UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to___________
Commission File Number 2-90679
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation of organization).
66 Main Street, Ellsworth, Maine
(Address of Principal Executive Offices)
(Zip Code)
04605
Registrant's telephone number, including area code
(207) 667-2504
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 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 XXX NO
Indicate the number of shares outstanding of each of the
issue's classes of common stock, as of the latest practicable
date.
Class Outstanding at June 30, 1996
(Common stock, $25.00 Par value) 201,911
1 of 18<PAGE>
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
Item 1: Financial Statements
Condensed consolidated balance sheets-
June 30, 1996, June 30, 1995,
December 31, 1995 3
Condensed consolidated statements of income-
six months ended June 30, 1996 and June 30,
1995, three months ended June 30, 1996
and June 30, 1995 4-5
Condensed consolidated statements of cash flows-
six months ended June 30, 1996 and
June 30, 1995 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-16
PART II Other Information
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of
Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
2 of 18 <PAGE>
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30 June 30 December 31
1996 1995 1995
(Unaudited) (Unaudited) (Audited) *
ASSETS
Cash and due from banks $ 5,738,970 $ 6,311,294 $ 7,343,489
Assets held for sale 80,341,017 62,225,547 73,686,067
(MARKET VALUE AT 6/30/96)
Investments securities:
Obligations of states and
political subdivisions 3,587,233 5,545,548 4,119,546
Federal Funds Sold 139,511 3,297,037 6,322,771
Loans (net of unearned
discount) 95,482,068 91,695,382 93,039,263
Less: Allowance for loan
losses 1,936,237 1,799,336 1,878,169
Net Loans $ 93,545,831 $ 89,896,046 $ 91,161,094
Premises, Furniture &
Equip Net 3,070,521 3,084,688 3,153,850
Other Assets 6,820,668 5,693,787 5,566,349
Total Assets $193,243,751 $176,053,947 $191,353,166
LIABILITIES & STOCKHOLDERS
INVESTMENTS
Deposits:
Demand $ 16,441,370 $ 16,760,601 $ 19,327,213
Savings 78,882,996 75,950,389 81,040,686
Time 65,938,941 58,953,078 64,989,970
Total Deposits 161,263,307 151,664,068 165,357,869
Borrowed Funds 7,496,000 0 110,000
Accrued Expenses & Other
Liabilities 3,096,008 2,843,392 3,090,803
Total Liabilities $171,855,315 $154,507,460 $168,558,672
STOCKHOLDERS INVESTMENT
Common Stock 5,062,875 5,062,875 5,062,875
Surplus 3,948,797 3,948,797 3,948,485
Retained Earnings 13,452,362 12,227,092 13,285,337
Net Unrealized Gain/(Loss)
on Securities Available
for Sale (1,021,395) 388,131 567,810
Less: Treasury Stock 54,203 80,408 70,013
Total Stockholders Invest $ 21,388,436 $ 21,546,487 $ 22,794,494
Total Liabilities &
Stockholders Investment $193,243,751 $176,053,947 $191,353,166
*Condensed from audited financial statements
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiary. Minority interests, which are
not significant are included in other liabilities in the balance sheet and
other operating expenses in the consolidated statement of income.
