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, 2000
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, 2000
(Common stock, $12.50 Par Value) 577,466
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
Item l: Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets - 4
June 30, 2000, June 30, 1999, December 31, 1999
Condensed Consolidated Statements of Income - 5-6
six months ended June 30, 2000 and June 30, 1999
three months ended June 30, 2000 and June 30, 1999
Condensed Consolidated Statements of Cash Flows - 7
six months ended June 30, 2000 and June 30, 1999
Consolidated Statement of Changes in Shareholders' Equity 9
six months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 10-12
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
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 Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Shareholders
Union Bankshares Company
We have reviewed the accompanying interim consolidated financial
information of Union Bankshares Company and Subsidiary as of June 30,
2000, and for the three- and six-month period then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit in accordance with generally accepted auditing standards,
the objective of which is to express an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
Berry Dunn McNeil & Parker
Portland, Maine
August 4, 2000
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 June 30 December 31
2000 1999 1999
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 9,827,250 $ 6,540,437 $ 9,035,081
Federal funds sold 42,078 2,438,195 39,698
Cash and cash equivalents 9,869,328 8,978,632 9,074,779
Available for sale securities 95,315,872 105,531,391 100,309,096
Held to maturity securities, at cost 4,260,070 4,293,731 4,236,504
Other investment securities, at cost 3,557,700 3,557,700 3,557,700
Loans (net of unearned discount) 138,060,361 114,860,050 127,649,151
Less: Allowance for loan losses 2,538,331 2,390,459 2,629,472
Net Loans $135,522,030 $112,469,591 $125,019,679
Premises, furniture & equip net 3,512,983 2,627,085 2,987,572
Deferred tax asset on unrealized gains 1,418,679 530,171 1,095,184
Acquisition costs 414,094 0 0
CSV life insurance 6,349,919 0 6,231,251
Other assets 5,543,069 6,116,871 5,337,900
Total Assets $265,763,744 $244,105,172 $257,849,665
LIABILITIES
Deposits:
Demand $ 23,008,331 $ 21,271,396 $ 25,368,731
Savings 88,667,000 86,891,992 92,067,463
Time 75,959,820 76,742,829 75,411,640
Total Deposits 187,635,151 184,906,217 192,847,834
Borrowed Funds 35,411,250 20,451,250 18,451,250
Sweep Repurchase 10,015,393 6,512,544 13,140,423
Accrued Expenses & Other Liabilities 4,862,173 4,466,670 5,767,167
Total Liabilities $237,923,967 $216,336,681 $230,206,674
SHAREHOLDERS' EQUITY
Common Stock, $12.50 par value. Authorized
1,200,000 shares, issued 582,394 shares
in 2000 and 1999 $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 3,963,533 3,963,432 3,963,533
Retained Earnings 19,712,149 17,765,560 18,837,028
Net Unrealized Gain/(Loss) on
Securities Available for Sale (2,774,105) (929,959) (2,128,324)
Less: Treasury Stock 341,725 310,467 309,171
Total Shareholders' Equity $ 27,839,777 $ 27,768,491 $ 27,642,991
Total Liabilities & Shareholders'
Equity $265,763,744 $244,105,172 $257,849,665
*Condensed from audited financial statements
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiary.
