FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996. 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 04605
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (207) 667-2504
Indicate by checkmark 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 March 31,1996
(Common stock, $25.00 Par value) 201,911
Page 1 of 17
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
Item 1: Financial Statements
Condensed consolidated balance sheets-
March 31, 1996, March 31, 1995, December 31, 1995 3
Condensed consolidated statements of income-
three months ended March 31, 1996
and March 31, 1995 4
Condensed consolidated statements of cash flows-
three months ended March 31, 1996
and March 31, 1995 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-16
PART II Other Information
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to
a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
3 of 17 <PAGE>
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
March 31 March 31 December 31
1996 1995 1995
(Unaudited) (Unaudited) (Audited) *
ASSETS
Cash and due from banks $ 5,125,853 $ 5,211,363 $ 7,343,489
Assets held for sale 83,522,985 69,543,637 73,686,067
(MARKET VALUE AT 3/31/96)
Investments securities:
Obligations of states and
political subdivisions 4,113,413 6,146,629 4,119,546
Federal Funds Sold 137,691 95,590 6,322,771
Loans (net of unearned discount) 94,253,799 87,638,871 93,039,263
Less: Allowance for loan losses 1,966,490 1,911,609 1,878,169
Net Loans $ 92,287,309 $ 85,727,262 $ 91,161,094
Premises, furniture & Equip Net 3,110,389 3,042,766 3,153,850
Other Assets 5,948,192 5,933,502 5,566,349
Total Assets $194,245,832 $175,700,749 $191,353,166
LIABILITIES & STOCKHOLDERS
INVESTMENTS
Deposits:
Demand $ 16,141,029 $ 16,936,348 $ 19,327,213
Savings 77,676,080 77,829,274 81,040,686
Time 65,841,515 55,174,978 64,989,970
Total Deposits 159,658,624 149,940,600 165,357,869
Borrowed Funds 9,465,000 3,050,000 110,000
Accrued Expenses & Other
Liabilities 3,237,178 2,271,067 3,090,803
Total Liabilities $172,360,802 $155,261,667 $168,558,672
STOCKHOLDERS INVESTMENT
Common Stock 5,062,875 3,801,200 5,062,875
Surplus 3,948,797 3,948,797 3,948,485
Retained Earnings 13,129,952 13,307,085 13,285,337
Net Unrealized Gain/(Loss) on
Securities Available for Sale (202,391) (537,592) 567,810
Less: Treasury Stock 54,203 80,408 70,013
Total Stockholders Investment $ 21,885,030 $ 20,439,082 $ 22,794,494
Total Liabilities &
Stockholders Investment $194,245,832 $175,700,749 $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.
Page 3 of 17
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-March 31,
1996 1995
INTEREST INCOME
Interest and Fees on Loans $2,133,990 $1,967,586
Interest and Fees on Municipal Loans and Bo 145,222 164,786
Interest and Dividends on Securities 1,312,373 1,142,667
Interest on Federal Funds Sold 26,286 27,029
Amortization & Accretion - Net 5,908 (20,071)
Total Interest Earned 3,623,779 3,281,997
INTEREST EXPENSE
Interest on Deposits 1,349,453 1,135,338
Interest on Funds Purchased/Borrowed 34,435 0
Total Interest Expense 1,383,888 1,135,338
NET INTEREST INCOME 2,239,891 2,146,659
Provision for loan losses 30,000 0
NET INTEREST INCOME AFTER LOAN PROVISION 2,209,891 2,146,659
NONINTEREST INCOME
Exchange, Commission & Fees 179,860 158,921
Trust Department 115,502 112,296
Financial Service Fees 17,904 17,944
Other Income 161,393 140,491
Net Securities Gains (Losses) (41) (63,677)
Total Noninterest Income 474,618 365,975
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,138,787 1,141,568
Building Maintenance & Operations 131,466 212,398
FDIC Insurance 500 91,491
Other Expenses 729,914 569,071
Total Noninterest Expense 2,000,667 2,014,528
INCOME BEFORE TAXES 683,842 498,106
Income Taxes 178,000 108,000
NET INCOME $ 505,842 $ 390,106
Per Share Data:
Net Income 2.51 1.93
Dividends Declared 1.00 1.00
Page 4 of 17
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the Quarter Ended March 31, 1996 and 1995
1996 1995
Net Cash Flows Provided by Operating Activities:
Net Income $ 505,842 $ 390,106
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 93,381 90,000
Provision for loan losses 30,000 0
Net securities gains 0 63,677
Net change in other assets (339,647) 49,188
Net change in other liabilities (146,375) (104,288)
Net amortization of premium on investments (275,078) (20,071)
Net change in deferred loan origination fees (13,537) (17,699)
Origination of loans held for sale (3,046,595) (1,643,260)
Proceeds from loans held for sale 2,481,209 1,610,552
Total adjustments (1,216,642) 28,099
Net cash provided by operating activities (710,800) 418,205
Cash Flows From Investing Activities:
Purchase of investments (22,948,788) (3,004,032)
Proceeds from sales of investments 0 7,500,000
Proceeds from maturities of investments 12,521,041 3,000,000
Net change in loans to customers (1,156,215) (3,725,902)
Capital expenditures (49,920) (126,900)
Net cash used in investing activities (11,633,882) 3,643,166
Cash Flows From Financing Activities:
Net Increase in other Borrowed Funds 9,355,000 3,050,000
