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 March 31, 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 March 31, 2000.
Class Outstanding at March 31, 2000
(Common stock, $12.50 Par Value) 578,336
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
March 31, 2000, March 31, 1999, December 31, 1999
Condensed Consolidated Statements of Income - 5
three months ended March 31, 2000 and March 31, 1999
Condensed Consolidated Statements of Cash Flows - 6
three months ended March 31, 2000 and March 31, 1999
Consolidated Statement of Changes in Shareholders' 8
Equity - three months ended March 31, 2000 and 1999
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
PART II Other Information
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
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 March 31,
2000, and for the three-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
May 4, 2000
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 March 31 December 31
2000 1999 1999
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 9,748,149 $ 6,289,823 $ 9,035,081
Federal funds sold 41,450 26,280 39,698
Cash and cash equivalents 9,789,599 6,316,103 9,074,779
Assets available for sale 97,494,041 108,184,680 100,309,096
(MARKET VALUE AT 3/31/00)
Held to maturity securities at cost 4,232,912 4,372,358 4,236,504
Other investment securities, at cost 3,557,700 3,557,700 3,557,700
Loans (net of unearned discount) 126,840,879 115,732,618 127,649,151
Less: Allowance for loan losses 2,618,378 2,472,065 2,629,472
Net Loans $124,222,501 $113,260,553 $125,019,679
Premises, furniture & equip net 3,070,610 2,623,394 2,987,572
SFAS 115 deferred tax asset on
unrealized gains 1,470,936 0 1,095,184
Acquisition Costs 164,939 8,295 0
CSV life insurance 6,296,524 576,806 6,231,251
Other assets 5,276,999 5,186,868 5,337,900
Total Assets $255,576,761 $244,086,757 $257,849,665
LIABILITIES
Deposits:
Demand $ 21,104,917 $ 19,111,107 $ 25,368,731
Savings 87,086,991 82,767,656 92,067,463
Time 74,660,374 77,823,702 75,411,640
Total Deposits 182,852,282 179,702,465 192,847,834
Borrowed Funds 28,451,250 22,706,250 18,451,250
Sweep Repurchase 11,760,052 7,534,466 13,140,423
Accrued Expenses & Other Liabilities 5,024,365 5,152,092 5,767,167
Total Liabilities $228,087,949 $215,095,273 $230,206,674
SHAREHOLDERS' EQUITY
Common Stock $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 3,963,533 3,963,014 3,963,533
Retained Earnings 19,374,395 17,427,050 18,837,028
Net Unrealized Gain/(Loss) on
Securities Available for Sale (2,872,575) 551,494 (2,128,324)
Less: Treasury Stock 256,466 229,999 309,171
Total Shareholders' Equity $ 27,488,812 $ 28,991,484 $ 27,642,991
Total Liabilities & Shareholders'
Equity $255,576,761 $244,086,757 $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 AND SUBSIDIARY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended - March 31,
2000 1999
INTEREST INCOME
Interest and Fees on Loans $2,603,882 $2,397,601
Interest and Fees on Municipal Loans and Bonds 240,714 225,067
Interest and Dividends on Securities 1,579,357 1,587,446
Interest on Federal Funds Sold 11,476 87,135
Amortization & Accretion - Net (3,795) (35,626)
Total Interest Earned 4,431,634 4,261,623
INTEREST EXPENSE
Interest on Deposits 1,355,879 1,408,382
Interest on Funds Purchased/Borrowed 444,037 340,999
Total Interest Expense 1,799,916 1,749,381
NET INTEREST INCOME 2,631,718 2,512,242
Provision for Loan Losses 30,000 65,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,601,718 2,447,242
NONINTEREST INCOME
Exchange, Commission & Fees 207,769 237,549
Trust Department 251,695 215,996
Financial Service Fees 18,429 17,992
Other Income 242,956 328,954
Gain on Sale of Other Real Estate Owned 0 153,984
Net Securities Gains/(Losses) (24,743) 101,988
Total Noninterest Income 696,106 1,056,463
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,129,569 1,059,274
Building Maintenance & Operations 144,521 143,205