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Six Months Ended - June 30,
2000 1999
INTEREST INCOME
Interest and Fees on Loans $5,320,814 $4,745,568
Interest and Fees on Municipal Loans and Bonds 503,733 492,127
Interest and Dividends on Securities 3,136,412 3,180,650
Interest on Federal Funds Sold 18,171 117,189
Amortization & Accretion - Net (399) (63,218)
Total Interest Earned 8,978,731 8,472,316
INTEREST EXPENSE
Interest on Deposits 2,758,002 2,795,771
Interest on Funds Purchased/Borrowed 1,028,165 698,086
Total Interest Expense 3,786,167 3,493,857
NET INTEREST INCOME 5,192,564 4,978,459
Provision for Loan Losses 75,000 110,000
NET INTEREST INCOME AFTER LOAN PROVISION 5,117,564 4,868,459
NONINTEREST INCOME
Exchange, Commission & Fees 439,598 467,332
Trust Department 543,640 433,548
Financial Service Fees 35,328 34,118
Other Income 524,523 668,586
Gain on Sale of Other Real Estate Owned 0 153,984
Net Securities Gains/(Losses) (43,914) 42,709
Total Noninterest Income 1,499,175 1,800,277
NONINTEREST EXPENSE
Salaries and Employee Benefits 2,482,288 2,265,008
Building Maintenance & Operations 274,678 283,026
FDIC Insurance 29,189 16,061
Other Expenses 1,800,569 1,622,874
Total Noninterest Expense 4,586,724 4,186,969
INCOME BEFORE TAXES 2,030,015 2,481,767
Income Taxes 577,000 776,355
NET INCOME $1,453,015 $1,705,412
Per Share Data:
Net Income $2.51 $3.10
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended - June 30,
2000 1999
INTEREST INCOME
Interest and Fees on Loans $2,716,932 $2,347,967
Interest and Fees on Municipal Loans and Bonds 263,019 267,060
Interest and Dividends on Securities 1,557,055 1,593,204
Interest on Federal Funds Sold 6,695 30,054
Amortization & Accretion - Net 3,396 (27,592)
Total Interest Earned 4,547,097 4,210,693
INTEREST EXPENSE
Interest on Deposits 1,402,123 1,387,389
Interest on Funds Purchased/Borrowed 584,128 357,087
Total Interest Expense 1,986,251 1,744,476
NET INTEREST INCOME 2,560,846 2,466,217
Provision for Loan Losses 45,000 45,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,515,846 2,421,217
NONINTEREST INCOME
Exchange, Commission & Fees 231,829 229,783
Trust Department 291,945 217,552
Financial Service Fees 16,899 16,126
Other Income 281,567 341,499
Net Securities Losses (19,171) (61,146)
Total Noninterest Income 803,069 743,814
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,352,719 1,205,734
Building Maintenance & Operations 130,157 139,821
FDIC Insurance 9,203 5,107
Other Expenses 953,343 847,398
Total Noninterest Expense 2,445,422 2,198,060
INCOME BEFORE TAXES 873,493 966,971
Income Taxes 247,000 306,000
NET INCOME $ 626,493 $ 660,971
Per Share Data:
Net Income $1.08 $1.20
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
2000 1999
Net Cash Flows Provided by Operating Activities:
Net Income $1,453,015 $1,705,412
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 229,186 228,906
Provision for loan losses 75,000 110,000
Disposals 33,526 27,066
Net securities (gains) losses 43,914 (42,709)
Net change in other assets (964,502) (649,297)
Net change in other liabilities (669,243) (2,995,607)
Net amortization of premium (accretion
of discount) on investments 25,877 (102,782)
Net change in deferred loan origination fees 1,291 3,528
Origination of loans held for sale (2,022,065) (14,100,581)
Proceeds from loans held for sale 2,454,329 15,730,147
Total adjustments (792,687) (1,791,329)
Net cash provided (used) by operating activities 660,328 (85,917)
Cash Flows From Investing Activities:
Purchase of securities available for sale (3,031,053) (40,384,868)
Purchase of securities held to maturity (50,000) (1,022,954)
Proceeds from sales of securities
available for sale 2,830,309 31,920,529
Proceeds from sales of securities held to maturity 0 0
Proceeds from maturities of securities
available for sale 3,720,641 9,895,537
Proceeds from maturities of securities
held to maturity 19,250 75,000
Net change in loans to customers (10,578,642) (4,595,324)
Capital expenditures (788,123) (229,282)
Net cash used in investing activities (7,877,618) (4,341,362)
Cash Flows From Financing Activities:
Net increase in other Borrowed Funds 13,834,970 0
Net increase/(decrease) in demand,
savings and money market accounts (6,103,946) 524,261
Net increase/(decrease) in time deposits 891,263 (3,647,060)
Purchase of Treasury Stock (85,259) (80,468)
Proceeds from sale of Treasury Stock 52,705 59,020
Dividends paid (577,894) (563,200)
Net cash provided/(used) by financing activities 8,011,839 (3,707,447)
Net increase/(decrease) in cash and cash equivalents 794,549 (8,134,726)
Cash and cash equivalents at beginning of period 9,074,779 17,113,358
Cash and cash equivalents at end of period $9,869,328 $8,978,632
Supplemental Schedule of Non-Cash Investing and Financing Activities
2000 1999
Net increase/(decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities 969,276 (3,169,683)
Deferred income/(expense) tax liability (323,495) 1,077,692
Net unrealized gain/(loss) on
available for sale securities $645,781 $(2,091,991)
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2000 and 1999
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
(LOSS)
Balance at December 31,
1998 $7,279,925 $3,963,432 $(289,019) $16,623,348 $1,162,032 $28,739,718
Net income, June 30,
1999 0 0 0 1,705,412 0 1,705,412
Change in net unrealized
gain (loss) on available
for sale securities,
net of tax of
$1,077,692 0 0 0 0 (2,091,991) (2,091,991)
Net Comprehensive
Loss 0 0 0 1,705,412 (2,091,991) (386,579)
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 (563,200) 0 (563,200)
Balance at June 30,
1999 $7,279,925 $3,963,432 $(310,467) $17,765,560 ($929,959) $27,768,491
Balance at December 31,
1999 $7,279,925 $3,963,533 $(309,171) $18,837,028 ($2,128,324) $27,642,991
Net income, June 30,
2000 0 0 0 1,453,015 0 1,453,015
Change in net unrealized gain
(loss) on available for sale
securities, net of tax
of $(323,495) 0 0 0 0 (645,781) (645,781)
Total Comprehensive
Income 0 0 0 1,453,015 (645,781) 807,234
Sale of 488 shares
Treasury stock 0 0 52,705 0 0 52,705
Repurchase of 870 shares
Treasury stock 0 0 (85,259) 0 0 (85,259)
Cash dividends
declared 0 0 0 (577,894) 0 (577,894)
Balance at June 30,
2000 $7,279,925 $3,963,533 $(341,725) $19,712,149 ($2,774,105) $27,839,777
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,
2000 and 1999 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, 1999.
