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 June 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 June 30, 1998
(Common stock, $12.50 Par Value) 481,783
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
Item l: Financial Statements
Condensed consolidated balance sheets - 3
June 30, 1998, June 30, 1997, December 31, 1997
Condensed consolidated statements of income - 4-5
six months ended June 30, 1998 and June 30, 1997
three months ended June 30, 1998 and June 30, 1997
Condensed consolidated statements of cash flows - 6
six months ended June 30, 1998 and June 30, 1997
Consolidated Statement of Changes in
Shareholders' Equity 8
six months ended June 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 Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 June 30 December 31
1998 1997 1997
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 7,506,384 $ 7,437,776 $ 7,650,086
Assets held for sale 70,284,469 88,868,093 66,403,649
(MARKET VALUE AT 6/30/98)
Held to maturity securities at cost 32,467,000 16,789,265 32,799,686
Federal funds sold 955,251 146,356 2,251,105
Loans (net of unearned discount) 112,310,289 102,272,573 107,037,968
Less: Allowance for loan losses 2,194,076 1,930,548 2,212,740
Net Loans $110,116,213 $100,342,025 $104,825,228
Premises, furniture & equip net 2,798,076 2,926,910 2,842,151
Other assets 6,353,724 5,984,659 5,787,926
Total Assets $230,481,117 $222,495,084 $222,559,831
LIABILITIES
Deposits:
Demand $ 20,020,053 $ 17,047,531 $ 20,574,024
Savings 77,231,974 73,344,446 80,170,160
Time 76,752,371 72,653,372 76,641,681
Total Deposits 174,004,398 163,045,349 177,385,865
Borrowed Funds 25,909,248 28,105,250 14,964,225
Accrued Expenses &
Other Liabilities 4,493,504 6,534,980 4,206,501
Total Liabilities $204,407,150 $197,685,579 $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 15,874,419 14,848,218 15,708,089
Net Unrealized Gain/(Loss) on
Securities Available for Sale 485,016 107,282 437,749
Less: Treasury Stock 303,565 164,092 160,695
Total Shareholders' Equity $ 26,073,967 $ 24,809,505 $ 26,003,240
Total Liabilities & Shareholders'
Equity $230,481,117 $222,495,084 $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)
Six Months Ended - June 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $4,967,245 $4,627,373
Interest and Fees on Municipal Loans and Bonds 375,446 273,491
Interest and Dividends on Securities 3,005,627 2,925,064
Interest on Federal Funds Sold 126,435 19,853
Amortization & Accretion - Net (105,173) 45,575
Total Interest Earned 8,369,580 7,891,356
INTEREST EXPENSE
Interest on Deposits 2,908,464 2,830,853
Interest on Funds Purchased/Borrowed 446,690 283,038
Total Interest Expense 3,355,154 3,113,891
NET INTEREST INCOME 5,014,426 4,777,465
Provision for Loan Losses 140,000 60,000
NET INTEREST INCOME AFTER LOAN PROVISION 4,874,426 4,717,465
NONINTEREST INCOME
Exchange, Commission & Fees 457,472 345,306
Trust Department 346,616 276,720
Financial Service Fees 35,121 33,727
Other Income 560,114 359,877
Net Securities Gains/(Losses) 10,870 2,283
Total Noninterest Income 1,410,193 1,017,913
NONINTEREST EXPENSE
Salaries and Employee Benefits 2,052,185 1,930,573
Building Maintenance & Operations 272,151 237,797
FDIC Insurance 15,909 15,266
Other Expenses 1,728,461 1,603,068
Total Noninterest Expense 4,068,706 3,786,704
INCOME BEFORE TAXES 2,215,913 1,948,674
Income Taxes 710,000 624,000
NET INCOME $1,505,913 $1,324,674
Per Share Data:
Net Income $3.13 $2.75
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended - June 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $2,489,895 $2,362,685
Interest and Fees on Municipal Loans and Bonds 217,552 152,880
Interest and Dividends on Securities 1,484,092 1,559,610
Interest on Federal Funds Sold 61,973 10,592
Amortization & Accretion - Net (69,631) 23,583
Total Interest Earned 4,183,881 4,109,350
INTEREST EXPENSE
Interest on Deposits 1,394,944 1,431,543
Interest on Funds Purchased/Borrowed 319,597 211,364
Total Interest Expense 1,714,541 1,642,907
NET INTEREST INCOME 2,469,340 2,466,443
Provision for Loan Losses 95,000 30,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,374,340 2,436,443
NONINTEREST INCOME
Exchange, Commission & Fees 254,998 180,209
Trust Department 179,727 147,043
Financial Service Fees 16,422 15,655
Other Income 300,946 190,885
Net Securities Gains/(Losses) 5,720 (117)
Total Noninterest Income 757,813 533,675
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,019,192 967,983
Building Maintenance & Operations 131,262 117,553
FDIC Insurance (141) 5,114
Other Expenses 907,647 833,323
Total Noninterest Expense 2,057,960 1,923,973
INCOME BEFORE TAXES 1,074,193 1,046,145
Income Taxes 345,000 364,000
NET INCOME $ 729,193 $ 682,145
Per Share Data:
Net Income $1.51 $1.42
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
1998 1997
Net Cash Flows Provided by Operating Activities:
Net Income $ 1,505,913 $ 1,324,674
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 174,088 207,156
Provision for loan losses 150,000 60,000
Disposals 84,141 0
Net change in OREO 0 42,399
Net change in other assets (565,798) (600,526)
Net change in other liabilities 287,003 3,184,592
Net amortization of premium on investments 214,207 (15,088)
Net change in deferred loan origination fees 32,101 18,116
Origination of loans held for sale (11,200,978) (3,605,760)
Proceeds from loans held for sale 11,177,162 3,112,485
