1
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 September 30, 1998
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 September 30, 1998
(Common stock, $12.50 Par Value) 481,819
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page
No
Item 1 Financial Statements
Condensed consolidated balance sheets-
September 30, 1998, September 30, 1997, and 3
December 31, 1997
Condensed consolidated statements of income-
nine months ended September 30, 1998 and
September 30, 1997
three months ended September 30, 1998 and 4-5
September 30, 1997
Condensed consolidated statements of cash
flows-
nine months ended September 30, 1998 and 6
September 30, 1997
Consolidated Statement of Changes in 8
Shareholders' Equity
nine months ended September 30, 1998 and 1997
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
PART II Other Information
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30 September 30 December 31
1998 1997 1997
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 7,022,450 $ 8,883,318 $ 7,650,086
Assets held for sale 110,932,643 72,825,300 66,403,649
(MARKET VALUE AT 9/30/98)
Held to maturity securities at cost 3,384,603 26,998,978 32,799,686
Federal funds sold 8,178,416 149,068 2,251,105
Loans (net of unearned discount) 111,084,153 104,659,319 107,037,968
Less: Allowance for loan losses 2,263,852 2,166,766 2,212,740
Net Loans $108,820,301 $102,492,553 $104,825,228
Premises, furniture & equip net 2,721,271 2,913,776 2,842,151
Other assets 6,007,592 5,510,746 5,787,926
Total Assets $247,067,275 $219,773,738 $222,559,831
LIABILITIES
Deposits:
Demand $ 22,324,197 $ 20,325,536 $ 20,574,024
Savings 84,863,302 77,303,178 80,170,160
Time 78,686,907 75,723,826 76,641,681
Total Deposits 185,874,406 173,352,540 177,385,865
Borrowed Funds 28,588,433 17,625,893 14,964,225
Accrued Expenses & Other
Liabilities 5,018,103 4,128,243 4,206,501
Total Liabilities $219,480,942 $195,106,676 $196,556,591
SHAREHOLDERS' EQUITY
Common Stock $ 6,069,300 $ 6,069,300 $ 6,069,300
Surplus 3,948,797 3,948,797 3,948,797
Retained Earnings 16,939,780 14,613,212 15,708,089
Net Unrealized Gain/(Loss) on
Securities Available for Sale 927,485 199,845 437,749
Less: Treasury Stock 299,029 164,092 160,695
Total Shareholders' Equity $ 27,586,333 $ 24,667,062 $ 26,003,240
Total Liabilities & Shareholders'
Equity $247,067,275 $219,773,738 $222,559,831
*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.
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Nine Months Ended - September 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $ 7,508,785 $ 6,976,452
Interest and Fees on Municipal Loans and Bonds 604,678 434,442
Interest and Dividends on Securities 4,549,552 4,573,982
Interest on Federal Funds Sold 207,485 26,613
Amortization & Accretion - Net (144,186) 56,484
Total Interest Earned 12,726,314 12,067,973
INTEREST EXPENSE
Interest on Deposits 4,405,078 4,326,960
Interest on Funds Purchased/Borrowed 795,010 627,734
Total Interest Expense 5,200,088 4,954,694
NET INTEREST INCOME 7,526,226 7,113,279
Provision for Loan Losses 213,000 90,000
NET INTEREST INCOME AFTER LOAN PROVISION 7,313,226 7,023,279
NONINTEREST INCOME
Exchange, Commission & Fees 738,521 642,825
Trust Department 526,377 426,329
Financial Service Fees 53,451 52,154
Other Income 1,003,675 698,001
Net Securities Gains/(Losses) 25,376 (5,298)
Total Noninterest Income 2,347,400 1,814,011
NONINTEREST EXPENSE
Salaries and Employee Benefits 3,171,128 3,038,990
Building Maintenance & Operations 405,738 359,768
FDIC Insurance 20,859 20,312
Other Expenses 2,699,685 2,539,239
Total Noninterest Expense 6,297,410 5,958,309
INCOME BEFORE TAXES 3,363,216 2,878,981
Income Taxes 1,075,000 914,000
NET INCOME $ 2,288,216 $ 1,964,981
Per Share Data:
Net Income $4.75 $4.08
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-September 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $2,541,540 $2,349,079
Interest and Fees on Municipal Loans and Bonds 229,232 160,951
Interest and Dividends on Securities 1,543,925 1,648,918
Interest on Federal Funds Sold 81,050 6,760
Amortization & Accretion - Net (39,013) 10,909
Total Interest Earned 4,356,734 4,176,617
INTEREST EXPENSE
Interest on Deposits 1,496,614 1,496,107
Interest on Funds Purchased/Borrowed 348,320 344,696
Total Interest Expense 1,844,934 1,840,803
NET INTEREST INCOME 2,511,800 2,335,814
Provision for Loan Losses 73,000 30,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,438,800 2,305,814