(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 for the six months ended June 30, 2000
and 1999 were 577,961 and 550,111, respectively, and have been restated for
1999 to reflect a 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 June 30, 2000,
and June 30, 1999, the following financial instruments, whose contract amounts
represent credit risk, were outstanding.
June 30
(000's omitted)
2000 1999
1. Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines $6,543 $6,384
B. Credit card lines 6,453 6,137
C. Secured real estate loans 6,074 4,422
D. Other 18,318 19,513
2. Financial Standby Letters of Credit: 82 165
(D) Regulatory Agencies
The Bank's primary regulators are the Federal Reserve Bank of Boston and, as a
state chartered bank 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 recently issued the following Statement
of Financial Accounting Standards (SFAS):
SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities
SFAS No. 138 Accounting for Certain Derivative Instruments and Certain
Hedging Activities
SFAS No. 137 and 138, which amend SFAS No. 133 and establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities, are
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not expect these statements to have any material impact
to its consolidated financial condition and results of operations.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activity. The Company adopted SFAS No. 133
effective July 1, 1998. During the six-month periods ended June 30, 2000 and
1999, the Company did not hold any derivative instruments, and management does
not expect to enter into derivative transactions in the near future. The effect
of adopting SFAS No. 133 on the consolidated financial statements of the
Company was limited to the transfer of securities from held to maturity to
available for sale.
(H) Recent Developments
As part of its efforts to broaden its community banking franchises and
enhance shareholder value, the Company announced during the first quarter of
2000 that it is expanding into the neighboring Waldo, Knox and Lincoln market.
A definitive merger agreement was signed to acquire all of the outstanding
common stock of Mid-Coast Bancorp, Inc. ("Mid-Coast"), the holding company for
Waldoboro Savings Bank. As a result, the savings bank, with assets of $78.0
million, will merge the operations of its four branch locations into Union's
branch network. Under the terms of the agreement, the Company will pay $15.875
per share in cash for each of the 715,457 outstanding shares of Mid-Coast
common stock. The aggregate purchase price is approximately $11.9 million,
which includes exercising all outstanding stock options. The transaction,
which will be accounted for under the purchase method, is expected to close in
the third quarter of 2000. The transaction has been approved by the Company's
and Mid-Coast's shareholders and is subject to approval by various regulatory
agencies.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
The following discussion and analysis focuses on the factors affecting Union
Bankshares Company (The Company) financial condition at June 30, 2000 as
compared to June 30, 1999.
Results of Operations
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on earning assets
(primarily loans and investments) and interest expense (primarily deposits and
borrowings). The Company's results are also affected by the provision for loan
losses; noninterest income, including gains and losses on the sales of loans
and securities; noninterest expenses; and income tax expense. Each of these
major components of the Company's operating results is highlighted below.
Net Income
The Company reported net income for the three months ended June 30, 2000 of
$626,493 versus $660,971 for the same period in 1999, and net income for the
first six months of 2000 of $1,453,015 versus $1,705,412 for the same period
in 1999.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
June 30,
2000 1999
Earnings Per Share 2.51 2.95
Return on Average Shareholders Equity 4.90%A 6.27%B
Return on Average Assets 0.57%A 0.72%B
Return on Average Earning Assets 0.59%A 0.77%B
A=annualized returns are: 9.80%, 1.14%, and 1.18%, respectively.
