable (111) 133
Decrease in accrued interest payable (80) (196)
Increase in other liabilities 394 130
Gain sold on securities sold (34) (3)
Gain on sale of loans (9) (45)
(Gain) loss on sale of OREO (2) 10
-----------------------
Net cash (used) provided by operating
activities 3,751 (1,269)
Cash Flows From Investing Activities
Interest bearing deposits
Maturities and redemptions 694 689
Purchases (690) (1,169)
Securities available for sale
Maturities and redemptions 7,381 13,728
Purchases (3,170) (13,728)
Purchase of Federal Home Loan Bank Stock (78) (35)
(Increase) decrease in loans, net (2,541) 6,065
Recoveries of loans charged off 79 40
Purchases of premises and equipment, net (348) (124)
Proceeds from sale of OREO 0 130
Investment in Ltd Partnerships (54) (373)
Proceeds from sale of repossessed property 11 56
-----------------------
Net cash provided by investing activities 1,284 5,843
Cash Flows From Financing Activities
Borrowings, net of repayments 7,174 275
Proceeds from exercise of stock options 0 37
Net increase (decrease) in demand, NOW,
savings, and money market accounts (9,555) 2,736
Net increase (decrease) in time deposits 494 (4,576)
Dividends paid (1,454) (1,238)
-----------------------
Net cash provided by financing activities (3,341) (2,766)
Increase in cash and cash equivalents 1,694 1,808
Cash and cash equivalents
Beginning 15,101 19,196
Ending 16,795 21,004
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 4,725 $ 4,683
-----------------------
Income Taxes Paid $ 930 $ 745
-----------------------
</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 June 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 June 30, follows:
<TABLE>
<CAPTION>
Intersegment Consolidated
2000 Union Citizens Elimination Other Totals
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 7,814 $ 3,841 $ 0 $ 0 $ 11,655
Interest expense 2,967 1,677 0 1 4,645
Provision for loan loss 0 125 0 0 125
Service fee income 906 249 0 0 1,155
Income tax expense (benefit) 622 199 0 (44) 777
Net income (loss) 1,943 392 0 (89) 2,246
Assets 194,963 99,432 (47) 464 294,812
<CAPTION>
Intersegment Consolidated
1999 Union Citizens Elimination Other Totals
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 7,303 $ 3,839 $ 0 $ 0 $ 11,142
Interest expense 2,822 1,674 0 1 4,497
Provision for loan loss 63 125 0 0 188
Service fee income 867 303 0 0 1,170
Income tax expense (benefit) 293 602 0 (5) 890
Net income (loss) 1,664 487 0 (135) 2,016
Assets 184,126 103,992 0 365 288,483
</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 June 30, 2000 and as
of December 31, 1999, and its results of operations for the three and six
months ended June 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 June 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.
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 and
systems integration of Citizens
* 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 June 30, 2000 was $1.2
million, compared with net income of $1 million for the second quarter of
1999. Net income per share was $.38 for the second quarter of 2000 compared
to $.34 for the same quarter of 1999. Net income for the first six months of
2000 was $2.2 million, compared with $2 million for the same period in 1999.