FDIC Insurance 19,986 10,954
Other Expenses 847,226 775,476
Total Noninterest Expense 2,141,302 1,988,909
INCOME BEFORE TAXES 1,156,522 1,514,796
Income Taxes 330,000 470,355
NET INCOME $ 826,522 $1,044,441
Per Share Data:
Net Income $1.43 $1.81
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
Net Cash Flows Provided by Operating Activities:
Net Income $ 826,522 $1,044,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 101,125 114,906
Provision for loan losses 30,000 65,000
Net securities (gains) losses 24,743 (101,988)
Net change in other assets (433,220) 250,977
Net change in other liabilities (498,394) (1,080,553)
Net amortization of premium (accretion
of discount) on investments 17,647 (115,383)
Net change in deferred loan origination fees (6,574) 5,340
Origination of loans held for sale (722,100) (5,761,775)
Proceeds from loans held for sale 805,463 8,133,261
Total adjustments (681,310) 1,509,785
Net cash provided by operating activities 145,212 2,554,226
Cash Flows From Investing Activities:
Purchase of investments (1,051,671) (22,277,459)
Proceeds from sales of investments 954,940 13,444,543
Proceeds from maturities of investments 1,689,123 7,189,813
Net change in loans to customers 773,752 (5,343,098)
Capital expenditures (184,163) (111,592)
Net cash used in investing activities 2,181,981 (7,097,793)
Cash Flows From Financing Activities:
Net increase/(decrease) in other Borrowed Funds 8,619,629 2,255,000
Net increase/(decrease) in deposits (9,995,552) (8,326,551)
Proceeds from sale of Treasury Stock 52,705 59,020
Dividends paid (289,156) (241,157)
Net cash used by financing activities (1,612,374) (6,253,688)
Net increase/(decrease) in cash and cash equivalents 714,820 (10,797,255)
Cash and cash equivalents at beginning of year 9,074,779 17,113,358
Cash and cash equivalents at end of period $ 9,789,599 $ 6,316,103
Supplemental Schedule of Non-Cash Investing and Financing Activities
2000 1999
Net increase as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities (1,100,502) 924,538
Deferred income/(expense) tax liability 356,251 (314,000)
Net unrealized gain on available for sale securities $ (744,251) $ 610,538
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31, 2000 and 1999
(Unaudited)
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDER'S
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
(LOSS)
Balance at December 31,
1998 $7,279,925 $3,963,014 $(289,019) $16,623,766 $1,162,032 $28,739,718
Net income, three
months ended March 31,
1999 0 0 0 1,044,441 0 1,044,441
Change in net unrealized
gain (loss) on available
for sale securities, net
of tax of
$314,000 0 0 0 0 (610,538) (610,538)
Total Comprehensive
Income 0 0 0 0 0 334,158
Sale of 454 shares Treasury
stock 0 0 59,020 0 0 59,020
Cash dividends
declared 0 0 0 (241,157) 0 (241,157)
Balance at March 31,
1999 $7,279,925 $3,963,014 $(229,999) $17,427,050 $ 551,494 $28,991,484
Balance at December 31,
1999 $7,279,925 $3,963,533 $(309,171) $18,837,028 $(2,128,324) $27,642,991
Net income, three months
ended March 31,
2000 0 0 0 826,522 0 826,522
Change in net unrealized gain
(loss) on available for sale
securities, net of tax
of $356,251 0 0 0 0 (744,251) (744,251)
Total Comprehensive
Income 0 0 0 0 0 82.271
Sale of 488 shares Treasury
stock 0 0 52,705 0 0 52,705
Cash dividends
declared 0 0 0 (289,155) 0 (289,155)
Balance at March 31,
2000 $7,279,925 $3,963,533 $(256,466) $19,374,395 $(2,872,575) $27,488,812
Notes to Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying consolidated financial statements of Union Bankshares
Company and its subsidiary (Union Trust Company) for the three month
period ended March 31, 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 as of March 31, 2000 and
1999 were 578,165 and 482,199, 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 March 31, 2000, and March 31, 1999,
the following financial instruments, whose contract amounts represent
credit risk, were outstanding.