Net increase(decrease) in deposits (5,699,245) (10,308,087)
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 0
Dividends paid (201,911) (151,474)
Net cash provided by financing activities 3,941,966 (7,424,121)
Net increase (decrease) in cash and
cash equivalents (8,402,716) (3,362,750)
Cash and cash equivalents at beginning of year 13,666,260 8,669,703
Cash and cash equivalents at 3/31/96 & 3/31/95 $5,263,544 $5,306,953
Supplemental Schedule of Non-Cash Investing and Financing Activities
Net increase (decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities (306,654) (814,533)
Deferred income liability 104,263 276,941
Net unrealized gain(losses) on available
for sale securities $(202,391) $(537,592)
Page 5 of 17
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 three-month period
ended March 31, 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 March 31, 1996 and March 31, 1995,
the following financial instruments, whose contract amounts represent
credit risk, were outstanding.
March 31
(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 5,666 8,266
B. Credit card lines 5,840 4,503
C. Secured real estate loans 3,233 1,446
D. Other 17,833 15,930
2. Financial Standby Letters of Credit: 42 127
3. Mortgages Transferred With Recourse: 0 0
Page 6 of 17
(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.
7 of 17 <PAGE>
(H) Recent Accounting Developments
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 circumstance 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 not
determined the impact of adopting SFAS No. 122.
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.
8 of 17 <PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
Net Income increased $115,736 or 29.7% for the first three months of
1996 versus the same period in 1995.
The following table summarizes the status of the bank's earnings per
share:
March 31,
1996 1995
Earnings Per Share 2.51 1.93
Return on Average Shareholders Equity 2.39A 1.93B
Return on Average Assets 0.27A 0.22B
Return on Average Earning Assets 0.39A 0.24B
A = annualized returns are: 9.56, 1.08%, and 1.56%, respectively.
B = annualized returns are: 8.32, .88%, and .96%, 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 healthy increase in net income for the first quarter 1996 versus the
first quarter 1995, results primarily from an increase in net interest
income, noninterest income and a decrease in noninterest expenses.
Despite a declining interest rate environment in the first quarter of
1996, net interest income was up some $93,000 from the same period last year.
The increase in noninterest income results primarily from improvements
in loan department fees, trust income, customer account fees and security
losses that occurred in 1995.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating
expenses were down some $14,000 from the same period in 1995.
Major initiatives are being made in 1996 on streamlining the Bank's work
flows and redesigning processes and procedures with the goal of significantly
improving efficiencies.
A decrease in salaries and employee benefits, due to reduced staff
levels and improved productivity, and the decrease in FDIC insurance premiums
were major contributors for the decline in noninterest expense.
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 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 for ourselves, with
the goals of improved earnings and productivity.
9 of 17 <PAGE>
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 first quarter of 1996 was $2,239,891; up
$93,232 or 4.34% over the same period in 1995.
The following table illustrates the bank's net interest spread position:
Three Months Ended March 31,
1996 1995
Yield on Earning Assets 8.29% 8.39%
Cost of All Funds 3.02% 2.87%
Net Interest Spread 5.27% 5.52%
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.
10 of 17 <PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $30,000 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 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 March 31, 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 current 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 its provisions for possible loan losses in the future as a result of
a continued softening of the market for real estate 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.
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)
Three Months Ended
March 31,
1996 1995
1. Nonaccrual Loans 645 157
2. Loans past due 90 days & accruing 6 62
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 1,206 905
5. Total nonperforming assets 1,857 1,124
6. Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) 7.79 5.03
7. Ratio of net (recoveries) chargeoffs to loans (.00062) .00002
8. Ratio of allowance for loan losses to loans 2.09 2.18
9. Coverage ratio(allowance for loan losses divided
by nonperforming assets) 105.87 170.07
10. Ratio of nonperforming assets to total assets .96 .64
11. Ratio of nonperforming loans to total loans .71 .26
While not attempting to sound self-serving 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.