Net income per share was $.74 for the first six months of 2000 compared to
$.66 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 June 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 $ 4,800 $ 73 6.08% $ 6,962 $ 81 4.65%
Interest bearing deposits 2,009 31 6.17% 2,386 33 5.53%
Investments (1) (2) 58,650 900 6.31% 62,278 920 6.08%
Loans, net (1), (3) 211,922 4,908 9.36% 198,246 4,583 9.33%
------------------------------------------------------------
Total interest-earning assets (1) 277,381 5,912 8.63% 269,872 5,617 8.43%
Cash and due from banks 8,582 8,391
Premises and equipment 4,064 4,387
Other assets 6,294 6,026
-------- --------
Total assets $296,321 $288,676
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 33,361 $ 164 1.97% $ 33,523 $ 162 1.93%
Savings and money market accounts 89,383 833 3.73% 84,514 735 3.48%
Certificates of deposit 100,639 1,322 5.25% 99,951 1,280 5.12%
Borrowed funds 3,742 60 6.41% 4,831 72 5.96%
------------------------------------------------------------
Total interest-bearing
Liabilities 227,125 2,379 4.19% 222,819 2,249 4.04%
Non-interest bearing deposits 31,434 30,416
Other liabilities 5,241 3,422
-------- --------
Total liabilities 263,800 256,657
Shareholders' equity 32,521 32,019
-------- --------
Total liabilities and
shareholders' equity $296,321 $288,676
======== ========
Net interest income (1) $ 3,533 $ 3,368
======= =======
Net interest spread (1) 4.44% 4.39%
Net interest margin (1) 5.20% 5.09%
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 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 $ 4,218 $ 122 5.78% $ 6,776 $ 156 4.61%
Interest bearing deposits 2,024 60 5.93% 2,242 61 5.44%
Investments (1) (2) 59,667 1,824 6.29% 60,844 1,822 6.15%
Loans, net (1), (3) 209,456 9,649 9.30% 198,671 9,103 9.25%
------------------------------------------------------------
Total interest-earning assets (1) 275,365 11,655 8.57% 268,533 11,142 8.40%
Cash and due from banks 8,646 8,921
Premises and equipment 4,048 4,457
Other assets 6,361 6,118
-------- --------
Total assets $294,420 $288,029
======== ========
Average Liabilities and
Shareholders' Equity:
NOW accounts $ 32,684 $ 317 1.94% $ 32,980 $ 314 1.91%
Savings and money market accounts 90,125 1,658 3.68% 83,928 1,451 3.46%
Certificates of deposit 99,282 2,571 5.18% 99,430 2,570 5.17%
Borrowed funds 3,093 99 6.40% 5,470 162 5.92%
------------------------------------------------------------
Total interest-bearing
Liabilities 225,184 4,645 4.13% 221,718 4,497 4.06%
Non-interest bearing deposits 31,842 30,940
Other liabilities 5,136 3,461
-------- --------
Total liabilities 262,162 256,119
Shareholders' equity 32,258 31,910
-------- --------
Total liabilities and
shareholders' equity $294,420 $288,029
======== ========
Net interest income (1) $ 7,010 $ 6,645
======= =======
Net interest spread (1) 4.44% 4.34%
Net interest margin (1) 5.20% 5.05%
--------------------
<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 $165 thousand, or 4.9%, to $3.5
million for the three months ended June 30, 2000, from $3.4 million for the
three months ended June 30, 1999. This increase was due to a more gradual
increase in the cost of interest-bearing liabilities compared to the yield
earned on interest-bearing assets which was fueled by the six 25 basis point
increases in the prime rate since June 30, 1999 which has taken it from
7.75% to 9.50%. The net interest spread increased by 5 basis points to 4.44%
for the three months ended June 30, 2000, from 4.39% for the three months
ended June 30, 1999. The net interest margin for the 2000 period increased
by 11 basis points to 5.2% from 5.09% for the 1999 period. This improvement
is mainly due to retaining loans held for sale in our portfolio and the
increase in interest rates in general between the two periods which is in
our favor.
Union's net interest income year to date was $7 million compared to the
prior year of $6.6 million or an increase of 5.5% between the two years. The
net interest spread increased by 10 basis points to 4.44% for the six months
ended June 30, 2000 from 4.34% for the six months ended June 30, 1999. The
net interest margin for the 2000 period increased to 5.20% from 5.05% for
the 1999 period or an increase of 15 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 June 30, 2000 Compared
to Three Months Ended June 30, 1999
Increase/(Decrease) Due to Change In
Volume Rate Net
-----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $(25) $ 17 $ (8)
Interest bearing deposits (5) 3 (2)
Investments (54) 34 (20)
Loans, net 318 7 325
---------------------------------
Total interest-earning assets 234 61 295
Interest-bearing liabilities:
NOW accounts (1) 3 2
Savings and money market accounts 42 56 98
Certificates of deposit 9 33 42
Borrowed funds (16) 4 (12)
---------------------------------
Total interest-bearing liabilities 34 96 130
---------------------------------
Net change in net interest income $200 $ 35 $165
=================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Compared
to Six Months Ended June 30, 1999
Increase/(Decrease) Due to Change In
Volume Rate Net
-----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $(59) $25 $(34)
Interest bearing deposits (6) 5 (1)
Investments (38) 40 2
Loans, net 496 50 546
---------------------------------
Total interest-earning assets 393 120 513
Interest-bearing liabilities:
NOW accounts (2) 5 3
Savings and money market accounts 107 100 207
Certificates of deposit (4) 5 1
Borrowed funds (70) 7 (63)
---------------------------------
Total interest-bearing liabilities 31 117 148
---------------------------------
Net change in net interest income $362 $ 3 $365
=================================
</TABLE>
Quarter Ended June 30, 2000 compared to Quarter Ended June 30, 1999.
