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, 1999
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, 1999
(Common stock, $12.50 Par Value) 577,836
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No
Item 1 Financial Statements
Condensed consolidated balance sheets-
September 30, 1999, September 30, 1998, and 3
December 31, 1998
Condensed consolidated statements of income-
nine months ended September 30, 1999 and
September 30, 1998
three months ended September 30, 1999 and 4-5
September 30, 1998
Condensed consolidated statements of cash
flows-
nine months ended September 30, 1999 and 6
September 30, 1998
Consolidated Statement of Changes in 8
Shareholders' Equity
nine months ended September 30, 1999 and 1998
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-19
PART II Other Information
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security 20
Holders
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30 September 30 December 31
1999 1998 1998
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 9,526,972 $ 7,022,450 $ 7,845,223
Assets available for sale 108,238,427 110,932,642 113,066,150
(MARKET VALUE AT 9/30/99)
Held to maturity securities at cost 4,290,102 3,384,604 4,375,981
Federal funds sold 13,544,460 8,178,416 9,268,135
Loans (net of unearned discount) 122,915,739 111,084,153 110,422,431
Less: Allowance for loan losses 2,557,322 2,263,852 2,434,636
Net Loans $120,358,417 $108,820,301 $107,987,795
Premises, furniture & equip net 2,991,755 2,721,271 2,653,775
Other assets 6,410,844 6,007,591 5,997,746
Total Assets $265,360,977 $247,067,275 $251,194,805
LIABILITIES
Deposits:
Demand $ 26,708,670 $ 22,324,197 $ 22,823,763
Savings 94,479,666 84,863,302 85,547,715
Time 76,771,273 78,686,907 79,657,538
Total Deposits 197,959,609 185,874,406 188,029,016
Borrowed Funds 25,451,250 20,451,250 20,451,250
Sweep Repurchase 9,373,977 8,137,183 8,965,977
Accrued Expenses & Other Liabilities 5,028,081 5,109,102 5,008,844
Total Liabilities $237,812,917 $219,571,941 $222,455,087
SHAREHOLDERS' EQUITY
Common Stock $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 3,963,432 3,948,797 3,963,432
Retained Earnings 18,274,739 15,638,155 16,623,348
Net Unrealized Gain/(Loss) on
Securities Available for Sale (1,659,569) 927,485 1,162,032
Less: Treasury Stock 310,467 299,029 289,019
Total Shareholders' Equity $ 27,548,060 $ 27,495,333 $ 28,739,718
Total Liabilities &
Shareholders' Equity $265,360,977 $247,067,275 $251,194,805
*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,
1999 1998
INTEREST INCOME
Interest and Fees on Loans $ 7,172,582 $ 7,508,784
Interest and Fees on Municipal Loans and Bonds 762,094 604,678
Interest and Dividends on Securities 4,761,201 4,549,552
Interest on Federal Funds Sold 181,724 207,485
Amortization & Accretion - Net (54,924) (144,186)
Total Interest Earned 12,822,677 12,726,313
INTEREST EXPENSE
Interest on Deposits 4,197,985 4,405,078
Interest on Funds Purchased/Borrowed 1,063,456 886,010
Total Interest Expense 5,261,441 5,291,088
NET INTEREST INCOME 7,561,236 7,435,225
Provision for Loan Losses 155,000 213,000
NET INTEREST INCOME AFTER LOAN PROVISION 7,406,236 7,222,225
NONINTEREST INCOME
Exchange, Commission & Fees 707,317 738,521
Trust Department 661,383 526,377
Financial Service Fees 52,062 53,451
Other Income 1,079,053 1,003,675
Gain on Sale of Other Real Estate Owned 153,984 0
Net Securities Gains/(Losses) (17,595) 25,376
Total Noninterest Income 2,636,204 2,347,400
NONINTEREST EXPENSE
Salaries and Employee Benefits 3,365,363 3,171,128
Building Maintenance & Operations 413,018 405,738
FDIC Insurance 21,414 20,859
Other Expenses 2,620,779 2,699,685
Total Noninterest Expense 6,420,574 6,297,410
INCOME BEFORE TAXES 3,621,866 3,272,215
Income Taxes 1,118,355 1,075,000
NET INCOME $ 2,503,511 $ 2,197,215
Per Share Data:
Net Income $4.33 $3.80
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-September 30,
1999 1998
INTEREST INCOME
Interest and Fees on Loans $2,427,014 $2,541,539
Interest and Fees on Municipal Loans and Bonds 269,967 229,232