3 of 18 <PAGE>
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Six Months Ended-June 30,
1996 1995
INTEREST INCOME
Interest and Fees on Loans $4,318,858 $4,151,376
Interest and Fees on Municipal Loans and Bonds 286,675 346,496
Interest and Dividends on Securities 2,663,553 2,201,208
Interest on Federal Funds 29,862 70,714
Amortization & Accretion - Net 3,782 (40,410)
Total Interest Earned 7,302,730 6,729,384
INTEREST EXPENSE
Interest on Deposits 2,674,257 2,346,655
Interest on Funds Purchased/Borrowed 143,156 9,947
Total Interest Expense 2,817,413 2,356,602
NET INTEREST INCOME 4,485,317 4,372,782
Provision for loan losses 60,000 0
NET INTEREST INCOME AFTER LOAN PROVISION 4,425,317 4,372,782
NONINTEREST INCOME
Exchange, Commission & Fees 371,118 326,963
Trust Department 234,401 221,035
Financial Service Fees 33,383 33,450
Other Income 344,861 285,430
Net Securities Gains (Losses) 3,737 1,045
Total Noninterest Income 987,500 867,923
NONINTEREST EXPENSE
Salaries and Employee Benefits 2,098,805 2,099,945
Building Maintenance & Operations 255,278 267,461
FDIC Insurance 1,000 181,491
Other Expenses 1,636,752 1,404,871
Total Noninterest Expense 3,991,835 3,953,768
INCOME BEFORE TAXES 1,420,982 1,286,937
Income Taxes 397,000 335,000
NET INCOME $1,023,982 $ 951,937
Per Share Data:
Net Income $ 5.07 $ 4.71
Dividends Declared 1.00 1.00
4 of 18 <PAGE>
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-June 30,
1996 1995
INTEREST INCOME
Interest and Fees on Loans $2,184,868 $2,183,790
Interest and Fees on Municipal Loans and Bonds 141,453 181,710
Interest and Dividends on Securities 1,351,180 1,058,541
Interest on Federal Funds Sold 3,576 43,685
Amortization & Accretion - Net (2,126) (20,339)
Total Interest Earned 3,678,951 3,447,387
INTEREST EXPENSE
Interest on Deposits 1,324,804 1,211,317
Interest on Funds Purchased/Borrowed 108,721 9,947
Total Interest Expense 1,433,525 1,221,264
NET INTEREST INCOME 2,245,426 2,226,123
Provision for loan losses 30,000 0
NET INTEREST INCOME AFTER LOAN PROVISION 2,215,426 2,226,123
NONINTEREST INCOME
Exchange, Commission & Fees 191,258 168,042
Trust Department 118,899 108,739
Financial Service Fees 15,479 15,506
Other Income 183,468 144,939
Net Securities Gains (Losses) 3,778 64,722
Total Noninterest Income 512,882 501,948
NONINTEREST EXPENSE
Salaries and Employee Benefits 960,018 958,377
Building Maintenance & Operations 123,812 55,063
FDIC Insurance 500 90,000
Other Expenses 906,838 835,800
Total Noninterest Expense 1,991,168 1,939,240
INCOME BEFORE TAXES 737,140 788,831
Income Taxes 219,000 227,000
NET INCOME $ 518,140 $ 561,831
Per Share Data:
Net Income $ 2.57 $ 2.78
Dividends Declared 1.00 1.00
5 of 18 <PAGE>
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995
1996 1995
Net Cash Flows Provided by Operating Activities:
Net Income $1,023,982 $ 951,937
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 189,094 180,000
Provision for loan losses 60,000 0
Net securities gains 0 (1,045)
Net change in other assets (1,349,079) 288,903
Net change in other liabilities (5,205) (676,613)
Net amortization of premium on investments (3,782) (271,912)
Net change in deferred loan origination fees 37,200 25,470
Origination of loans held for sale (6,072,372) (3,045,352)
Proceeds from loans held for sale 5,420,303 3,083,034
Total adjustments (1,723,841) (417,515)
Net cash provided by operating activities (699,859) 534,422
Cash Flows From Investing Activities:
Purchase of investments (25,006,914) (8,965,601)
Proceeds from sales of investments 0 15,383,492
Proceeds from maturities of investment 17,130,958 8,215,749
Net change in loans to customers (2,481,937) (7,894,713)
Capital expenditures (105,765) (258,802)
Net cash used in investing activities (10,463,658) 6,480,125
Cash Flows From Financing Activities:
Net increase(decrease) in other Borrowed Funds 7,386,000 0
Net increase(decrease) in deposits (4,094,562) (5,741,227)
Transfer to Holding Company 472,000 0
Purchase of Treasury Stock 0 (14,560)
Proceeds from sale of Treasury Stock 15,810 0
Proceeds from issuance Common Stock 312 0
Payment to eliminate fractional shares 0 29,868
Dividends paid (403,822) (350,000)
Net cash provided by financing activities 3,375,738 (6,075,918)
Net increase (decrease) in cash
and cash equivalents (7,787,779) 938,628
Cash and cash equivalents at beginning of year 13,666,260 8,669,703
Cash and cash equivalents at 6/30/96 & 6/30/95 $ 5,878,481 $ 9,608,331
6 of 18 <PAGE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
Net increase (decrease) as a result of adopting 1996 1995
Statement of Financial Accounting Standards No. 115
Available for sale securities (1,547,568) 588,077
Deferred income (expense) liability 526,173 (199,946)
Net unrealized gain(loss) on available
for sale securities $(1,021,395) $ 388,131
7 of 18 <PAGE>
Notes to Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying consolidated financial statements of Union
Bankshares Company and its subsidiary (Union Trust Company) for
the six-month period ended June 30, 1996 and 1995 are unaudited.