Interest and Dividend Income. Union's interest and dividend income
increased by $295,000, or 5.25%, to $5.9 million for the three months ended
June 30, 2000, from $5.6 million for the three months ended June 30, 1999.
Average earning assets increased by $7.5 million, or 2.8%, to $277.4 million
for the three months ended June 30, 2000, from $269.9 million for the three
months ended June 30, 1999. Average loans approximated $211.9 million for
the three months ended June 30, 2000 up from $198.2 million for the three
months ended June 30, 1999. Increases in construction loans of $.8 million
or 15.1%, the $6.2 million or 7.8% increase in residential real estate
secured loans, the $10.3 million or 12.0% increase in commercial loans, and
the $1.1 million or 11.5% increase in loans to municipalities was partially
offset by the $4.7 million or 22.4% 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
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 $3.6 million, or 5.8%, to $58.6 million for the
three months ended June 30, 2000, from $62.3 million for the three months
ended June 30, 1999. The average balance in Interest Bearing Deposits
decreased by $377,000 to $2.0 million from $2.4 million or 15.8%. The
average level of federal funds sold decreased by $2.2 million or 31.1%, to
$4.8 million for the three months ended June 30, 2000, from $7.0 million for
the three months ended June 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, the paydown of debt and the continuing growth in our loan
portfolio. Interest Income on non-loans was $1 million for both years
reflecting the increase in yields offset by the decrease in volume.
Interest Expense. Union's interest expense increased by $130 thousand, or
5.8%, to $2.4 million for the three months ended June 30, 2000 from $2.2
million for the three months ended June 30, 1999. Average interest-bearing
liabilities increased by $4.3 million, or 1.9% to $227.1 million for the
three months ended June 30, 2000, from $222.8 million for the three months
ended June 30, 1999. Average time deposits increased $.7 million, or .7%, to
$100.6 million for the three months ended June 30, 2000, from $99.9 million
for the three months ended June 30, 1999, while the average balances for
money market and saving accounts increased by $4.9 million to $89.4 million
for the three months ended June 30, 2000, from $84.5 million for the three
months ended June 30, 1999. The 5.8% 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 6 months as they anticipate the interest rates
paid on all deposit instruments will continue to rise.
The average balance on funds borrowed has dropped from $4.8 million on
average in 1999 to $3.7 million in 2000 as Union paid off some long term
Federal Home Loan Bank borrowings during the second quarter of 1999.
Noninterest Income. Union's noninterest income decreased $43,000, or 6.3%,
to $635 thousand for the three months ended June 30, 2000, from $678
thousand for the three months ended June 30, 1999. The results for the
period reflected a net loss of $3 thousand from the sale of securities
compared to a net gain of $3 thousand from sales during 1999. Trust
department income rose to $34 thousand in the second quarter of 2000 from
$31 thousand in the same period of 1999 or a 9.7% increase. There was no
gain on Sale of Loans for 2000 and $29 thousand 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 $11 thousand, or 1.8%, to $604 thousand for the
three months ended June 30, 2000, from $615 thousand for the three months
ended June 30, 1999. This was primarily caused by a drop in Overdraft Fee
and Deposit Service Charge income due to the continuing strong economy
offset by the increase in ATM income.