Total adjustments 351,926 2,403,374
Net cash provided by operating activities 1,857,839 3,728,048
Cash Flows From Investing Activities:
Purchase of investments (24,554,508) (37,310,914)
Proceeds from sales of investments 1,500,000 13,024,648
Proceeds from maturities of investments 18,503,380 4,225,368
Proceeds from sale of other real estate owned 0 424,519
Net change in loans to customers (5,473,086) (1,533,581)
Capital expenditures (214,154) (216,954)
Net cash used in investing activities (10,238,368) (21,386,914)
Cash Flows From Financing Activities:
Net increase/(decrease) in
other Borrowed Funds 10,945,023 21,932,249
Net increase/(decrease) in deposits (3,381,467) (5,783,662)
Purchase of Treasury Stock (181,870) (111,020)
Proceeds from sale of Treasury Stock 39,000 2,963
Proceeds from issuance of Common Stock 0 0
Dividends paid (479,712) (399,712)
Net cash provided by financing activities 6,940,974 15,640,818
Net increase/(decrease) in cash
and cash equivalents (1,439,556) (2,018,048)
Cash and cash equivalents at beginning of year 9,901,191 9,602,180
Cash and cash equivalents at 6/30/98 & 6/30/97 $8,461,635 $7,584,132
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 411,854 (131,394)
Deferred income/(expense) tax liability (131,380) 44,523
Net unrealized gain/(loss) on available
for sale securities $ 280,474 $(86,871)
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 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, June
30, 1997 0 0 0 1,324,674 0 1,324,674
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 (399,712) 0 (399,712)
Balance at June
30, 1997 $6,069,300 $3,948,797 $(164,092) $14,848,218 $107,282 $24,809,505
Net income, June
30, 1998 0 0 0 1,505,913 0 1,505,913
Change in net unrealized
gain (loss) on available
for sale securities, net of
tax of $64,956 0 0 0 0 377,734 377,734
Total Comprehensive
Income 0 0 0 0 0 1,883,647
Sale of 312 shares
Treasury stock 0 0 39,000 0 0 39,000
Repurchase of 1,452 shares
Treasury stock 0 0 (178,473) 0 0 (178,473)
Cash dividends
declared 0 0 0 (479,712) 0 (479,712)
Balance at June
30, 1998 $6,069,300 $3,948,797 $(303,565) $15,874,419 $485,016 $26,073,967
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, 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 June 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 June 30, 1998, and June 30, 1997,
the following financial instruments, whose contract amounts represent
credit risk, were outstanding.
June 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 6,488 6,398
B. Credit card lines 6,061 6,126
C. Secured real estate loans 4,792 2,470
D. Other 15,728 12,470
2. Financial Standby Letters of Credit: 109 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 year 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 June 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. The Bank's core accounting system has been
essentially year 2000 compliant for several years. 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 $181,239 or 13.7% for the first six months of 1998
versus the same period in 1997. The following table summarizes the status
of the bank's earnings per share:
June 30,
1998 1997
Earnings Per Share 3.13 2.75
Return on Average Shareholders Equity 5.90%A 5.78%B
Return on Average Assets 0.66%A 0.64%B
Return on Average Earning Assets 0.72%A 0.68%B
A=annualized returns are: 11.80%, 1.32%, and 1.44%, respectively.
B=annualized returns are: 11.56%, 1.28%, and 1.36%, respectively.
The healthy increase in net income for the second quarter and the first
six months of 1998 versus the same period in 1997 results primarily from
an increase in net interest income and noninterest income.
Despite narrowing margins, net interest income was up some $157,000 or
3.3% 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, loan and bank fees.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating
expenses increased some $282,000 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 ever changing 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 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 1998 was $2,469,340, up
$2,897 or .12% and for the first six months of 1998 was $5,014,426, up
$236,961 or 4.9% over the same periods in 1997.
The following table illustrates the bank's net interest spread position:
Six Months Ended June 30,
1998 1997
Yield on Earning Assets 8.03% 8.35%
Cost of all Funds 3.19% 3.40%
Net Interest Spread 4.84% 4.95%
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 $80,000 to $140,000 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 June 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)
Six Months Ended
June 30,
1998 1997
1. Nonaccrual Loans 245 558
2. Loans past due 90 days & accruing 1,048 491
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 376 376
5. Total nonperforming assets 1,669 1,425
6. Ratio of total nonperforming loans
to capital and the allowance for
loan losses (Texas ratio) 4.49 4.00
7. Ratio of net chargeoffs to loans .0011 .00200
8. Ratio of allowance for loan
losses to loans 1.95 1.89
9. Coverage ratio (allowance for loan
losses divided by nonperforming
assets) 131.45 135.51
10. Ratio of nonperforming assets
to total assets .72 .64
11. Ratio of nonperforming loans
to total loans .56 .99
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
$218,301 or 40.9% and $383,696 or 37.8% for the three and six months ended
June 30, 1998 over the same period in 1997.