NONINTEREST INCOME
Exchange, Commission & Fees 281,049 297,519
Trust Department 179,761 149,609
Financial Service Fees 18,330 18,427
Other Income 443,561 338,124
Net Securities Gains/(Losses) 14,506 (7,581)
Total Noninterest Income 937,207 796,098
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,118,943 1,108,417
Building Maintenance & Operations 133,587 121,971
FDIC Insurance 4,950 5,046
Other Expenses 971,224 936,171
Total Noninterest Expense 2,228,704 2,171,605
INCOME BEFORE TAXES 1,147,303 930,307
Income Taxes 365,000 290,000
NET INCOME $ 782,303 $ 640,307
Per Share Data:
Net Income $1.62 $1.33
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
1998 1997
Net Cash Flows Provided by Operating Activities:
Net Income $2,288,216 $1,964,981
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 289,842 315,156
Provision for loan losses 213,000 90,000
Net securities gains 25,376 0
Disposal of fixed assets 84,141 0
Loss on sale of other real estate owned 0 27,399
Provision for other real estate owned 0 15,000
Net change in other assets (219,666) (126,613)
Net change in other liabilities 811,602 6,169,498
Net amortization of premium on investments 384,473 241,029
Net change in deferred loan origination fees 6,661 27,580
Origination of loans held for sale (17,247,605) (5,811,159)
Proceeds from loans held for sale 16,001,930 5,651,685
Total adjustments 349,754 6,599,575
Net cash provided by operating activities 2,637,970 8,564,556
Cash Flows From Investing Activities:
Purchase of investments (48,388,964) (63,810,745)
Proceeds from sales of investments 11,993,610 36,280,474
Proceeds from maturities of investments 22,348,943 12,436,521
Net change in loans to customers (4,214,734) (3,723,573)
Proceeds from sale of other real estate owned 0 424,519
Capital expenditures (253,103) (311,820)
Net cash used in investing activities (18,514,248) (18,704,624)
Cash Flows From Financing Activities:
Net increase/(decrease) in
other Borrowed Funds 13,624,208 6,064,213
Net increase/(decrease) in deposits 8,409,791 4,523,529
Purchase of Treasury Stock (177,334) (115,407)
Proceeds from sale of Treasury Stock 39,000 7,350
Proceeds from issuance of Common Stock 0 0
Payment for fractional shares 0 (29,699)
Dividends paid (719,712) (879,712)
Net cash provided by financing activities 21,175,953 9,570,274
Net increase/(decrease) in cash
and cash equivalents 5,299,675 (569,794)
Cash and cash equivalents at beginning of year 9,901,191 9,602,180
Cash and cash equivalents at 9/30/98 & 9/30/97 $15,200,866 $9,032,386
Supplemental Schedule of Non-Cash Investing and Financing Activities
1998 1997
Net increase/(decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities 351,021 356,011
Deferred income/(expense) liability 119,346 (156,166)
Net unrealized gain/(loss) on available
for sale securities $231,673 $199,845
Net transfer from Investments Held to Maturity
to AFS in accordance with FAS 133 $28,502,694 $ 0
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 1998 and 1997
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDER'S
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
Balance at December 31,
1996 $6,069,300 $3,948,797 $ (56,035) $13,923,256 $(171,460) $23,713,858
Net income, September 30,
1997 0 0 0 1,964,981 0 1,964,981
Change in net unrealized
gain (loss) on available
for sale securities, net of
tax of $151,074 0 0 0 0 278,742 278,742
Total Comprehensive
Income 0 0 0 0 0 1,603,416
Sale of 35 shares
Treasury stock 0 0 7,350 0 0 7,350
Repurchase of 512 shares
Treasury stock 0 0 (115,407) 0 0 (115,407)
Cash dividends
declared 0 0 0 (641,174) 0 (641,174)
Balance at September 30,
1997 $6,069,300 $3,948,797 $(164,092) $14,613,212 $107,282 $24,574,499
Balance at December 31,
1997 $6,069,300 $3,948,797 $(160,695) $15,708,089 $437,749 $26,003,240
Net income, September 30,
1998 0 0 0 2,288,216 0 2,288,216
Change in net unrealized gain
(loss) on available for sale
securities, net of tax
of $64,956 0 0 0 0 489,736 489,736
Total Comprehensive
Income 0 0 0 0 0 2,777,952
Sale of 312 shares
Treasury stock 0 0 43,536 0 0 43,536
Repurchase of 1,452 shares
Treasury stock 0 0 (181,870) 0 0 (181,870)
Cash dividends
declared 0 0 0 (719,712) 0 (719,712)
Balance at September 30,
1998 $6,069,300 $3,948,797 $(299,029) $16,939,780 $927,485 $27,586,333
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 nine month
period ended September 30, 1998 and 1997 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, 1997.