Noninterest Expense. Union's noninterest expense increased $193 thousand,
or 8.0%, to $2.6 million for the three months ended June 30, 2000, from $2.4
million for the three months ended June 30, 1999. Salaries increased
$158,000, or 15.0%, to $1.2 million for the three months ended June 30,
2000, from $1.0 million for the three months ended June 30, 1999, reflecting
normal salary activity 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 $42
thousand or 17.7% to $279 thousand for the three months ended June 30, 2000,
from $237 thousand for the three months ended June 30, 1999 mainly due to a
$10,000 increase in payroll taxes and a $30,000 increase in retirement plans
expense. Equipment expense decreased $34 thousand to $230 thousand for the
three months ended June 30, 2000, from $286 thousand for the same period in
1999 resulting from decreased depreciation cost of $23.7 thousand on
computer equipment and software which are depreciated as an expense over a
time period of three to five years and a $13,600 decrease in equipment
repair expense. Other operating expense for the quarter was $763 thousand up
from $738 thousand for the same quarter in 1999. The increase of $25
thousand, or 3.4%, is mainly due to the American Stock Exchange listing fee
of $22,500 booked in June of 2000, which is not immediately deductible for
income taxes.
During the quarter ended June 30, 2000, Union incurred no expenses related
to the merger, including legal and advisory fees compared to approximately
$71.2 thousand during the second quarter of 1999.
Income Tax Expense. Union's income tax expense decreased by $172,000, or
35.1%, to $318,000 for the three months ended June 30, 2000, from $490
thousand for the comparable period of 1999 because of our reduced income,
$114,000 historic rehabilitation credit available to us for the second
quarter of the 2000 tax year due to our partnership investment in a low
income housing project sponsored by Housing Vermont in our market area, and
the reduction in non-deductible acquisition expenses related to the merger.
Year to Date June 30, 2000 compared to Year to Date June 30, 1999.
Interest and Dividend Income. Union's interest and dividend income increased
by $513,000, or 4.6%, to $11.6 million for the six months ended June 30,
2000, from $11.1 million for the six months ended June 30, 1999. Average
earning assets increased by $6.8 million, or 2.5%, to $275.4 million for the
six months ended June 30, 2000, from $268.5 million for the six months ended
June 30, 1999. Average loans approximated $209.4 million for the six months
ended June 30, 2000 up from $198.7 million for the six months ended June 30,
1999. Increases in construction loans of $.9 million or 16.8%, the $5.9
million or 7.4% increase in residential real estate secured loans, the $8.0
million or 9.4% increase in commercial loans, and the $825 thousand or 8.9%
increase in loans to municipalities was partially offset by the $4.8 million
or 22.2% 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 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 $1.2 million, or 1.9%, to $59.7 million for the six
months ended June 30, 2000, from $60.8 million for the six months ended June
30, 1999. The average level of federal funds sold decreased by $2.6 million
or 37.8%, to $4.2 million for the six months ended June 30, 2000, from $6.8
million for the six months ended June 30, 1999. The average balance in
Interest Bearing Deposits decreased by $218,000 to $2.0 million from $2.2
million or 9.7% 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, the paydown of
debt and the continuing growth in our loan portfolio. Interest Income on
non-loans was $2 million for both years reflecting the increase in yields
offset by the overall decrease in volume.
Interest Expense. Union's interest expense increased by $148 thousand, or
3.3%, to $4.6 million for the six months ended June 30, 2000 from $4.5
million for the six months ended June 30, 1999. Average interest-bearing
liabilities increased by $3.5 million, or 1.6%, to $225.2 million for the
six months ended June 30, 2000, from $221.7 million for the six months ended
June 30, 1999. Average time deposits decreased $148 thousand, or 1.5%, to
$99.3 million for the six months ended June 30, 2000, from $99.4 million for
the six months ended June 30, 1999, while the average balances for money
market and savings accounts increased by $6.2 million to $90.1 million for
the six months ended June 30, 2000, from $83.9 million for the six months
ended June 30, 1999. The 7.4% 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 6 months as they anticipate the interest rates paid on all
deposit instruments will continue to rise.