Interest and Dividends on Securities 1,580,551 1,543,925
Interest on Federal Funds Sold 64,535 81,050
Amortization & Accretion - Net 8,294 (39,013)
Total Interest Earned 4,350,361 4,356,733
INTEREST EXPENSE
Interest on Deposits 1,402,214 1,496,614
Interest on Funds Purchased/Borrowed 365,370 348,320
Total Interest Expense 1,767,584 1,844,934
NET INTEREST INCOME 2,582,777 2,511,799
Provision for Loan Losses 45,000 73,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,537,777 2,438,799
NONINTEREST INCOME
Exchange, Commission & Fees 239,985 281,049
Trust Department 227,835 179,761
Financial Service Fees 17,944 18,330
Other Income 408,600 443,561
Net Securities Gains/(Losses) (58,437) 14,506
Total Noninterest Income 835,927 937,207
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,100,355 993,266
Building Maintenance & Operations 129,992 133,587
FDIC Insurance 5,353 4,950
Other Expenses 997,905 971,224
Total Noninterest Expense 2,233,605 2,103,027
INCOME BEFORE TAXES 1,140,099 1,272,979
Income Taxes 342,000 365,000
NET INCOME $ 798,099 $ 907,979
Per Share Data:
Net Income $1.38 $1.57
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
1999 1998
Net Cash Flows Provided by Operating Activities:
Net Income $ 2,503,511 $ 2,197,215
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 343,321 289,842
Provision for loan losses 155,000 213,000
Net securities gains (15,729) 25,376
Disposal of fixed assets 27,996 84,141
Loss on sale of other real estate owned 0 0
Provision for other real estate owned 0 0
Net change in other assets (507,248) (219,666)
Net change in other liabilities 1,884,521 811,602
Net amortization of premium on investments 54,924 384,473
Net change in deferred loan origination fees 468 6,661
Origination of loans held for sale (15,834,176) (17,247,605)
Proceeds from loans held for sale 16,630,989 16,001,930
Total adjustments 2,740,066 349,754
Net cash provided by operating activities 5,243,577 2,637,970
Cash Flows From Investing Activities:
Purchase of investments (48,497,106) (48,388,964)
Proceeds from sales of investments 33,430,795 11,993,610
Proceeds from maturities of investments 9,990,317 22,348,943
Net change in loans to customers (7,560,747) (4,214,734)
Proceeds from sale of other real estate owned 0 0
Capital expenditures (709,297) (253,103)
Net cash used in investing activities (13,346,038) (18,514,248)
Cash Flows From Financing Activities:
Net increase/(decrease) in other Borrowed Funds 5,000,000 13,624,208
Net increase/(decrease) in deposits 9,931,212 8,409,791
Purchase of Treasury Stock (80,468) (177,334)
Proceeds from sale of Treasury Stock 59,020 39,000
Proceeds from issuance of Common Stock 0 0
Payment for fractional shares 0 0
Dividends paid (849,229) (719,712)
Net cash provided by financing activities 14,060,535 21,175,953
Net increase/(decrease) in cash and cash equivalents 5,958,074 5,299,675
Cash and cash equivalents at beginning of year 17,113,358 9,901,191
Cash and cash equivalents at 9/30/99 & 9/30/98 $23,071,432 $15,200,866
Supplemental Schedule of Non-Cash Investing and Financing Activities
1999 1998
Net increase/(decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities 4,275,153 351,021
Deferred income/(expense) liability 1,453,552 119,346
Net unrealized gain/(loss) on available
for sale securities $2,821,601 $231,673
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 1999 and 1998
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDER'S
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
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 2,197,215 0 2,197,215
Change in net unrealized
gain (loss) on available
for sale securities, net of tax
of $252,288 0 0 0 0 489,736 489,736
Total Comprehensive
Income 0 0 0 0 0 2,686,951
Effect of the May 28, 1999
stock split effected in the
form of a 20% stock dividend (96,850
shares) 1,210,625 0 0 (1,210,625) 0 0
Sale of 312 shares Treasury
stock 0 0 43,536 0 0 43,536
Repurchase of 1,412 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 $7,279,925 $3,948,797 $(299,029) $15,638,155 $927,485 $27,495,333