This increase is primarily due to an increase in loan department income of
$96,339 or 62.6%, credit card income of $32,974 or 16.4% and trust income
of $69,896 or 25.3%.
Net security gains amounted to $5,720 and $10,870 for the three and six
months ended June 30, 1998 compared to $(117) and $2,283 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 $133,987 or 69.6% and $282,002 or 7.5% for
the three and six months ended June 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
Six Months Ended June 30, $710,000 $624,000 32.0% 32.0%
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 June 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
June 30, 1998 $26,606,097 $55.22
June 30, 1997 $24,443,892 $50.74
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 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, 1998, the Company had met the minimum capital ratios. In
fact, the Bank's strong capital position at June 30, 1998 exceeded the
minimums established by the Federal Reserve Board as follows:
Minimum Regulatory
June 30, 1998 Requirements
Tier 1 Capital Ratio 22.2 3.0%
Total Capital Ratio 23.5 8.0%
Leverage Ratio 11.5
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 second
quarter of 1998 and $.50 for the second 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 June 30, 1998, Union Trust Company is liability sensitive as
measured by GAP. The Bank's cash flows indicate that the Company is
slightly asset sensitive. Bank earnings may be negatively affected,
should interest rates fall.
As of June 30, 1998, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 98%, its one year GAP
(measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a point in time) was 1% or 99% matched,
and $87,130,000 in assets and $98,879,000 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,
1998 1997
Net cash from operations $ 1,857,839 $ 3,728,048
Net cash from investing activities $(10,238,368) $(21,386,914)
Net cash from financing activities $ 6,940,974 $ 15,640,818
Net increase (decrease) $ (1,439,556) $ (2,018,048)
BALANCE SHEET ANALYSIS
The Bank experienced an increase in loan demand during the first six
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 June 30, Increase
1998 1997 (Decrease)
Total Assets $230,481,117 $222,495,084 $ 7,986,033
Total Earnings Assets $213,822,933 $206,145,739 $ 7,677,194
Loans $110,116,213 $100,342,025 $ 9,774,188
Assets AFS at Market $ 71,239,720 $ 89,014,449 $(17,774,729)
Assets Held to Maturity $ 32,467,000 $ 16,789,265 $ 15,677,735
Deposits $174,004,398 $163,045,349 $ 10,959,049
Capital $ 26,073,967 $ 24,809,505 $ 1,264,462
SECURITIES PORTFOLIO
The objective of the securities portfolio is to provide for a stable
earnings base and the investment of excess liquidity. The securities
portfolio decreased $2,096,994 to $103,706,720 or 45.0% of total assets as
of June 30, 1998, as compared to 47.6% at June 30, 1997. The Bank
continues its prefunding strategy for its security portfolio during the
second quarter of 1998 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.
LOANS
Loan demand continues to show signs of moderate growth during the second
quarter of 1998 and thus the Bank experienced an increase of $9,774,188 or
9.7% at June 30, 1998 versus June 30, 1997.
It should be pointed out that the Bank has sold and serviced $51,210,106
of real estate loans and $3,194,928 of commercial mortgages and has over
$3,162,034 of loans held for sale at June 30, 1998.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" clearly indicates the quality of the loan portfolio at
June 30, 1998.
The Bank's loan to deposit ratio was 63.3% and the allowance for loan
losses 1.95 of total loans at June 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 $10,959,049, or 6.7% 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 6.15% 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 and Reports on Form 8-K
A. Non-Applicable
B. Reports on Form 8-K
During the Registrant's fiscal quarter ended June 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
August 12, 1998
Sally J. Hutchins, Vice President /Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7506384
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 955251
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70284469
<INVESTMENTS-CARRYING> 32467000
<INVESTMENTS-MARKET> 32946108
<LOANS> 112310289
<ALLOWANCE> 2194076
<TOTAL-ASSETS> 230481117
<DEPOSITS> 174004398
<SHORT-TERM> 25909248
<LIABILITIES-OTHER> 4493504
<LONG-TERM> 0
0
0
<COMMON> 6069300
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 230481117
<INTEREST-LOAN> 4967245
<INTEREST-INVEST> 3402335
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8369580
<INTEREST-DEPOSIT> 5908464
<INTEREST-EXPENSE> 3355154
<INTEREST-INCOME-NET> 5014426
<LOAN-LOSSES> 140000
<SECURITIES-GAINS> 10870
<EXPENSE-OTHER> 1728461
<INCOME-PRETAX> 2215913
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1505913
<EPS-PRIMARY> 3.13
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 245
<LOANS-PAST> 1048
<LOANS-TROUBLED> 1367
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2194076
<CHARGE-OFFS> 246
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