March 31
(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 $6,648 $6,395
B. Credit card lines 6,402 6,034
C. Secured real estate loans 3,471 3,949
D. Other 17,572 19,744
2. Financial Standby Letters of Credit: 82 155
3. Mortgages Transferred With Recourse: 0 0
(D) Regulatory Agencies
The Bank's primary regulators are 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 recently issued the following
Statements of Financial Accounting Standard (SFAS):
SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities
SFAS No. 137, which amends SFAS No. 133 and establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect this statement
to have any material impact to its consolidated financial condition and
results of operations.
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-month periods ended March 31,
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 and is subject to approval by Union's and
Mid-Coast's shareholders and various regulatory agencies, is expected to
close in the third quarter of 2000.
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 March 31,
2000 as compared to March 31, 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 for the first three months of 2000 net income of
$826,522 versus $1,044,441 for the same period in 1999.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
March 31,
2000 1999
Earnings Per Share 1.43 1.81
Return on Average Shareholders Equity 2.75%A 2.76%B
Return on Average Assets 0.33%A 0.32%B
Return on Average Earning Assets 0.36%A 0.34%B
A=annualized returns are: 11.00%, 1.32%, and 1.44%, respectively.
B=annualized returns are: 11.04%, 1.28%, and 1.36%, respectively.
The decrease in net income for the first quarter of 2000 versus the first
quarter in 1999 was not unexpected due to several events that occurred in
the first three 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 1999), net interest income was up only $119,476 or 4.7% from the
same period last year, due to margin compression and increased competition
and pricing pressures in the Bank's immediate market area.
The 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 increased $152,393 from the same period 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 first quarter of 2000 was $2,631,718, up
$119,476 or 4.7% over the same period in 1999.
The following table illustrates the bank's net interest spread position:
Three Months Ended March 31,
2000 1999
Yield on Earning Assets 7.57% 7.65%
Cost of all Funds 2.94% 2.93%
Net Interest Spread 4.63% 4.72%
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 $35,000 to $30,000 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 March 31, 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 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)
Three Months Ended
March 31,
2000 1999
1. Nonaccrual Loans 1,600 635
2. Loans past due 90 days & accruing 360 73
3. Restructured loans 0 0
4. Other real estate owned (including insubstance foreclosure) 0 0
5. Total nonperforming assets 1,960 708
6. Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) 5.94% 2.30%
7. Ratio of net chargeoffs to loans .0003% .0002%
8. Ratio of allowance for loan losses to loans 2.06% 2.14%
9. Coverage ratio (allowance for loan losses divided by
nonperforming assets) 133.57% 349.15%
10. Ratio of nonperforming assets to total assets .77% .29%
11. Ratio of nonperforming loans to total loans 1.55% .61%
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), decreased only
$79,642 or 9.9% during the first quarter of 2000 versus 1999.
This decrease is primarily due to a decrease in loan department income of
$92,758 or 60.0%. Offsetting factors were increases in credit card
income of $21,339 or 18.5% and trust income of $35,699 or 16.5%.
Net security gains/(losses) amounted to ($24,743) and $101,988 for the
three months ended March 31, 2000 and 1999, respectively.
NONINTEREST EXPENSES
Noninterest expenses consist of employee compensation and benefits,
occupancy and equipment expenses and miscellaneous expenses. Management
is continually reviewing expenses to control them and develop more
efficient delivery systems for all Bank services.