Balance at December 31,
1998 $7,279,925 $3,963,432 $(289,019) $16,623,248 $1,162,032 $28,739,718
Net income, September 30,
1999 0 0 0 2,503,511 0 2,503,511
Change in net unrealized gain (loss) on available
for sale securities, net of tax of
$1,453,552 0 0 0 0 (2,821,601) (2,821,601)
Total Comprehensive
Income 0 0 0 0 0 (318,090)
Sale of 454 shares Treasury
stock 0 0 59,020 0 0 59,020
Repurchase of 726 shares Treasury
stock 0 0 (80,468) 0 0 (80,468)
Cash dividends
declared 0 0 0 (852,120) 0 (852,120)
Balance at September 30,
1999 $7,279,925 $3,963,432 $(310,467) $18,274,739 $(1,659,569) $27,548,060
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, 1999 and 1998 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, 1998.
(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, 1999 were 582,394 and have been restated for 1998 to reflect the May
28, 1999 20% 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 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, 1999, and
September 30, 1998, the following financial instruments, whose contract
amounts represent credit risk, were outstanding.
September 30
(000's omitted)
1999 1998
1. Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines 6,562 6,796
B. Credit card lines 6,242 5,924
C. Secured real estate loans 5,625 4,264
D. Other 21,131 17,409
2. Financial Standby Letters of Credit: 165 97
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 1998:
SFAS No. 132 Employer's Disclosure about Pension and Other Post-
Retirement Benefits
SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 132, which revises employers' disclosures about pension and
other post-retirement benefits, is effective for years beginning after
December 31, 1997. The Company implemented SFAS No. 132 in 1998. The
required disclosures have been made in the Company's consolidated
financial statements.
SFAS No. 133, which establishes accounting and reporting standards for
derivative instruments and for hedging activity, is effective for fiscal
years beginning after June 15, 1999. The Company adopted SFAS No. 133
effective July 1, 1998. During the three-year period ended December 31,
1998, the Company did not hold any derivative instruments. The effect
of adopting SFAS No. 133 on the consolidated financial statements of the
Company is limited to the transfer of securities from held to maturity
to available for sale.
In June 1999, the Financial Accounting Standards Board issued the
following Statements of Financial Accounting Standards:
SFAS No. 136 Transfer of Assets to a Not-for-Profit Organization or
Charitable Trust that raises or holds Contributions for Others
SFAS No. 137 Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 136, which establishes standards for transactions in which an
entity makes contributions by transferring assets to a not-for-profit
organization, is effective for years beginning after December 31, 1999.
The Company does not expect any impact to its financial statements.
SFAS No. 137, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities, is effective for
years beginning after December 31, 1999. The Company does not expect
any material impact to its financial statements.
Year 2000 Readiness
It has been widely publicized that many computer software applications
and hardware 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 the year as "00" and may
incorrectly interpret the year as "1900."
Union Trust, recognizing the importance of this issue, has been working
on this problem for some time. The Company adopted a plan of action in
1997 to minimize the risks to the Company's operations posed by the Year
2000 event. The plan included the formation of a Technology Steering
Committee to assess, monitor and review vendor compliance and
certification. The committee's charter also called for it to identify
clearly all systems and equipment used in the day to day operations of
the Company that might be affected and to oversee the remediation of any
date recognition problems thus identified.