However, in the opinion of the Company, all adjustments consisting of normal,
recurring accruals necessary for a fair presentation have been reflected
therein.
Certain financial information which is normally included in
financial statements prepared in accordance with generally
accepted accounting principles, but which is not required for
interim reporting purposes, has been omitted. The accompanying
consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended
December 31, 1995.
(B) Earnings Per Share
Earnings per common share are computed by dividing the net
income available for common stock by the weighted average number
of common shares outstanding during this period. On April 12,
1995 the Company declared a 33 1/3 percent stock dividend, payable
on May 15, 1995, and earnings per share have been restated for the
periods to reflect the stock dividend.
(C) Off-Balance Sheet Items
In the normal course of business, the Bank is a party to
financial instruments with off balance sheet risk to meet the
financing need of its customers. These financial instruments
include commitments to extend credit and letters of credit. The
instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the statement of financial
position. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of
financial instruments. At June 30, 1996, and June 30, 1995, the
following financial instruments, whose contract amounts represent
credit risk, were outstanding.
June 30
(000's omitted)
1996 1995
1. Unused Commitments:
A. Revolving , open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines 5,543 6,760
B. Credit card lines 5,779 4,609
8 of 18 <PAGE>
C. Secured real estate loans 3,342 2,117
D. Other 13,125 14,758
2. Financial Standby Letters of Credit: 62 42
3. Mortgages Transferred With Recourse: 0 0
9 of 18 <PAGE>
(D) Regulatory Agencies
The Bank's primary regulator is the Federal Reserve Bank of
Boston and as a state chartered bank to the Bureau of Banking in
Augusta, Maine.
(E) General
Any loans classified for regulatory purposes as loss,
doubtful, substandard or special mention do not (1) represent or
result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity
or capital resources or (2) represent material credits about which
management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
(F) FDICIA
The Federal Deposit Insurance Corporation Improvement Act of
1991, signed into law in December, 1992 has many implications for
financial and internal audit management throughout the industry.
Extremely broad in scope, the Act includes many significant, yet
often ambiguous, provisions that will be clarified when published.
In this connection the Board of Directors of the Federal
Deposit Insurance Corporation (FDIC) in May, 1994, approved the
final regulations and related guidelines implementing the
management reporting, audit committee, and independent audit
requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). These long awaited
and often debated regulations are scheduled to be published soon,
and most of the provisions will apply to fiscal years ending
December 31, 1994, or thereafter.
The final regulations and guidelines incorporated many of
the general provisions contained in the proposed rule, but also
include many significant differences from the original proposal.
For instance, the regulations will apply only to institutions with
total assets at or above $500 million originally proposed.
(G) Impact of Inflation and Changing Prices
The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles which
require the measurement of financial position and operating
results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the
assets and virtually all of the liabilities of the Company are
monetary in nature. As a result, interest rates have more
significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates
may not necessarily move in the same direction or in the same
magnitude as inflation.
(H) Recent Accounting Developments
10 of 18<PAGE>
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," effective for financial
statements for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be held and used by an entity being
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount for an asset may
not be recoverable. The Company expects no material impact from
adopting SFAS No. 121.
In May 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 122,
"Accounting for Mortgage Servicing Rights" (an amendment of FASB
Statement No. 65). SFAS No. 122 applies to mortgage banking
activities in which a mortgage loan is originated, or purchased,
and then sold with the right to service the loan retained by the
mortgage banking entity. The Statement amends SFAS No. 65, which
provided only for the recognition of purchased mortgage servicing
rights. Prior to SFAS No. 122, purchased mortgage servicing
rights were capitalized only in circumstances where the right to
service loans was acquired from another organization. SFAS No.