B=annualized returns are: 12.54%, 1.44%, and 1.54%, respectively.
The decrease in net income for the three and six months ended June 30, 2000
versus the same periods in 1999 was not unexpected due to several events that
occurred in the first six months of 1999, including one time gains on a sale
of bank owned property and security gains realized on the Company's security
portfolio.
As a result of narrowing margins, (offset in part by overall loan growth
during 2000), net interest income for the second quarter of 2000 and for the
first six months of 2000 was up a modest $94,629 or 3.8% and $214,105 or 4.3%,
respectively, from the same periods last year, due to margin compression and
increased competition and pricing pressures in the Bank's immediate market area.
The decrease in noninterest income results primarily from one time events in
1999 which was a gain on the sale of other real estate owned of $153,984 and
security gains of $101,988, offset by improvements in bankcard and trust fees.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating
expenses, for the second quarter of 2000 and the six months ended June 30, 2000
increased $247,362 and $399,755, respectively, from the same periods in 1999
due to increased staffing and the expenses related to upgrading equipment and
facilities.
During 2000, the Company is continuing to implement specific strategic
priorities that will focus on growing the Bank and 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 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 2000 was $2,560,846, up a modest
$94,629 or 3.8% and for the first six months of 2000 was $5,192,564, up
$214,105 or 4.3% over the same periods in 1999.
The following table illustrates the bank's net interest spread position:
Six Months Ended June 30,
2000 1999
Yield on Earning Assets 7.84% 7.53%
Cost of all Funds 3.21% 2.89%
Net Interest Margin 4.63% 4.64%
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 for the six month period ended June 30, 2000
decreased $35,000 to $75,000 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 June 30, 2000
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,
2000 1999
1. Nonaccrual Loans 1,467 515
2. Loans past due 90 days & accruing 351 122
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 0 0
5. Total nonperforming assets 1,818 637
6. Ratio of total nonperforming loans
to capital and the allowance for
loan losses (Texas ratio) 5.48 2.11
7. Ratio of net chargeoffs to loans .0012 .0013
8. Ratio of allowance for loan losses to loans 1.84 2.08
9. Coverage ratio (allowance for loan losses
divided by nonperforming assets) 139.60 375.27
10. Ratio of nonperforming assets to total assets .68 .26
11. Ratio of nonperforming loans to total loans .68 .26
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 one time gains/(losses), increased $17,280 or 2.1%
and decreased $62,362 or 3.8% for the three and six months ended June 30, 2000
over the same periods in 1999. This decrease is primarily due to a decrease in
loan department income of $153,211 or 45.9%. Offsetting factors were increases
in trust income of $110,092 or 25.4% and credit card income of $36,860 or 15.8%.
Net security gains/(losses) amounted to $(19,171) and $(43,914) for the three
and six months ended June 30, 2000 compared to $(61,146) and $40,842 for the
same periods in 1999.
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 $247,362 or 11.2% and $399,755 or 9.5% for the
three and six months ended June 30, 2000 over the same periods in 1999. 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
2000 1999 2000 1999
Six Months Ended June 30, $577,000 $776,355 28.4% 31.3%
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap analysis as of December
31, 1999 as provided on page 12 in the Bank's 1999 Annual Report. Data as of
June 30, 2000 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, 2000 $27,839,777 $48.17
June 30, 1999 $27,768,491 $48.06
December 31, 1999 $27,642,991 $51.50
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 June 30, 2000, the
Company had met the minimum capital ratios. In fact, the Bank's strong capital
position at June 30, 2000 exceeded the minimums established by the Federal
Reserve Board as follows:
Minimum Regulatory
June 30, 2000 Requirements
Leverage Capital Ratio 11.6 3.0%
Risk Based Ratio 20.9 8.0%
Tier I Ratio 19.6 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 second
quarter of 2000 and 1999, respectively.
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 June 30, 2000, Union Trust Company is liability sensitive. The Bank
remains liability sensitive between 37 and 60 month horizons. Bank earnings
may be negatively affected, should interest rates fall.