During 1998, guided by the stringent requirements of federal and state
banking regulators and a comprehensive plan of action developed by the
Technology Steering Committee, the Company completed the assessment
phase, identified mission critical systems, tested all those internal
systems and worked on contingency plans. It has also taken steps to
verify that all third party vendors, suppliers and other related
business parties are adequately prepared for the year 2000. Primarily
for operational reasons, Union Trust replaced its mainframe operating
system in 1995. The system vendor has certified to the Company that the
system is Year 2000 compliant, and the Company has completed the
validation of the system's readiness. Union Trust is currently on track
with the Federal Financial Institutions Examination Council's (FFIEC)
required time frames for compliance, and the Company's efforts have been
examined by the bank regulators. The Company has also embarked upon an
awareness program to educate its employees and customers regarding Year
2000 issues. During 1998, the Company participated in several seminars
to educate the public about this issue. The Company also hosted
discussion groups with area professionals to review potential areas of
concern. This program has been expanded during 1999 to include more
customer communications and public seminars.
The Company has estimated that the total costs directly relating to
fixing Year 2000 issues, such as hardware purchases, software
modification and system testing, will not have a material effect on the
performance of the Company. The Company estimates that the total costs
for evaluation, remediation and testing could amount to as much as
$100,000, of which $78,000 has been expensed. In addition, it is
estimated that approximately 5,000 employee-hours were utilized during
1998 and 1999 for related activities, which are not reflected in the
above figures.
The Company's most reasonable, likely, worst case Year 2000 scenarios
may include the failure of a vendor or third party provider - which is
beyond the Company's control. In the event a failure occurs, the
Company will implement manual contingency systems without serious impact
on the Company's financial condition. The Company has created
contingency plans for all mission critical functions. These plans have
been tested in 1999 and are within all FFIEC guidelines.
Management believes the Company is adequately addressing the Year 2000
issue and that the current preparations and testing being conducted
throughout the organization seek to minimize any potential adverse
effects on the Company or its customers.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
Net income increased $306,296 or 13.9% for the first nine months of 1999
versus the same period in 1998. The following table summarizes the
status of the bank's earnings per share:
September 30,
1999 1998
Earnings Per Share 4.33 3.80
Return on Average Shareholders Equity 8.90%A 8.76%B
Return on Average Assets 0.97%A 0.98%B
Return on Average Earning Assets 1.04%A 1.05%B
A=annualized returns are: 11.87%, 1.29%, and 1.39%, respectively.
B=annualized returns are: 11.68%, 1.30%, and 1.40%, respectively.
The moderate increase in net income for the first nine months of 1999
versus the same periods in 1998 results primarily from an increase in
net interest income and noninterest income and cost control efforts.
As a result of narrowing margins, net interest income was up only
$126,011 or 1.7% from the same period last year, due to margin
compression and increased competition and pricing pressures in the
Bank's immediate market area.
The increase in noninterest income results primarily from improvements
in virtually all fee income categories, in particular, in bankcard fees,
trust fees and loan fees. There was also a one time gain on the sale of
other real estate owned.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating
expenses increased $123,164 from the same period in 1998 due to
increased staffing and the expenses related to upgrading equipment and
facilities.
During 1999, the Company is implementing 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 and exploring new fee generation
opportunities.
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 lag the national trend, 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 1999 was $2,582,777, up
$70,978 or 2.8% and for the first nine months of 1999 was $7,561,236, up
$126,011 or 1.7% over the same periods in 1998.
The following table illustrates the bank's net interest spread position:
Nine Months Ended September 30,
1999 1998
Yield on Earning Assets 7.39% 7.89%
Cost of all Funds 2.72% 3.04%
Net Interest Spread 4.67% 4.86%
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 decreased $58,000 to $155,000 from the
same period last year, resulting from management's ongoing evaluation of
the allowance for loan losses. 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, 1999 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,
1999 1998
1. Nonaccrual Loans 524 397
2. Loans past due 90 days & accruing 383 46
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 0 376
5. Total nonperforming assets 907 819
6. Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) 3.01 1.48
7. Ratio of net chargeoffs to loans 0.026 0.14
8. Ratio of allowance for loan losses to loans 2.08 2.04
9. Coverage ratio (allowance for loan losses divided by
nonperforming assets) 281.92 276.43
10. Ratio of nonperforming assets to total assets .34 .33
11. Ratio of nonperforming loans to total loans .74 .18
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), decreased
$28,337 or 3.1% and increased $331,775 or 14.3% for the three and nine
months ended September 30, 1999 over the same period in 1998.