122 amends SFAS No. 65 by requiring the capitalization of mortgage
servicing rights, whether they were acquired from another
organization or originated internally. Additionally, SFAS No. 122
has provisions that require an impairment analysis of the
servicing right regardless of whether the servicing right was
originated or purchased. The Company has determined the impact of
adopting SFAS No. 122 is immaterial for 1996.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-based Compensation," effective for financial
statements for the fiscal year beginning after December 15, 1995.
SFAS No. 123 requires entities to disclose the fair value of their
stock options, although they will not have to record the options
at fair value in the financial statement. As of December 31,
1995, the Company did not offer stock-based compensation to its
employees.
11 of 18 <PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
Net Income increased $72,045 or 7.6% for the first six
months of 1996 versus the same period in 1995.
The following table summarizes the status of the bank's
earnings per share:
June 30,
1996 1995
Earnings Per Share 5.07 4.71
Return on Average Shareholders Equity 4.77%A 4.62%B
Return on Average Assets 0.55%A 0.54%B
Return on Average Earning Assets 0.60%A 0.59%B
A = annualized returns are; 9.54%, 1.10%, and 1.20%, respectively.
B = annualized returns are; 9.24%, 1.08%, and 1.18%, respectively.
On April 12, 1995, the Company declared a 33 1/3 percent
stock dividend, payable on May 15, 1995 and earnings per share
have been restated for the above periods to reflect the stock
dividend.
The increase in net income for the second quarter and the
first six months of 1996 versus the same periods in 1995 results
primarily from an increase in net interest income, noninterest
income and cost containment efforts found in noninterest expenses.
It should be noted, excluding net security gains, net income was
up $69,353 or 7.3%.
The increase in net interest income of some $573,000 or 8.5%
was a result of higher loan and investment balances and interest
rates based on current market conditions.
The increase in noninterest income results primarily from
loan department fees, trust income, and customer account fees.
Noninterest expenses, consisting primarily of employee
compensation and benefits, occupancy and equipment expenses, and
other general operating expenses was up some $38,000 or l.0% from
the same period in 1995. Excluding an adjustment for a 27th pay
period affecting salary expense, noninterest expenses were down
some $71,000 or 1.8%.
Major initiatives are being made in 1996 on streamlining the
Bank's work flows, reducing staff and improving efficiencies.
12 of 18<PAGE>
A decrease in salaries and employee benefits, due to reduced
staff levels and improved productivity, and the decrease in FDIC
insurance premiums will continue to be major contributors in
controlling noninterest expenses.
The Bank is constantly monitoring the economy and its effect
on the banking industry in New England, and in particular, in
Maine, in Hancock and Washington Counties (our service
territories). The economy of this area continues to be sluggish,
inflation remains low, and growth will be moderate and as in years
past, we will continue to operate in a conservatively planned
manner. We are growing according to our strategic plan and remain
within the risk parameters we have set forth for ourselves, with
the goals of improved earnings and productivity.
NET INTEREST INCOME
Net interest income, the difference between interest income
on earning assets such as loans and investment securities and
interest expense on interest bearing liabilities such as funds on
deposit continues to be the most significant determinant of the
Company's earnings performance. Because of the significance of
net interest, the management of interest rate risk has become
increasingly important to ensure the continued profitability of
the Bank. Interest rate risk results from volatile interest
rates, increased competition, and changes in the regulatory
environment. As a banking company, our exposure to interest rate
movements is controlled by matching the interest rates as well as
the maturities
of assets and liabilities.
Net interest income for the second quarter of 1996 was
$1,433,525, up $19,303 or l.0% and for the first six months of
1996 was $4,485,317, up $112,535 or 2.57% over the same periods in
1995.