As of June 30, 2000, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 67%, its one year GAP
(measurement of interest sensitivity of interest earning assets and interest
bearing liabilities at a point in time) was 15% or 85% matched, and $80,367,000
in assets and $119,610,000 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,
2000 1999
Net cash from operations $ 660,328 $ (499)
Net cash used by investing activities $(7,877,618) $(4,426,780)
Net cash from (used by) financing activities $ 8,011,839 $(3,707,447)
Net increase (decrease) $ 794,549 $(8,134,726)
BALANCE SHEET ANALYSIS
Total assets increased $7,814,000 or 3.03% for the first six months of 2000
primarily due to increased loan volume of some $10,502,000 or 8.40% offset by
a decrease in securities of $4,970,000, a decrease in deposits of $5,213,000
and an increase in borrowings of $16,960,000 to fund loan growth in 2000.
The following financial statistics give a general overview and profile of
the Company:
As of June 30, Increase
2000 1999 (Decrease)
Total Assets $265,763,744 $244,105,172 $ 21,658,572
Total Earnings Assets $238,697,750 $228,290,607 $ 10,407,143
Loans $135,522,030 $112,469,591 $ 23,052,439
Assets AFS at Market $ 98,873,572 $109,089,091 $(10,215,519)
Assets Held to Maturity $ 4,260,070 $ 4,293,731 $ (33,661)
Deposits $187,635,151 $184,906,217 $ 2,728,934
Borrowings and Sweep Repurchase
Agreements $ 45,426,643 $ 26,963,794 $ 18,462,849
Capital $ 27,839,777 $ 27,768,491 $ 71,286
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 $10,249,180 to $103,133,642 or 38.8% of total assets as of June 30,
2000, as compared to 46.4% at June 30, 1999. A portion of this decrease is
due to the reclassification of $4,965,343 in Assets AFS - Loans which were
previously held in this section of the balance sheet. These were moved 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 second
quarter of 2000 and thus the Bank experienced an increase of $23,052,439 or
20.5% at June 30, 2000 versus June 30, 1999. 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 the balance sheet. These were
moved into the mortgage loan portfolio on July 15, 1999. There has been a
slight change in the Company's loan mix and as of June 30, 2000, the loan
portfolio remains diversified, posting growth primarily in consumer real
estate loans of $18,361,334 or 48.2% from June 30, 1999 and totaling 40.9% and
33.2% of total loans for June 30, 2000 and June 30, 1999, respectively.
Commercial real estate loans were 27.2%, loans to individuals for household,
family and other personal expenditures were 16.4%, commercial loans accounted
for 7.0% and 8.5% was invested in municipal loans at June 30, 2000.
It should be pointed out that the Bank has sold and serviced $60,419,403 of real
estate loans and $2,250,835 of commercial mortgages and has over $162,200 of
loans held for sale at June 30, 2000.
The section of management's discussion and analysis entitled "Provision for
Loan Losses" clearly indicates the quality of the loan portfolio at June 30,
2000.
The Bank's loan to deposit ratio was 72.2% and the allowance for loan losses
1.84% of total loans at June 30, 2000.
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 $2,728,934, or 1.5% over the comparable period in
1999, 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 6.44% of its deposit base.
BORROWINGS AND SWEEP REPURCHASE AGREEMENTS
Total advances from the Federal Home Bank increased $14,960,000 or 73.1% over
the comparable period in 1999, primarily to fund new loan originations for 2000.
Sweep repurchase agreements totaling $10,015,393 as of June 30, 2000 versus
$6,512,544 as of June 30, 1999 increased $4,225,586 or 56.1%. The increase
was primarily due to competitive rates and account features.
YEAR 2000 READINESS
As of December 31, 1999, the Bank experienced no significant operational or
financial impact from the year 2000 transition. Union Trust, recognizing the
importance of this issue, started working on this problem several years ago.
The Company adopted a plan of action back in 1997 to minimize the risks to the
Company's operations and financial condition 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 1999 and 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. As of December 31, 1999,
Union Trust met 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 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. During 1999, the Bank
joined an inter bank Y2K group to address the issues of the Year 2000 event,
in particular, addressing cash reserves, security and customer communication
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 have amounted to as much as $110,000, of which
$85,000 and $25,000 was expensed in 1999 and 1998, respectively. In
addition, it is estimated that approximately 3,500 employee-hours were
utilized during the period for related activities, which are not reflected
in the above figures.
Management believes the Company has and will continue to adequately
address the Year 2000 event and that testing will be conducted throughout
the organization during year 2000 to minimize any potential adverse
effects on the Company and its customers.
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
Union Bankshares Company filed a current report on Form 8-K dated March
31, 2000 disclosing under Item 5 that Union Trust Company has reached an
agreement to acquire Waldoboro Savings Bank.
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 10, 2000
Sally J. Hutchins, Vice President /Treasurer