The average balance on funds borrowed has dropped from $5.5 million on
average in 1999 to $3.1 million in 2000 as Union paid off some long term
Federal Home Loan Bank borrowings during the second quarter of 1999.
Noninterest Income. Union's noninterest income decreased $18,000, or 1.4%,
to $1.3 million for the six months ended June 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
rose to $76,000 in the first half of 2000 from $68,000 in the same period of
1999 or a 11.8% increase. Gain on Sale of Loans dropped $36,000 to $9,000
for 2000 from $45,000 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
$15,000, or 1.3%, to $1.16 million for the six months ended June 30, 2000,
from $1.17 million for the six months ended June 30, 1999. This was
primarily caused by drops in Overdraft Fee and Service Charges on Deposit
income due to the continuing strong economy offset by increased ATM income.
Noninterest Expense. Union's noninterest expense increased $293,000, or
6.0%, to $5.1 million for the six months ended June 30, 2000, from $4.8
million for the six months ended June 30, 1999. Salaries increased $223,000,
or 10.7%, to $2.3 million for the six months ended June 30, 2000, from $2.1
million for the six months ended June 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
$79 thousand, or 15.9%, to $577 thousand for the six months ended June 30,
2000, from $498 thousand for the six months ended June 30, 1999 mainly due
to a $22,500 increase in health insurance costs, a $38,000 increase in
retirement plans expense, and a $13,000 increase in payroll taxes. Net
occupancy expense increased $15 thousand, or 5.4%, to $292,000 for the six
months ended June 30, 2000, from $277,000 for the six months ended June 30,
1999 due mainly to the increase in fuel costs and property tax expense.
Equipment expense decreased $9 thousand to $530 thousand for the six months
ended June 30, 2000, from $539 thousand for the same period in 1999
primarily resulting from decreased equipment repair expense.
Other operating expenses were $1.435 million for the first six months of
2000 compared to $1.450 million for the same period in 1999. Year 2000
expenses were $1.5 thousand during the first half of 2000 compared to $55
thousand in 1999.
During the period ended June 30, 2000, Union incurred approximately $1
thousand of expenses related to the merger, including legal and advisory
fees compared to $108.8 thousand during the same period of 1999. Union
incurred a one-time listing fee in June of 2000 of $22,500 from the American
Stock Exchange. Other large variance categories were Charitable
Contributions up $45,200 from $14,500 through June 30, 1999 to $59,700 in
2000. Printing costs were up $28,300 between years from $18,400 to $46,700
due to the expense of a professional annual report, proxy and Form 10-K.
State Franchise taxes were up $8,000 between years due to the increase in
our deposit base. FDIC assessment was up $12,200 due to increased deposit
base and the increased assessment rate. Advertising and public relations
expenses were up $13,200 as media exposure was expanded at Citizens.
Income Tax Expense. Union's income tax expense decreased by $113,000, or
12.7%, to $777,000 for the six months ended June 30, 2000, from $890,000 for
the comparable period of 1999 because of our $114,000 historic
rehabilitation credit that was available to us for the second quarter of the
2000 tax year due to our partnership investment in a low income housing
project sponsored by Housing Vermont in our market area.
FINANCIAL CONDITION
At June 30, 2000, Union had total consolidated assets of $294.8 million,
including net loans and loans held for sale of $209.1 million, deposits of
$248.5 million and shareholders' equity of $33.1 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 decreased by $.7 million or .2% to $294.8 million at
June 30, 2000 from $295.5 million at December 31, 1999. Historically, June
30th of each year is our low point in terms of total assets, net loans and
deposits. This is a one day aberration as the Towns, Villages and School
Districts that we lend to must be out of debt one day during the year. These
loans totaled $11.6 million on June 29, 2000, $5.8 million on June 30, 2000
and $12.7 million on July 3. In spite of this drop, total net loans and
loans held for sale increased by $2.6 million or 1.3% to $209.1 million or
70.9% of total assets at June 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 $1.7 million or 11.2%
to $16.8 million at June 30, 2000 from $15.1 million at December 31, 1999,
which was primarily attributable to the one day increase in liquidity caused
by the municipal variation discussed above.