The following table illustrates the bank's net interest
spread position:
Six Months Ended June 30,
1996 1995
Yield on Earning Assets 8.41% 8.54%
Cost of All Funds 3.20% 3.06%
Net Interest Spread 5.22% 5.48%
The Bank continues to monitor short and long-term interest
rates, balance sheet volumes and maturities in order to evaluate
the potential impact on its net interest spreads and capital.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $60,000 from the
same period last year, resulting from management's ongoing
evaluation of the allowance for loan losses. This increase was
due to increased loan volume and the desire to maintain the
13 of 18<PAGE>
Allowance for Loan Losses at 2.0% of gross loans. The process to
evaluate the adequacy of the allowance for loan losses involves a
high degree of management judgment. Such judgement is based, in
part, on systematic methods. These methods, which are generally
quantitative measures, are employed, not so the allowance will be
the result of routine mathematical exercises, but to help ensure
that all relevant matters affecting loan collectability will
consistently be identified. Such methods at June 30, 1996
included a loan-by-loan analysis of all larger commercial and
commercial real estate loans which were non-performing or which
were being closely monitored by management for potential problems,
and a quantitative analysis of residential real estate and
consumer loans. Based on these analyses, an estimation of
potential loss exposure was made and an allowance allocated. The
estimation of potential loss exposure reflects declining real
estate values, as evidenced by appraisals and other available
information.
Although management utilized its best judgement in providing
for possible losses, there can be no assurance that the Company
will not have to increase it provisions for possible loan losses
in the future as a result of increased loan demand in the
Company's primary market areas, future increases in non-performing
assets or otherwise which would adversely affect the Company's
results of operations.
14 of 18 <PAGE>
The following table reflects the quality of the Bank's loan
portfolio and the emphasis placed upon the management of credit
risk:
(000's Omitted)
Six Months Ended
June 30,
1996 1995
1. Nonaccrual Loans 490 163
2. Loans past due 90 days & accruing 148 188
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 1,190 905
5. Total nonperforming assets 1,828 1,256
6. Ratio of total nonperforming loans to capital
and the allowance for loan losses
(Texas ratio) 7.84 5.38
7. Ratio of net chargeoffs to loans .00002 .142
8. Ratio of allowance for loan losses to
loans 2.03 1.96
9. Coverage ratio(allowance for loan losses divided by
nonperforming assets) 105.92 143.23
10. Ratio of nonperforming assets to total assets .95 .71
11. Ratio of nonperforming loans to total loans .67 .38
It is important to note that the directors, officers and
employees of the Bank are proud of the above data and their
efforts in serving its community while simultaneously working
hand-in-hand with state and federal regulators in structuring its
financial position during these times. Most assuredly all parties
concerned benefit from just such cooperative effort.
NONINTEREST INCOME
The Company receives noninterest income from trust fees,
service charges on deposit accounts and other income comprised of
fees earned from a variety of other services. Securities gains
15 of 18<PAGE>
and losses are another major component of this category.
Noninterest income, excluding securities gains, increased
$71,878 or 16.4% and $116,885 or 13.5% for the three and six
months ended June 30, 1996 over the same period in 1995.
This increase is primarily due to an increase in loan
department income of $44,155 or 34.0%, customer account income of
$44,155 or 13.5%, credit card income of $13,000 or 8.9% and trust
income of $13,366 or 6.1%.
Net security gains amounted to $3,778 and $3,737 for the
three and six months ended June 30, 1996 compared to $64,722 and
$1,045 for the same periods in 1995.
NONINTEREST EXPENSES
Noninterest expenses consist of employee compensation and
benefits, occupancy and equipment expenses and miscellaneous
expenses. Management is continually reviewing expenses to control
them and develop more efficient delivery systems for all Bank
services.
A generally flat economy in Maine and in particular in
Downeast Maine, has compelled or should compel banking
institutions of our size to manage their institutions prudently
and conservatively. This we are committed to do. Accordingly, a
concerted effort in reducing noninterest expense has been a major
undertaking in fiscal year 1996.
Noninterest expenses increased slightly by $51,928 or 2.7%
and $38,067 or 1.0% for the three and six months ended June 30,
1996 over the same period in 1995. The primary reasons for the
increase were increased costs in connection with consulting fees,
due to an efficiency study conducted in the fall of 1995,
depreciation expense due to the upgrade of the Bank's software
system, and costs associated with loan expenses on foreclosed
property. Offsetting the increases, there were decreases in
salaries and benefits due to reduced staff levels and improved
productivity, and a decrease in FDIC insurance premiums.
INCOME TAXES
Income taxes are provided in accordance with the
comprehensive income tax allocation method which recognizes the
tax effects of all income and expense transactions in each year's
statement of income, regardless of the year the transactions are
reported for tax purposes. The tax effects of these timing
differences are reflected in deferred income tax accounts in the
consolidated financial statements.