11 of 17
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 and losses are another major component
of this category.
Noninterest income, excluding security losses, increased $45,007 or
10.5%, during the first quarter of 1996 versus 1995.
The increase is primarily due to an increase of loan department income
of $24,452 or 42.4%, and service fees of some $21,000 or 13.2%, due to
increased loan volumes and fee income.
Net security losses amounted to $41 and $63,677 for the three months
ended March 31, 1996 and 1995, respectively.
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 particularly 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 expenses has been a
major undertaking in fiscal 1996.
Noninterest expenses decreased $13,861 or .7% for the first quarter of
1996 versus the first quarter of 1995. A decrease in salaries and benefits,
due to reduced staff levels and improved productivity, and the decrease in
FDIC insurance premiums were major contributors for the decline.
INCOME TAXES
Income taxes are provided in accordance with the comprehensive income
tax allocation method which recognizes the tax effects of all income and
expenses 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 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
Three Months ended March 31, $178,000 $108,000 26.0 21.7
12 of 17 <PAGE>
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 March 31, 1996 is essentially identical to that reported in the
Form 10K.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' Equity was as follows for the following periods:
SHAREHOLDER'S EQUITY
Amount Book Value
Per Share
March 31, 1996 $21,885,030 $108.39
March 31, 1995 $20,439,082 $101.23
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 March 31,
1996 the Company had met the minimum capital ratios. In fact, the Bank's
strong capital position at March 31, 1996 exceeded the minimums established
by the Federal Reserve Board as follows:
March 31, 1996 Minimum Regulatory
Requirements
Tier 1 Capital Ratio 20.7 4.0%
Total Capital Ratio 11.3 8.0%
Leverage Ratio 11.4
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
first quarter of 1996 and 1995.
13 of 17 <PAGE>
STOCK DIVIDENDS
On April 12, 1995, the Company declared a 33 1/3 percent stock dividend
to be payable on May 15, 1995. Accordingly, book value per share and cash
dividends per share have been retroactively restated for the first 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 March 31, 1996, the Bank's ratio of rate-sensitive assets to rate-
sensitive liabilities at the one-year horizon was 80%, its one-year GAP
(measurement of interest sensitivity of interest-earning assets and interest-
bearing liabilities at a point in time) was -12%, and $97,160,000 in assets
and $73,226,000 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:
March 31,
1996 1995
Net cash from operations $ (710,800) $ 418,205
Net cash from investing activities $(11,633,882) $ 3,643,166
Net cash from financing activities $ 3,941,966 $(7,424,121)
Net increase $ (8,402,716) $(3,362,750)
14 of 17
BALANCE SHEET ANALYSIS
The Bank experienced a healthy increase in loan demand during the first
three months of 1996; 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 March 31, Increase
1996 1995 (Decrease)
Total Assets $194,245,832 $175,700,749 $18,545,083
Total Earnings Assets $180,061,398 $161,513,118 $18,548,280
Loans $ 94,253,799 $ 87,638,871 $ 6,614,928
Securities $ 83,897,365 $ 74,530,287 $ 9,367,078
Deposits $159,658,624 $149,940,600 $ 9,718,024
Capital $ 21,885,030 $ 20,439,082 $ 1,445,948
SECURITIES PORTFOLIO
The objective of the securities portfolio is to provide for a stable
earnings base and the investment of excess liquidity. As shown under the
section "Balance Sheet Analysis", the securities portfolio increased
$9,367,078 or 12.6% as of March 31, 1996 as compared to a 43.1% decrease at
March 31, 1995. The Bank implemented a prefunding strategy for its security
portfolio during the first quarter of 1996 as evidenced by security and
borrowings 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.
LOANS
Loan demand was strong during the first quarter of 1996 and thus the
Bank experienced an increase of $6,614,928 or 7.6% at March 31, 1996 versus
March 31, 1995.
It should be pointed out that the Bank has sold and serviced $41,210,491
of real estate loans and $2,647,645 of commercial mortgages and has over
$1,792,833 of loans held for sale at March 31, 1996.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" clearly indicates the quality of the loan portfolio at March
31, 1996.
The Bank's loan-to-deposit ratio was 59.0% and the allowance for loan
losses 2.1% of total loans at March 31, 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.
15 of 17
DEPOSITS
Total deposits increased $9,718,024 or 6.5% 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 asset 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 2.63% of its deposit base.
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 March 31, 1996, the
Registrant was not required to and did not file any reports on Form 8-K.
16 of 17 <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
May 3, 1996
Sally J. Hutchins, Vice President/Treasurer
22 of 17<PAGE>
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