Securities available for sale decreased from $60.4 million at December 31,
1999 to $55.4 million at June 30, 2000, a $5 million or 8.3% 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 decreased $9.1 million or 3.5% to $248.5 million at June 30, 2000
from $257.6 million at December 31, 1999. A $6.0 million drop in Now
accounts and a $3.8 million decrease in money market accounts, mainly
Municipal accounts, accounted for the decrease. Total borrowings increased
$7.2 million to $10.0 million at June 30, 2000 from $2.9 million at December
31, 1999. The increase was in short-term liquidity 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 June 30, 2000, Union's loan portfolio totaled $212.3 million, or 72.0%,
of assets, of which $103.7 million, or 48.8% of gross loans, consisted of
residential mortgages and construction loans, and $67.8 million, or 31.9%,
of total loans consisted of commercial real estate loans. As of such date,
Union's loan portfolio also included $18.8 million of commercial loans, $5.8
million of municipal loans, and $16.2 million of consumer loans
representing, in order, 8.9%, 2.8% and 7.6% of total loans outstanding on
June 30, 2000.
The following table shows information on the composition of Union's loan
portfolio as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
Loan Type 2000 1999
------------------------------------------------------
<S> <C> <C>
Real Estate $100,072 $ 87,154
Commercial real estate 64,251 69,807
Commercial 18,441 16,246
Consumer 16,209 18,661
Municipal loans 5,830 9,657
Loans held for sale 7,534 8,102
---------------------
Total loans 212,337 209,627
Deduct:
Allowance for loan losses 2,934 2,870
Net deferred loan fees,
premiums & discounts 267 273
---------------------
3,201 3,143
$209,136 $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 $151.1 million residential mortgage portfolio,
approximately $47.4 million of which is serviced for unaffiliated third
parties at June 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 June 30, 2000, Union serviced $11.2 million
of commercial and commercial real estate loans for unaffiliated third
parties.
An increase of $12.9 million or 14.8% in residential real estate loans and
an increase of $2.2 million or 13.5% in commercial loans was partially
offset by a $5.6 million or 8% decrease in commercial real estate loans, a
$2.4 million or 13.1% decrease in consumer loans, a drop in municipal loans
outstanding of $3.8 million or 39.6% and a drop in loans held for sale of
$568 thousand or 7.0%.
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 $1.6 million at June 30, 2000,
$951,000 at December 31, 1999 and $664,000 at June 30, 1999. The increase in
non-accrual loans between year-end and June 30, 2000 is mainly due to three
commercial loan customers whose properties are in the process of foreclosure
by Union. A portion of these loans are backed by SBA guarantees that have
not yet been exercised. Interest income not recognized on such loans
amounted to approximately $156 thousand and $70 thousand as of June 30, 2000
and 1999, respectively and $183 thousand as of December 31, 1999.
Union had $2.1 million and $3.17 million in loans past due 90 days or more
and still accruing at June 30, 2000 and December 31, 1999, respectively. At
June 30, 2000, Union had internally classified certain loans totaling $1.5
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 June 30, 2000, Union had acquired by foreclosure or through repossession
real estate worth $99,000, 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 six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended, June 30 Six Months Ended, June 30,
----------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at the beginning of period $2,899 $2,885 $2,870 $2,845
Charge-offs:
Real Estate 0 0 0 16
Commercial 2 27 16 30
Consumer and other 60 75 124 137
----------------------------------------------
Total charge-offs 62 102 140 183
----------------------------------------------
Recoveries:
Real Estate 1 0 1 1
Commercial 8 1 29 5
Consumer and other 25 18 49 34
----------------------------------------------
Total recoveries 34 19 79 40
----------------------------------------------
Net charge-offs (28) (83) (61) (143)
Provision for loan losses 63 88 125 188
----------------------------------------------
Balance at end of period $2,934 $2,890 $2,934 $2,890
==============================================
</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>
June 30, December 31,
-----------------------------------------------
2000 1999
-----------------------------------------------
(dollars in thousands)
Amount Percent Amount Percent
-----------------------------------------------
<S> <C> <C> <C> <C>
Real Estate
Residential $ 542 18.4% $ 557 42.3%
Commercial 1,070 36.4% 1,014 30.6%
Construction 99 3.4% 77 3.7%
Other Loans
Commercial 539 18.4% 416 8.1%
Consumer installment 375 12.8% 448 8.6%
Home equity loans 28 1.0% 28 1.8%
Municipal, Other and Unallocated 281 9.6% 330 4.9%
----------------------------------------------
Total $2,934 100.0% $2,870 100.0%
==============================================
Ratio of Net Charge Offs to
Average Loans (1) 0.06% 0.16%
------ ------
Ratio of Allowance for Loan
Losses to Loans 1.43% 1.42%
------ ------
--------------------
<FN>
<F1> Annualized
</FN>
</TABLE>
Investment Activities At June 30, 2000, the reported value of investment
securities available-for-sale was $55.4 million or 18.8% of its assets.