Effective January 1, 1993, the Company adopted Statement 109
and has reported the cumulative effect of that change in the
method of accounting for income taxes in the 1993 consolidated
statements of income. Pursuant to the deferred method under APB
Opinion 11, which was applied in 1992, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes are not
16 of 18<PAGE>
adjusted for subsequent changes in tax rates.
The status of the Bank's income tax expense is as follows:
Tax Expense Effective Rate
1996 1995 1996 1995
Six Months ended June 30, $397,000 $335,000 27.9 26.0
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap
analysis as of December 31, 1995 as provided on page 12 in the
Bank's 1995 Annual Report. Data as of June 30, 1996 is
essentially identical to that reported in the Annual Report.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' Equity was as follows for the following
periods:
SHAREHOLDER'S EQUITY
Amount Book Value
Per Share
June 30, 1996 $21,388,436 $110.99
June 30, 1995 $21,546,487 $104.71
December 31, 1995 $19,181,381 $ 95.00
During 1989, the Federal Reserve Board issued final
guidelines for a risk-based approach to measuring the capital
adequacy of bank holding companies and state-chartered banks that
are members of the Federal Reserve System. These capital
requirements generally called for an 8% total capital ratio by
year-end 1992 of which 4% must be comprised of Tier 1 capital.
Risk-based capital ratios are calculated by weighing assets and
off-balance sheet instruments according to their relative credit
risks. At June 30, 1996, the Company had met the minimum capital
ratios. In fact, the Bank's strong capital position at June 30,
1996 exceeded the minimums established by the Federal Reserve
Board as follows:
Minimum Regulatory
June 30, 1996 Requirements
Tier 1 Capital Ratio 21.0 4.0%
Total Capital Ratio 22.6 8.0%
Leverage Ratio 11.1
17 of 18 <PAGE>
DIVIDENDS
The common stock is not actively traded and therefore, we
are not aware of the price of all trades. The price is
established by determining what a willing buyer will pay a willing
seller.
Cash dividends per share declared on common stock were $1.00
for the second quarter of 1996 and 1995.
STOCK DIVIDENDS
On April 12, 1995, the Company declared a 33 1/3 percent
stock dividend to be payable on May 15, l995. Accordingly, book
value per share and cash dividends per share have been
retroactively restated for the second quarter of 1995 to reflect
the stock dividend.
LIQUIDITY MANAGEMENT
Liquidity management is the process by which the Bank
structures its cash flow to meet requirements of its customers as
well as day-to-day operating expenses.
Liquidity is provided from both assets and liabilities. The
asset side of the balance sheet provides liquidity through the
regular maturities on our securities portfolio, as well as the
interest received on these assets. In addition, U.S. Government
securities may be readily converted to cash by sale in the open
market. On the liability side, liquidity comes from deposit
growth and the Bank's accessibility to other sources of borrowed
funds. In this respect, liquidity is enhanced by a significant
amount of core demand and savings deposits from a broad customer
base.
As a part of the Bank's asset and liability management and
liquidity needs, management actively evaluates its funding
resource and strategies to reduce and manage the vulnerability of
its operation to changes in interest rates.
When a Company's ability to reprice interest-bearing
liabilities exceeds its ability to reprice interest-earning assets
within shorter time periods, material and prolonged increases in
interest rates generally adversely affect net interest income,
while material and prolonged decreases in interest rates generally
have the opposite effect.
A principal objective of the Company is to reduce and manage
the vulnerability of its operations to changes in interest rates
by managing the ratio of interest-rate sensitive assets to
interest-rate sensitive liabilities within specified maturities or
repricing dates.
Union Trust Company is asset-sensitive as a result of its
variable-rate loan portfolio and its short-term investment
portfolio. Bank earnings may be negatively affected, should
interest rates fall.
As of June 30, 1996, the Bank's ratio of rate-sensitive
assets to rate-sensitive liabilities at the one-year horizon was
18 of 18<PAGE>
75%, its one-year GAP (measurement of interest sensitivity of
interest-earning assets and interest-bearing liabilities at a
point in time) was 15%, and $104,356,000 in assets and $74,357,000
in liabilities will be repriceable in one year.