(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. Weighted shares as of September
30, 1998 were 485,544 and have been restated for 1997, 1996 and 1995 to
reflect the July 1997 20% stock dividend and 2 for 1 stock split.
(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 needs 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 September 30, 1998, and
September 30, 1997, the following financial instruments, whose contract
amounts represent credit risk, were outstanding.
September 30
(000's omitted)
1998 1997
1. Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines 6,796 6,191
B. Credit card lines 5,924 6,088
C. Secured real estate loans 4,264 5,785
D. Other 17,409 11,223
2. Financial Standby Letters of Credit: 97 35
3. Mortgages Transferred With Recourse: 0 0
(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 of the State of
Maine.
(E) General
Any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention that were not disclosed under Item III of
Industry Guide 3 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) 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 a 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.
(G) Recent Accounting Developments
The Financial Accounting Standards Board issued the following Statements
of Financial Accounting Standards during 1997:
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information
These two statements do not change the measurement or recognition
methods used in the financial statements but rather deal with disclosure
and presentation requirements.
SFAS No. 130 and No. 131 are effective for periods beginning after
December 15, 1997. The financial statements include unrealized gains
and losses on available for sale securities as the only item reported as
other comprehensive income under SFAS No. 130. SFAS No. 131 has no
effect on disclosure requirements as the Company has no reportable
segments.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits" effective
for financial statements for the fiscal year beginning after December
15, 1997. SFAS No. 132, which supersedes the benefit disclosure
requirements in FASB Statements No's 87, 88 and 106, requires entities
to standardize the disclosure requirements for pension and other post
retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair value of plan
assets that will facilitate financial analysis. The Company expects no
material impact from adopting SFAS No. 132.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective for financial
statements for fiscal years beginning after June 15, 1999. SFAS No. 133
requires entities to recognize all derivatives for either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company adopted SFAS No. 133 in July and
expects no material impact.
Year 2000 Readiness
It has been widely publicized that many computer applications will not
operate past the year 2000 without modifications. This problem results
from the fact that some computer systems store dates in two digit format
(i.e., 98) instead of four digit format (1998). On January 1, 2000, it
is possible that some systems with time sensitive software programs will
recognize that year as "00" and may incorrectly interpret the year as
1900.
In 1997, the Company adopted a plan of action to minimize the risk of
the Year 2000 event. The plan included the formation of a Technology
Steering Committee to assess, monitor, and review vendor compliance and
certification and to identify clearly all systems and equipment used in
the day to day operations of the Bank that might be affected.
During 1998, the Bank has completed the assessment phase, identified
mission critical systems, put a testing strategy in place, worked on
contingency plans and undertaken steps to verify that all vendors,
suppliers and other related business parties will be ready for the year
2000. Union Trust is currently conducting tests of its mission critical
systems and is on track with the FFIEC time frames. The following table
identifies each phase and its estimated timetable for completions for
Union Trust Company:
Phase Completed By
1. Awareness June 30, 1997
2. Assessment December 31, 1997
3. Implementation & Approval March 31, 1999
4. Final Review & Approval June 30, 1999
5. Monitoring Through year 2000
The Company has estimated that the total costs directly relating to
fixing Year 2000 issues, such as software modification and system
testing, will not have a material effect on the performance of the Bank.
The Year 2000 Budget is currently $100,000. No direct costs (other than
human resource hours) have been expensed as of this date.
The Bank's most reasonable likely worst case Year 2000 scenarios may
include the failure of a vendor or third party provider - which is
beyond the Bank's control. In the event a failure occurs - the Bank
will implement manual contingency systems without serious impact on the
Bank's financial condition.