The increase is primarily due to an increase of loan department fees of
$30,204 or 7.5%, credit card income of $38,472 or 8% and trust income of
$135,006 or 25.7%. There was also a one time entry of $153,984 which
was a gain on the sale of other real estate owned.
Net security gains/(losses) amounted to $(58,437) and $(17,595) for the
three and nine months ended September 30, 1999 compared to $14,506 and
$25,376 for the same periods in 1998.
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 $130,578 or 6.2% and $123,164 or 2% for
the three and nine months ended September 30, 1999 over the same period
in 1998. 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
1999 1998 1999 1998
Nine Months Ended September 30, $1,118,355 $1,075,000 30.9% 32.0%
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap analysis as of
December 31, 1998 as provided on page 12 in the Bank's 1998 Annual
Report. Data as of September 30, 1999 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, 1999 $27,548,060 $47.67
September 30, 1998 $27,495,333 $47.58
December 31, 1998 $28,739,718 $49.74
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, 1999, the Company had met the minimum capital
ratios. In fact, the Bank's strong capital position at September 30,
1999 exceeded the minimums established by the Federal Reserve Board as
follows:
Minimum Regulatory
September 30, 1999 Requirements
Leverage Capital Ratio 11.22 3.0%
Risk Based Ratio 21.79 8.0%
Tier 1 Ratio 20.53 4.0%
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 1999 and $.50 for the third quarter of 1998.
STOCK DIVIDENDS
On April 14, 1999, the Board of Directors of Union Bankshares Company
declared a 20% stock dividend payable to stockholders of record on April
23, 1999.
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, 1999, 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 September 30, 1999, the Bank's ratio of rate sensitive assets to
rate sensitive liabilities at the one year horizon was 82%, its one year
GAP (measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a point in time) was 8% or 92% matched,
and $99,866,000 in assets and $121,611,000 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,
1999 1998
Net cash from operations $ 5,243,577 $ 2,637,970
Net cash from investing activities $(13,346,038) $(18,514,248)
Net cash from financing activities $ 14,060,535 $ 21,175,953
Net increase (decrease) $ 5,958,074 $ 5,299,675
BALANCE SHEET ANALYSIS
The Bank experienced an increase in loan demand during the first nine
months of 1999; 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
1999 1998 (Decrease)
Total Assets $265,360,977 $247,067,275 $ 18,293,702
Total Earnings Assets $246,431,406 $231,315,962 $ 15,115,444
Loans $120,358,417 $108,820,301 $ 11,538,116
Assets AFS at Market $108,238,427 $110,932,643 $ (2,694,216)
Assets Held to Maturity $ 4,290,102 $ 3,384,603 $ 905,499
Deposits $197,959,609 $185,874,406 $ 12,085,203
Capital $ 27,548,060 $ 27,495,333 $ 52,727
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 $8,843,900 to $112,528,529 or 42.4% of total assets
as of September 30, 1999, as compared to 46.3% at September 30, 1998. A
portion of this decrease is due to the reclassification of $4,965,343 in
Assets Available for Sale - Loans into the mortgage loan portfolio on
July 15, 1999.
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 1999 and thus the Bank experienced an increase of $11,538,116
or 10.6% at September 30, 1999 vs September 30, 1998. A portion of this
increase is due to the reclassification of $4,965,343 in Assets AFS -
Loans which were previously held in the investment section of balance
sheet. These were moved into the mortgage loan portfolio on July 15,
1999.
It should be pointed out that the Bank has sold and serviced $61,276,253
of real estate loans and $2,294,208 of commercial mortgages and has
$375,800 of loans held for sale at September 30, 1999.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" clearly indicates the quality of the loan portfolio at
September 30, 1999.
The Bank's loan to deposit ratio was 62.1% and the allowance for loan
losses 2.08% of total loans at September 30, 1999.
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 $12,085,203, or 6.5% over the comparable period
in 1998, 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 5.06% 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, 1999, 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 9, 1999
Sally J. Hutchins, Vice President/Treasurer
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