In addition to the "traditional" GAP calculation, the
Company analyzes future net interest income based on budget
projections including anticipated business activity, anticipated
changes in interest rates and other variables, which are adjusted
periodically by management to take into account current economic
conditions, the current interest rate environment, and other
factors.
The status of the Bank's sources of cash to fund its
operation are as follows:
June 30,
1996 1995
Net cash from operations $ (699,859) $ 534,422
Net cash from investing activities $(10,463,658) $ 6,480,125
Net cash from financing activities $ 3,375,738 $(6,075,919)
Net increase (decrease) $ (7,787,779) $ 938,628
BALANCE SHEET ANALYSIS
The Bank experienced an increase in loan demand during the
first six months of 1995; the quality and strength of the balance
sheet remains strong.
The following financial statistics give a general overview
and profile of the Company:
As of June 30, Increase
1996 1995 (Decrease)
Total Assets $193,243,751 $176,053,947 $17,189,804
Total Earnings Assets $177,613,592 $160,964,178 $16,649,414
Loans $ 93,545,831 $ 89,896,046 $ 3,649,785
Assets Held For Sale $ 78,394,817 $ 62,225,547 $16,169,270
Deposits $161,263,307 $151,664,068 $ 9,599,239
Capital $ 21,388,436 $ 21,546,487 $ (158,051)
SECURITIES PORTFOLIO
The objective of the securities portfolio is to provide for
19 of 18<PAGE>
a stable earnings base and the investment of excess liquidity. As
shown under the section "Balance Sheet Analysis", the securities
portfolio increased $16,169,270 to $78,394,817 or 40.6% of total
assets as of June 30, 1996, as compared to 35.3% at June 30, 1995.
The Bank implemented a prefunding strategy for its security
portfolio during the first quarter of 1996 as evidenced by
security and borrowing balances.
The Company has reviewed its investment policy regarding
securities. In recognition of current economic conditions and the
attendant responsibility of management to consider known liquidity
requirements and to provide for capital planning, securities may
be sold as part of prudent asset/liability management.
Accordingly, the Bank has reclassified certain securities
(exclusive of tax-free securities) to assets available for sale.
Therefore, such assets were recorded at fair market.
20 of 18 <PAGE>
LOANS
Loan demand continues to show signs of moderate growth
during the second quarter of 1996 and thus the Bank experienced an
increase of $3,786,686 or 4.1% at June 30, 1996, vs June 30, 1995.
.
It must be pointed out that the Bank has sold and serviced
$42,321,243 of real estate loans and $2,611,006 of commercial
mortgages and has over $1,879,516 of loans held for sale at June
30, 1996.
The section of management's discussion and analysis entitled
"Provision for Loan Losses" clearly indicates the quality of the
loan portfolio at June 30, 1996.
The Bank's loan-to-deposit ratio was 59.2% and the allowance
for loan losses 2.03% of total loans at June 30, 1996.
Managements approach to loan growth is to seek out and work
with borrowers whose financial condition, credit history, and
performance would warrant extensions of credit.
In brief, the Company's loan portfolio is driven by a desire
to maintain our credit standards while meeting the financial needs
of qualified borrowers in the community.
DEPOSITS
Total deposits increased $9,599,239, or 6.3% over the
comparable period in 1995, primarily due to competitive interest
rates on products offered and as a result of a calling program
instituted in 1995. The proportion of interest bearing funds
continues to place emphasis on the need for properly matching our
assets and liabilities to maintain stable net interest margins.
The Company has continued its overall asset and liability
management strategy which is to maintain flexibility in its
interest sensitivity gap in order to take advantage of both short-
term and long-term changes in market rates while minimizing the
risk of adverse effects on operations.
The Bank is not reliant on volatile liabilities as evidenced
by such comprising only 3.78% of its deposit base.
21 of 18 <PAGE>
PART II
Item 1: N/A
Item 2: N/A
Item 3: N/A
Item 4: N/A
Item 5: N/A
Item 6: Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
A. Non-Applicable.
B. Reports on Form 8-K.
During the Registrant's fiscal Quarter Ended June 30,
1996, the Registrant was not required to and did not file any
reports on Form 8-K.
22 of 18 <PAGE>
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 COMPANY
Peter A. Blyberg, President
August 9, 1996
Date
Sally J. Hutchins, VicePresident/Treasurer
23 of 18<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
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