A generally flat economy in Maine and 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 $152,393 or 7.7% for the first quarter of
2000 versus the first quarter of 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
Three Months Ended March 31, $330,000 $470,355 28.5% 31.1%
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 March 31, 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
March 31, 2000 $27,488,812 $51.50
March 31, 1999 $28,991,484 $48.13
December 31, 1999 $27,642,991 $51.48
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 March 31, 2000, the Company had met the minimum capital ratios. In
fact, the Bank's strong capital position at March 31, 2000 exceeded the
minimums established by the Federal Reserve Board as follows:
Minimum Regulatory
March 31, 2000 Requirements
Leverage Capital Ratio 11.7 3.0%
Risk Based Ratio 21.8 8.0%
Tier 1 Ratio 20.5 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 and $.41 for
the first 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 March 31, 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 March 31, 2000, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 69%, its one year GAP
(measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a point in time) was 13% or 87% matched,
and $76,247,000 in assets and $109,956,000 in liabilities will be
repriceable in one year.
In addition to the "traditional" GAP calculation, the Company analyzes
future net interest income based on budget projections including
anticipated business activity, anticipated changes in interest rates and
other variables, which are adjusted periodically by management to take
into account current economic conditions, the current interest rate
environment, and other factors.
The status of the Bank's sources of cash to fund its operation are as
follows:
March 31,
2000 1999
Net cash from operations $ 145,212 $ 2,554,226
Net cash from (used by) investing activities $ 2,181,981 $ (7,097,793)
Net cash (used by) from financing activities $(1,612,374) $ (6,253,688)
Net increase (decrease) $ 714,820 $(10,797,255)
BALANCE SHEET ANALYSIS
The Bank experienced an increase in loan demand during the first three
months of 2000; the quality and strength of the balance sheet remains
strong.
The following financial statistics give a general overview and profile of
the Company:
As of March 31, Increase
2000 1999 (Decrease)
Total Assets $255,576,761 $244,086,757 $ 11,490,004
Total Earnings Assets $229,548,604 $229,401,571 $ 147,033
Loans $126,840,879 $115,732,618 $ 11,108,261
Assets AFS at Market $101,051,741 $111,742,380 $(10,690,639)
Assets Held to Maturity $ 4,232,912 $ 4,372,358 $ (139,446)
Deposits $182,852,282 $179,702,465 $ 3,149,817
Borrowings and Sweep
Repurchase Agreements $ 40,211,302 $ 30,240,716 $ 9,970,586
Capital $ 27,488,812 $ 28,991,484 $ (1,502,672)
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 $10,830,085 to $105,284,653 or 41.2% of total assets
as of March 31, 2000, as compared to 47.6% at March 31, 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 first
quarter of 2000 and thus the Bank experienced an increase of $11,108,261
or 9.6% at March 31, 2000 versus March 31, 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
March 31, 2000, the loan portfolio remains diversified, posting growth
primarily in consumer real estate loans of some $13,857,000 or 36.5% from
March 31, 1999 and totaling 40.9% and 32.8% of total loans for March 31,
2000 and March 31, 1999, respectively. Commercial real estate loans were
29.3%, loans to individuals for household, family and other personal
expenditures were 16.9%, commercial loans accounted for 6.0% and 6.9% was
invested in municipal loans at March 31, 2000.
It should be pointed out that the Bank has sold and serviced $60,785,943
of real estate loans and $2,265,477 of commercial mortgages and has over
$511,101 of loans held for sale at March 31, 2000.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" clearly indicates the quality of the loan portfolio at
March 31, 2000.
The Bank's loan to deposit ratio was 69.4% and the allowance for loan
losses 2.06% of total loans at March 31, 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 $3,149,817, or 1.8% 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 5.87% of its deposit base.
BORROWINGS AND SWEEP REPURCHASE AGREEMENTS
Total advances from the Federal Home Bank increased $5,745,000 or 25.3%
over the comparable period in 1999, primarily to fund new loan
originations for 2000.
Sweep repurchase agreements totaling $11,760,052 as of March 31, 2000
versus $7,534,466 as of March 31, 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
May 9, 2000
Sally J. Hutchins, Vice President /Treasurer
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