UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ending: March 31, 2000 Commission file number: 000-28449 UNION BANKSHARES, INC. VERMONT 03-0283552 P.O. BOX 667 MAIN STREET MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address and former fiscal year, if changed since last report: Not applicable 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 such 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 [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of March 31, 2000: Common Stock, $2 par value 3,029,529 shares UNION BANKSHARES, INC. TABLE OF CONTENTS PART 1 FINANCIAL INFORMATION Financial Statements Union Bankshares, Inc. Consolidated Balance Sheet 3 Consolidated Statement of Income - Year to Date 4 Consolidated Statement of Changes in Stockholder's Equity 5 Consolidated Statement of Cash Flows 6 Notes to Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II OTHER INFORMATION Item 6 EXHIBITS AND REPORTS ON FORM 8-K 23 Signatures 23 Union Bankshares, Inc. and Subsidiaries Statement of Condition (Unaudited) <TABLE> <CAPTION> March 31 December 31 (Dollars in Thousands) 2000 1999 ----------------------- <S> <C> <C> Assets Cash and due from banks $ 10,043 $ 11,627 Federal funds sold and overnight deposits 3,380 3,474 ---------------------- Total cash and cash equivalents 13,423 15,101 Interest bearing deposits 2,053 1,957 Securities available-for-sale 57,165 60,441 Federal Home Loan Bank stock 1,019 939 Loans held for sale 6,798 8,102 Loans 204,231 201,525 Unearned loan fees (268) (273) Allowance for loan losses (2,899) (2,870) ---------------------- Loans, net 201,064 198,382 ---------------------- Accrued interest receivable 2,253 2,199 Bank premises and equipment, net 4,081 4,040 Other real estate owned, net 83 27 Other assets 4,165 4,288 ---------------------- Total assets $292,105 $295,476 ====================== Liabilities and Stockholders' equity: Liabilities: Deposits: Non-interest bearing $ 32,025 $ 32,989 Interest bearing 219,883 224,604 ---------------------- Total deposits 251,908 257,593 Borrowed funds 4,126 2,872 Accrued interest and other liabilities 3,617 2,791 ---------------------- Total liabilities 259,651 263,256 ---------------------- Stockholders' equity: Common stock, $2 par value; 5,000,000 shares authorized; 3,263,489 shares issued at 3/31/00 and 12/31/99. 6,527 6,527 Paid-in capital and surplus 238 238 Retained earnings 28,534 28,180 Treasury stock at cost (233,960 shares at 3/31/00 and 12/31/99) (1,592) (1,592) Accumulated other comprehensive income (1,253) (1,133) ---------------------- Total stockholders' equity 32,454 32,220 ---------------------- Total liabilities and stockholders' equity $292,105 $295,476 ====================== </TABLE> See accompanying notes to unaudited financial statements Union Bankshares, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> March 31 March 31 (Dollars in Thousands) 2000 1999 ------------------------ <S> <C> <C> Interest income: Interest and fees on loans $ 4,741 $ 4,520 Interest and dividends on investment securities 924 902 Interest on federal funds sold 49 75 Interest on interest bearing deposits 29 28 ------------------------ $ 5,743 $ 5,525 ------------------------ Interest expense: Interest on deposits 2,227 2,158 Interest on federal funds purchased 1 0 Interest on borrowed funds 38 90 ------------------------ $ 2,266 $ 2,248 ------------------------ Net interest income 3,477 3,277 Provision for loan losses 62 100 ------------------------ Net interest income after provision for loan losses 3,415 3,177 Noninterest income: Trust department income 42 37 Service fees 554 563 Security gains 37 0 Gain on sale of loans 9 16 Other 6 7 ------------------------ 648 623 ------------------------ Noninterest expense: Salaries and wages 1,099 1,034 Pension and other employee benefits 298 261 Occupancy expense, net 157 144 Equipment expense 300 275 Other operating expense 672 712 ------------------------ 2,526 2,426 ------------------------ Income before income tax expense 1,537 1,374 Income tax expense 459 401 ------------------------ Net income $ 1,078 $ 973 ======================== Earnings per common share $ .36 $ .32 ======================== Weighted average number of common shares outstanding 3,029,529 3,025,331 ======================== </TABLE> See accompanying notes to unaudited financial statements Union Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders Equity (Unaudited) <TABLE> <CAPTION> Accumulated