As of June 1998, the Company has created several basic contingency
plans. Planning efforts will continue during 1998 based on the latest
FFIEC guidelines. Management believes the Bank is adequately addressing
the Year 2000 issue and that the current preparations and testing being
conducted throughout the organization, all seek to minimize any
potential adverse effect on the Bank or its customers.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
Net income increased $323,235 or 16.5% for the first nine months of 1998
versus the same period in 1997. The following table summarizes the
status of the bank's earnings per share:
September 30,
1998 1997
Earnings Per Share 4.75 4.08
Return on Average Shareholders Equity 8.76%A 8.43%B
Return on Average Assets 0.98%A 0.94%B
Return on Average Earning Assets 1.05%A 1.03%B
A=annualized returns are: 11.68%, 1.30%, and 1.40%, respectively.
B=annualized returns are: 11.24%, 1.25%, and 1.37%, respectively.
The healthy increase in net income for the third quarter and the first
nine months of 1998 versus the same periods in 1997 results primarily
from an increase in net interest income and noninterest income.
Despite narrowing margins, net interest income was up some $413,000 or
5.8% from the same period last year, due to increased loan and
investment volumes.
The increase in noninterest income results primarily from improvements
in virtually all fee income categories, in particular, in bankcard fees,
trust fees and loan and bank fees.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating
expenses increased some $339,000 from the same period in 1997 due to
increased staffing and the expenses related to upgrading equipment and
facilities.
During 1998, the Company will implement specific strategic priorities
that will focus on increasing fee based revenues and controlling overall
expense. With the everchanging environment of interest rate risk, fee
income has developed into a significant component in the Bank's total
revenue generation goals. While revenue generation is a top priority,
the Company will also focus on productivity and maximizing the returns
of its financial and human resources.
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 and borrowed funds
continues to be the most significant determinant of the Company's
earnings performance. Because of the significance of net interest
income, the management of interest rate risk has become increasing
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 third quarter of 1998 was $2,511,800, up
$175,986 or 7.5% and for the first nine months of 1998 was $7,526,226,
up $412,947 or 5.8% over the same periods in 1997.
The following table illustrates the bank's net interest spread position:
Nine Months Ended September 30,
1998 1997
Yield on Earning Assets 7.88% 8.26%
Cost of all Funds 3.04% 3.22%
Net Interest Spread 4.86% 5.04%
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 $123,000 to $213,000 from the
same period last year, resulting from management's ongoing evaluation of
the allowance for loan losses. This increase was due to 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 judgement. 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 September 30, 1998 included a loan-by-loan
analysis of all larger commercial loans and commercial real estate loans
which were non-performing or which were being closely monitored by
management for potential problems, and a quantitive 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.
During May 1998, the Bank implemented a Loan Review Program whereas an
independent loan review service firm conducted a review of the
commercial loan portfolio. The review included updates to comments on
all criticized and classified assets over $100,000, all loans delinquent
over 30 days and over $100,000, non accruals over $100,000, new (closed)
and renewed loans over $100,000 as well as the adequacy of the loan loss
reserve.
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 provision 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.
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)
Nine Months Ended
September 30,
1998 1997
1. Nonaccrual Loans 397 524
2. Loans past due 90 days & accruing 46 69
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 376 376
5. Total nonperforming assets 819 969
6. Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) 1.48 2.21
7. Ratio of net chargeoffs to loans 0.14 0.006
8. Ratio of allowance for loan losses to loans 2.04 2.07
9. Coverage ratio (allowance for loan losses divided by
nonperforming assets) 276.43 223.63
10. Ratio of nonperforming assets to total assets .33 .44
11. Ratio of nonperforming loans to total loans .18 .57
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 and losses are another
major component of this category.
Noninterest income, excluding securities gains/(losses), increased
$119,022 or 14.8% and $502,715 or 27.6% for the three and nine months
ended September 30, 1998 over the same period in 1997.
This increase is primarily due to an increase of loan department fees of
$164,495 or 68.6%, credit card income of $31,853 or 7.1%, trust income
of $100,048 or 23.5%, and customer account income of $95,696 or 14.9%.
Net security gains/(losses) amounted to $14,506 and $25,376 for the
three and nine months ended September 30, 1998 compared to $(7,581) and
$(5,298) for the same periods in 1997.
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.
Noninterest expenses increased $57,099 or 2.6% and $339,101 or 5.7% for
the three and nine months ended September 30, 1998 over the same period
in 1997. The increase was primarily attributable to increased staffing
and the expenses related to upgrading equipment and facilities.
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.
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.