Union had no securities classified as held-to-maturity or trading
securities. The reported value of securities available-for-sale at June 30,
2000, reflects a negative valuation adjustment of $1.5 million. The offset
of this adjustment, net of income tax effect, was a $1 million decrease in
Union's other comprehensive income component of shareholders' equity and an
increase in net deferred tax assets of $523,000.
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 June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Six Months Ended, June 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 $ 31,842 12.54% $ 32,505 12.83%
Now accounts 32,684 12.87% 1.94% 34,654 13.67% 1.95%
Money Markets 53,954 21.25% 4.36% 49,296 19.45% 4.14%
Savings 36,171 14.24% 2.71% 38,064 15.02% 2.71%
------------------ ------------------
Total non-certificate deposits: 154,651 60.90% 154,519 60.97%
------------------ ------------------
Certificates of deposit:
Less than $100,000 76,612 30.17% 5.08% 78,030 30.79% 5.05%
$100,000 and over 22,670 8.93% 5.65% 20,870 8.24% 5.48%
------------------ ------------------
Total certificates of deposit 99,282 39.10% 98,900 39.03%
------------------ ------------------
Total deposits $253,933 100.00% 3.60% $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 June 30, 2000 and
December 31, 1999 that mature during the periods indicated:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------
(dollars in thousands)
<S> <C> <C>
Within 3 months $ 2,719 $ 2,301
3 to 6 months 6,101 11,872
6 to 12 months 5,427 3,751
Over 12 months 5,883 3,491
--------------------------
$20,130 $21,415
==========================
</TABLE>
Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $10
million at June 30, 2000 at a weighted average rate of 6.53%. 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 second quarter of 2000 is a net increase of $7.1 million
in short-term 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 $7.1 million for
the first six months of 2000 compared to actual results of $7.0 million in a
rising rate environment, or a 1.0% difference. Union would have anticipated
an increase in our net interest margin in the rising rate environment but it
was mitigated by the placement of three commercial loan customers into non-
accrual during the second quarter of 2000. Net income was projected to be
$2.3 million compared to actual results of $2.2 million. The $47 thousand
difference would have been greater without the unanticipated $114,000
historic rehabilitation tax credit taken in the second quarter of 2000. The
decrease was caused by the payout of $109,000 in severance pay, lower
overdraft and deposit service charge income than anticipated, lower than
expected net interest margin, charitable contributions being $40,000 higher
than planned, and the $22,500 listing fee for the American Stock Exchange.
Return on Assets was projected to be 1.59% and actual results were 1.53%.
Return on Equity was projected to be 14.11% compared to actual of 13.92%.
The lower results of these ratios is based on lower net income as explained
above.