Other Total Common Paid-in Capital Retained Treasury Comprehensive Stockholders' Stock & Surplus Earnings Stock Income (Loss) Equity ------------------------------------------------------------------------------------ (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1999 $6,527 $238 $28,180 $(1,592) $(1,133) $32,220 Net income 1,078 1,078 Net unrealized holding gain on securities available-for-sale, net of tax (120) (120) ------- Comprehensive income 958 ------- Cash dividends declared 0 0 (724) 0 0 (724) Treasury stock purchased 0 0 0 0 0 0 Exercise of stock option 0 0 0 0 0 0 --------------------------------------------------------------------------------- Balance, March 31, 2000 $6,527 $238 $28,534 $(1,592) $(1,253) $32,454 ================================================================================= </TABLE> Union Bankshares, Inc. and Subsidiaries Consolidated Statement of Cash Flows (UNAUDITED) <TABLE> <CAPTION> March 31 March 31 (Dollars in Thousands) 2000 1999 ------------------- <S> <C> <C> Cash Flows From Operating Activities Net Income $1,078 $ 973 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 247 213 Provision for loan losses 62 100 Provision (credit) for deferred income taxes (78) 9 Amortization, net Securities 65 16 Amortization, net Limited Partnerships 8 0 Increase (decrease) in unamortized loan fees (5) 15 (Increase) decrease in loans held for sale 1,313 (646) Increase in accrued interest receivable (54) (38) Decrease in other assets 247 219 Increase in income taxes payable 532 393 Increase in accrued interest payable 112 10 Increase (decrease) in other liabilities 189 (4) Gain on securities (37) 0 Gain on sale of loans (9) (16) (Gain) loss on sale of OREO (1) 2 ------------------ Net cash provided by operating activities 3,669 1,246 Cash Flows From Investing Activities Interest bearing deposits Maturities and redemptions 297 198 Purchases (393) (276) Securities available for sale Maturities and redemptions 5,259 4,032 Purchases (2,193) (5,230) Purchase of Federal Home Loan Bank Stock (80) (16) (Increase) decrease in loans, net (2,839) 1,930 Recoveries of loans charged off 45 22 Purchases of premises and equipment, net (288) (78) Proceeds from sale of OREO 0 24 Investment in Ltd Partnerships 0 (373) Proceeds from sale of repossessed property 0 31 ------------------ Net cash used in investing activities (192) 264 Cash Flows From Financing Activities Borrowings, net of repayments 1,254 (91) Proceeds from exercise of stock options 0 37 Net increase (decrease) in demand, NOW, savings, and money market accounts (8,488) (2,333) Net increase in time deposits 2,803 1,652 Dividends paid (724) (790) ------------------ Net cash provided by financing activities (5,155) (1,525) Decrease in cash and cash equivalents (1,678) (15) Cash and cash equivalents Beginning 15,101 19,196 Ending 13,423 19,181 Supplemental Disclosure of Cash Flow Information: Interest Paid $2,154 $ 2,238 ================== Income Taxes Paid $ 0 $ 0 ================== </TABLE> UNION BANKSHARES, INC. NOTES TO FINANCIAL STATEMENTS: Note 1. The accompanying interim consolidated financial statements of Union Bankshares, Inc. (the Company) for the interim period ended March 31, 2000 and 1999 which are unaudited, have been prepared in accordance with the accounting policies described in the company's annual report to shareholders and Form 10K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Company's 1999 Annual report, Form S-4, and Form 8K. Note 2. Acquisition Effective November 30, 1999, following the receipt of all required stockholder, state and federal regulatory approvals, Union Bankshares, Inc. acquired Citizens Saving Bank and Trust Co.. This makes Union a two bank holding company. The accompanying consolidated financial statements reflect the merger accounted for in a tax-free transaction as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the acquisition been consumated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of Citizens common stock into 6.5217 shares of Union common stock, with the exchange of 991,089 shares (net of 196 fractional shares redeemed for approximately $4,516) of newly-issued Company common stock. Note 3. Commitments and Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, after consulting with the Company's legal counsel, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. Note 4 Earnings Per Share Earnings per common share amounts are computed based on the weighted average number of shares of common stock outstanding during the period (retroactively adjusted for stock dividends) and reduced for shares held in Treasury. The assumed conversion of available stock options does not result in material dilution. Note 5 Reportable Segments The company has two reportable operating segments, Union Bank (Union) and Citizens Savings Bank and Trust Company (Citizens). Management regularly evaluates separate financial information for each segment in deciding how to allocate resources and in assessing performance. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the period ended March 31, follows: <TABLE> <CAPTION> Intersegment Consolidated 2000 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest income $ 3,841 $ 1,902 $ 0 $ 0 $ 5,743 Interest expense 1,451 815 0 0 2,266 Provision for loan loss 0 62 0 0 62 Service fee income 444 110 0 0 554 Income tax expense (benefit) 373 103 0 (17) 459 Net income (loss) 903 201 0 (26) 1,078 Assets 193,030 98,737 (21) 359 292,105 <CAPTION> Intersegment Consolidated 1999 Union Citizens Elimination Other Totals - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest income $ 3,607 $ 1,918 $ 0 $ 0 $ 5,525 Interest expense 1,396 852 0 0 2,248 Provision for loan loss 38 62 0 0 100 Service fee income 427 136 0 0 563 Income tax expense (benefit) 287 120 0 (6) 401 Net income (loss) 804 219 0 (50) 973 Assets 191,136 98,119 0 332 289,587 </TABLE> Amounts in the "Other" column encompass activity in Union Bankshares, Inc., the "parent company." Holding company assets are stated after intercompany eliminations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis provides information regarding Union Bankshares, Inc.'s (Union's) financial position as of March 31, 2000 and as of December 31, 1999, and its results of operations for the three months ended March 31, 2000 and 1999. This discussion should be read in conjunction with the information in this document under Financial Statements and related notes and with other financial data appearing elsewhere in this filing. In the opinion of Union's management, the unaudited interim data reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly present Union's consolidated financial position and results of operations to be expected for the interim period. Management is not aware of the occurrence of any events after March 31, 2000, which would materially affect the information presented below. The millennium change was basically a non-event as far as problems and both banks completed their year-end processing on schedule. On February 4, 2000, Citizens upgraded their main application software from Jack Henry 20/20 to Jack Henry Silverlake. On that day, Union Bank became the Electronic Data Processing Server for Citizens. Therefore, both of Union's subsidiaries are processed on Union Bank's IBM AS400 located in Morrisville, Vermont. The transition was planned to be as transparent as possible to customers and line staff of Citizens. Citizens reimburses Union for costs incurred under a data processing agreement between the banks. Intercompany revenues and costs have been eliminated in consolidation. Only a few other, non-material operational changes have resulted from the switch and internal controls have been maintained. The Company may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Company may include forward-looking statements in its filings with the Securities and Exchange Commission, in its reports to stockholders, including this Quarterly Report, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risk exists that predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. Also when we use any of the words "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. Many possible events or factors could affect the future financial results and performance of our company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. The possible events or factors that might affect our forward-looking statements include, but are not limited to, the following: * uses of monetary, fiscal and tax policy by various governments * political, legislative or regulatory developments in Vermont or the United States including changes in laws concerning taxes, banking and other aspects of the financial services industry * developments in general economic or business conditions, including interest rate fluctuations, market fluctuations and perceptions, and inflation * changes in the