The status of the Bank's income tax expense is as follows:
Tax Expense Effective Rate
1998 1997 1998 1997
Nine Months Ended September 30, $1,075,000 $914,000 32.0% 31.8%
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap analysis as of
December 31, 1997 as provided on page 14 in the Bank's 1997 Annual
Report. Data as of September 30, 1998 is essentially identical to that
reported in the Annual Report.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' Equity was as follows for the following periods:
SHAREHOLDERS' EQUITY
Amount Book Value
Per Share
September 30, 1998 $27,586,333 $57.25
September 30, 1997 $24,667,062 $51.20
December 31, 1997 $26,003,240 $53.97
The Federal Reserve Board 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 generally
call for an 8% total capital ratio of which 3% 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 September 30, 1998, the Company had met the minimum capital
ratios. In fact, the Bank's strong capital position at September 30,
1998 exceeded the minimums established by the Federal Reserve Board as
follows:
Minimum Regulatory
September 30, 1998 Requirements
Tier 1 Capital Ratio 21.4 3.0%
Total Capital Ratio 22.6 8.0%
Leverage Ratio 11.2
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 $.50 for the
third quarter of 1998 and $.50 for the third quarter of 1997, adjusted
for a July 1997 20% stock dividend and two for one stock split
STOCK DIVIDENDS
On June 11, 1997, the Board of Directors of Union Bankshares Company
declared a 20% stock dividend payable to stockholders of record on June
27, 1997. The Board also declared a two for one stock split, subject to
shareholder approval of an amendment to the Articles of Incorporation of
the Company. A special shareholders meeting was held on July 30, 1997
to vote said amendment.
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, US 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.
As of September 30, 1998, Union Trust Company is asset sensitive as
measured by GAP. The Bank is asset sensitive between 37 and 60 month
horizons. Bank earnings may be negatively affected, should interest
rates fall.
As of September 30, 1998, the Bank's ratio of rate sensitive assets to
rate sensitive liabilities at the one year horizon was 114%, its one
year GAP (measurement of interest sensitivity of interest earning assets
and interest bearing liabilities at a point in time) was 6% which is
106% matched, and $118,940,000 in assets and $104,521,000 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:
September 30,
1998 1997
Net cash from operations $ 2,637,970 $ 8,564,556
Net cash from investing activities $(18,514,248) $(18,704,624)
Net cash from financing activities $ 21,175,953 $ 9,570,274
Net increase (decrease) $ 5,299,675 $ (569,794)
BALANCE SHEET ANALYSIS
The Bank experienced an increase in loan demand during the first nine
months of 1998; 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 September 30, Increase
1998 1997 (Decrease)
Total Assets $247,067,275 $219,773,738 $ 27,293,537
Total Earnings Assets $231,315,962 $202,465,898 $ 28,850,064
Loans $108,820,301 $102,492,553 $ 6,327,748
Assets Held for Sale $110,932,643 $ 72,825,300 $ 38,107,343
Assets Held to Maturity $ 3,384,603 $ 26,998,978 $(23,614,375)
Deposits $185,874,406 $173,352,540 $ 12,521,866
Capital $ 27,586,333 $ 24,667,062 $ 2,919,271
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
$14,492,968 to $114,317,246 or 58.7% of total assets as of September 30,
1998, as compared to 45.4% at September 30, 1997. The Bank continues
its prefunding strategy for its security portfolio during the third
quarter of 1998 as evidenced by security and borrowing balances.
Upon adoption of FAS 133 in July, 1998, $21,270,958 in Mortgage Backed
Securities and $7,231,736 in State and Municipal Bonds were reclassified
from Held to Maturity to Available for Sale.
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.
LOANS
Loan demand continues to show signs of moderate growth during the third
quarter of 1998 and thus the Bank experienced an increase of $6,327,748
or 6.2% at September 30, 1998 vs September 30, 1997.
It should be pointed out that the Bank has sold and serviced $51,848,096
of real estate loans and $3,171,190 of commercial mortgages and has over
$4,322,875 of loans held for sale at September 30, 1998.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" clearly indicates the quality of the loan portfolio at
September 30, 1998.
The Bank's loan to deposit ratio was 59.8% and the allowance for loan
losses 2.03% of total loans at September 30, 1998.
Management's 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 $12,521,866, or 7.2% over the comparable period
in 1997, primarily due to competitive interest rates on products offered
and an active calling program. 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 5.88% 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 September 30, 1998, the
Registrant was not required to and did not file any reports on Form 8-K.
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
November 5, 1998
Sally J. Hutchins, Vice President/Treasurer
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