The Company generally requires collateral or other security to support
financial instruments with credit risk. As of June 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 $23,496,000
-----------
Standby letters of credit and
commercial letters of credit $ 704,000
-----------
Credit Card arrangements $ 2,012,000
-----------
Home Equity Lines of Credit $ 3,742,000
-----------
</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 June 30,
2000:
<TABLE>
<CAPTION>
June 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 $ 5,091 $ -0- $ -0- $ -0- $ -0- $ 5,091
Interest bearing deposits 396 693 673 191 -0- 1,953
Investments available for sale (1) 673 4,399 15,430 11,635 22,328 54,465
FHLB Stock -0- -0- -0- -0- 1,019 1,019
Loans (fixed and adjustable rate) 58,698 34,760 30,352 32,642 55,885 212,337
------------------------------------------------------------------------
Total interest sensitive assets $ 64,858 $ 39,852 $ 46,455 $ 44,468 $ 79,232 $274,865
------------------------------------------------------------------------
Interest sensitive liabilities:
Certificates of deposit $ 22,271 $ 49,393 $ 23,920 $ 693 $ -0- $ 96,277
Money markets 40,287 -0- -0- -0- 10,676 50,963
Regular savings 16,290 -0- -0- -0- 20,466 36,756
Now accounts 19,246 -0- -0- -0- 12,300 31,546
Borrowed funds 6,077 2,232 618 618 501 10,046
------------------------------------------------------------------------
Total interest sensitive liabilities $104,171 $ 51,625 $ 24,538 $ 1,311 $ 43,943 $225,588
------------------------------------------------------------------------
Net interest rate sensitivity gap (39,313) (11,773) 21,917 43,157 35,289 49,277
Cumulative net interest rate
Sensitivity gap (39,313) (51,086) (29,169) 13,988 49,277
Cumulative net interest rate
sensitivity gap as a
percentage of total assets (13.33%) (17.33%) (9.89%) 4.74% 16.71%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets (14.30%) (18.59%) (10.61%) 5.09% 17.93%
Cumulative net interest earning
assets as a percentage of
cumulative interest-bearing
liabilities (17.43%) (22.65%) (12.93%) 6.20% 21.84%
--------------------
<FN>
<F1> Investments available for sale exclude marketable equity securities
with a fair value of $926,000 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
JUNE 30, 2000
(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-00 11.00 14,300 1.42 4,862 1.64 14.38 17,293 (31,69)
9.50 14,099 0.00 4,733 1.59 14.02 25,316 00.00
8.00 13,902 (1.40) 4,605 1.55 13.66 34,203 35.10
December-01 11.00 14,671 2.61 4,859 1.58 13,37 21,566 (27.00)
9.50 14,298 0.00 4,629 1,51 12.82 29,543 00.00
8.00 13,931 (2,57) 4,402 1.43 12.27 38,380 29.91
December-02 11.00 15,674 4.00 5,277 1.65 13.58 26,169 (23,01)
9.50 15,071 0.00 4,900 1.53 12.79 33,988 00.00
8.00 14,481 (3.92) 4,532 1.42 12.00 42,650 25.48
</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 2.24% 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 74.4% 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.: Union Bank and Citizens (the Banks) are
subject to various regulatory capital requirements administered by the
federal banking agencies. Management believes, as of June 30, 2000 that the
Banks meet all capital adequacy requirements to which they are subject.
As of June 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 June 30, 2000:
Total capital to risk weighted assets
Union Bank $24,587 19.10% $10,298 8.0% $12,873 10.0%
Citizens 11,951 17.28% 5,533 8.0% 6,916 10.0%
Tier I capital to risk weighted assets
Union Bank $22,842 17.74% $ 5,150 4.0% $ 7,726 6.0%
Citizens 11,084 16.03% 2,766 4.0% 4,149 6.0%
Tier I capital to average assets
Union Bank $22,842 11.76% $ 7,769 4.0% $ 9,712 5.0%
Citizens 11,084 11.25% 3,941 4.0% 4,926 5.0%
</TABLE>
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 Second Quarter Results filed on July 14,
2000
Press Release announcing AMEX listing filed on July 14, 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.
Union Bankshares, Inc.
Dated: August 14, 2000
/s/ Kenneth D. Gibbons
-------------------------------------
Kenneth D. Gibbons
Director and Chief Executive Officer
/s/ Marsha A. Mongeon
-------------------------------------
Marsha A. Mongeon
Chief Financial Officer and Treasurer