competitive environment for financial services organizations * the Company's ability to retain key personnel * changes in technology including demands for greater automation and systems integration of Citizens * timely integration of Citizens, unanticipated lower revenues, loss of customers or business, or higher operating expenses * adverse changes in the securities market When relying on forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties. RESULTS OF OPERATIONS The Company's net income for the quarter ended March 31, 2000 was $ 1.08 million, compared with net income of $973 thousand for the first quarter of 1999. Net income per share was $.36 for the first quarter of 2000 compared to $.32 for the same quarter of 1999. Net Interest Income. The largest component of Union's operating income is net interest income, which is the difference between interest and dividend income received from interest-earning assets and the interest expense paid on its interest-bearing liabilities. Yields Earned and Rates Paid. The following tables show, for the periods indicated, the total amount of income recorded from interest-earning assets, and the related average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and average rates, and the relative net interest spread and net interest margin. All yield and rate information is calculated on an annualized basis. Yield and rate information for a period is average information for the period, and is calculated by dividing the income or expense item for the period by the average balances of the appropriate balance sheet item during the period. Net interest margin is net interest income divided by average interest- earning assets. Nonaccrual loans are included in asset balances for the appropriate periods, but recognition of interest on such loans is discontinued and any remaining accrued interest receivable is reversed, in conformity with federal regulations. The yields and net interest margins appearing in the following tables have been calculated on a pre-tax basis: <TABLE> <CAPTION> Three months ended March 31, 2000 1999 ---------------------------------------------------------------- Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate ---------------------------------------------------------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Average Assets: Federal funds sold $ 3,635 $ 49 5.39% $ 6,588 $ 75 4.55% Interest bearing deposits 1,982 29 5.85% 2,015 28 5.56% Investments (1) (2) 60,683 924 6.26% 59,147 902 6.24% Loans, net (1), (3) 206,946 4,741 9.25% 199,164 4,520 9.17% -------------------------------------------------------------- Total interest-earning assets (1) 273,246 5,743 8.51% 266,914 5,525 8.38% Cash and due from banks 8,766 9,297 Premises and equipment 4,033 4,529 Other assets 6,579 5,605 -------- -------- Total assets $292,624 $286,345 ======== ======== Average Liabilities and Shareholders' Equity: NOW accounts $ 32,008 153 1.91% $ 32,259 152 1.88% Savings and money market accounts 90,868 825 3.63% 83,140 716 3.44% Certificates of deposit 97,925 1,249 5.10% 98,912 1,290 5.22% Borrowed funds 2,443 39 6.39% 6,026 90 5.97% -------------------------------------------------------------- Total interest-bearing Liabilities 223,244 2,266 4.06% 220,337 2,248 4.08% Non-interest bearing deposits 32,250 31,427 Other liabilities 5,085 2,831 -------- -------- Total liabilities 260,579 254,595 Shareholders' equity 32,045 31,750 -------- -------- Total liabilities and shareholders' equity $292,624 $286,345 ======== ======== Net interest income (1) $3,477 $3,277 ====== ====== Net interest spread (1) 4.45% 4.30% Net interest margin (1) 5.19% 5.01% - -------------------- <FN> <F1> Average yield reported on a tax-equivalent basis. <F2> The average balance of investments is calculated using the amortized cost basis. <F3> Net of unearned income and allowance for loan loss. </FN> </TABLE> Union's net interest income increased by $200 thousand, or 6.1%, to $3.48 million for the three months ended March 31, 2000, from $3.28 million for the three months ended March 31, 1999. This increase was primarily due to the lower cost of interest-bearing liabilities as a result of lower interest rates paid on deposits and the increased yield on loans. The net interest spread increased by 15 basis points to 4.45% for the three months ended March 31, 2000, from 4.30% for the three months ended March 31, 1999. The net interest margin for the 2000 period increased by 18 basis points to 5.19% from 5.01% for the 1999 period. This improvement is mainly due to retaining loans held for sale in our portfolio, the payoff of some long term borrowings with Federal Home Loan Bank of Boston, and the increase in interest rates in general between the two periods which is in our favor. Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Union's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: * changes in volume (change in volume multiplied by prior rate); * changes in rate (change in rate multiplied by prior volume); and * total change in rate and volume. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate. <TABLE> <CAPTION> Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 ------------------------------------------ Increase/(Decrease) Due to Change In Volume Rate Net ------------------------------------------ (dollars in thousands) <S> <C> <C> <C> Interest-earning assets: Federal funds sold $(34) $ 8 $(26) Interest bearing deposits 0 1 1 Investments 17 5 22 Loans, net 178 43 221 ------------------------------- Total interest-earning assets 161 57 218 ------------------------------- Interest-bearing liabilities: NOW accounts (1) 2 1 Savings and money market accounts 67 42 109 Certificates of deposit (13) (28) (41) Borrowed funds (54) 3 (51) ------------------------------- Total interest-bearing liabilities (1) 19 18 ------------------------------- Net change in net interest income $162 $ 38 $200 =============================== </TABLE> Interest and Dividend Income. Union's interest and dividend income increased by $218,000, or 3.94%, to $5.7 million for the three months ended March 31, 2000, from $5.5 million for the three months ended March 31, 1999. Average earning assets increased by $6.3 million, or 2.37%, to $273.2 million for the three months ended March 31, 2000, from $266.9 million for the three months ended March 31, 1999. Average loans approximated $207 million for the three months ended March 31, 2000 up from $199.2 million for the three months ended March 31, 1999. Increases in construction loans of $1 million or 18.33%, the $5.9 million or 8.50% increase in residential real estate secured loans, and the $5.7 million or 6.65% increase in commercial loans was partially offset by the $4.9 million or 29.4% decrease in personal loans. Construction Lending was strong throughout 1999 and into the winter of 2000. A conscious decision to retain loans packaged for sale in our portfolio in mid 1999 accounts for the majority of the increase in both the residential real estate and commercial loan portfolios. The decrease in personal loans is due to a late 1998 decision to exit the Dealer floorplan business at Citizens. The average balance of investment securities (including mortgage-backed securities) increased by $1.5 million, or 2.6%, to $60.7 million for the three months ended March 31, 2000, from $59.1 million for the three months ended March 31, 1999. The average level of federal funds sold decreased by $3 million or 44.8%, to $3.6 million for the three months ended March 31, 2000, from $6.6 million for the three months ended March 31, 1999. The slight increase in the investment portfolio and the decrease in Federal Funds Sold and Interest Bearing Deposits in 2000 reflects the closer attention to cash management since Y2 passed with no liquidity crisis, the paydown of debt and the continuing growth in our loan portfolio. Interest Income on non-loans was $1 million for both years reflecting the increase in yields offset by the overall decrease in volume. Interest Expense. Union's interest expense increased by $18 thousand, or 8%, to $2.27 million for the three months ended March 31, 2000 from $2.25 million for the three months ended March 31, 1999. Average interest-bearing liabilities increased by $2.9 million, or 1.3% to $223.2 million for the three months ended March 31, 2000, from $220.3 million for the three months ended March 31, 1999. Average time deposits decreased $1.0 million, or 1.0%, to $97.9 million for the three months ended March 31, 2000, from $98.9 million for the three months ended March 31, 1999, while the average balances for money market and saving accounts increased by $7.7 million to $90.9 million for the three months ended March 31, 2000, from $83.1 million for the three months ended March 31, 1999. The 9.3% increase in balances was all in money market accounts as the rate structure was tiered to remain competitive with other financial institutions. Customers have maintained very liquid positions during the last 15 months as they anticipate the interest rates paid on all deposit instruments will continue to rise. The average balance on funds borrowed has dropped from $6 million on average in 1999 to $2.4 million in 2000 as Union paid off some long term Federal Home Loan Bank borrowings during the second quarter of 1999. Noninterest Income. Union's noninterest income increased $25,000, or 4.0%, to $648 thousand for the three months ended March 31, 2000, from $623 thousand for the three months ended March 31, 1999. The results for the period reflected a net gain of $37 thousand from the sale of securities compared to no gain or loss from sales during 1999. Trust department income rose to $42,000 in the first quarter of 2000 from $37,000 in the same period of 1999 or a 13.5% increase. Gain on Sale of Loans dropped $7,000 to $9,000 for 2000 from $16,000 for 1999. This change can be explained by management's decision to retain in portfolio a higher percentage of loans that could be sold due to the interest rate environment and other reinvestment rates available. Other noninterest income and service fees (sources of which include deposit and loan fees, ATM fees, and safe deposit fees) decreased by $9,000, or 1.6%, to $554 thousand for the three months ended March 31, 2000, from $563 thousand for the three months ended March 31, 1999. This was primarily caused by a drop in Overdraft Fee income due to the continuing strong economy. Noninterest Expense. Union's noninterest expense increased $100,000, or 4.1%, to $2.5 million for the three months ended March 31, 2000, from $2.4 million for the three months ended March 31, 1999. Salaries increased $65,000, or 6.3%, to $1.1 million for the three months ended March 31, 2000, from $1.03 million for the three months ended March 31, 1999, reflecting normal salary activity and pay for overtime during the 1st quarter of 2000 related to a systems conversion at Citizens. Pension and employee benefits increased $37 thousand or 14.2% to $298 thousand for the three months ended March 31, 2000, from $261 thousand for the three months ended March 31, 1999 mainly due to a $23,000 increase in health insurance costs and a $14,000 increase in retirement plans expense. Net occupancy expense increased $13 thousand, or 9.0%, to $157,000 for the three months ended March 31, 2000, from $144,000 for the three months ended March 31, 1999 due mainly to the increase in fuel costs and building maintenance expense. Equipment expense increased $25 thousand to $300 thousand for the three months ended March 31, 2000, from $275 thousand for the same period in 1999 primarily resulting from increased depreciation cost on computer equipment and software purchases which are depreciated as an expense over a time period of three to five years. During the quarter ended March 31, 2000, Union incurred approximately $2 thousand of expenses related to the merger, including legal and advisory fees compared to $94 thousand during the 1st quarter of 1999. Income Tax Expense. Union's income tax expense increased by $58,000, or 14.5%, to $459,000 for the three months ended March 31, 2000, from $401,000 for the comparable period of 1999 because of our increased income and the absence of the historic rehabilitation credit that was available to us for the 1999 tax year due to our partnership investment in a low income housing project sponsored by Housing Vermont in our market area. FINANCIAL CONDITION At March 31, 2000, Union had total consolidated assets of $292 million, including net loans and loans held for sale of $208 million, deposits of $252 million and shareholders' equity of $32.5 million. Based on the most recent information published by the Vermont Banking Commissioner, in terms of total assets at December 31, 1999, Union Bank ranked as the 11th largest institution of the 26 commercial banks and savings institutions headquartered in Vermont, and Citizens ranked as the 20th. Union's total assets decreased by $3.4 million or 1.1% to $292.1 million at March 31, 2000 from $295.5 million at December 31, 1999. Total net loans and loans held for sale increased by $1.4 million or .7% to $207.9 million or 71.2% of total assets at March 31, 2000 as compared to $206.5 million or 69.9% of total assets at December 31, 1999, an increase of $3 million in Commercial Real Estate loans held in portfolio offset by a $1.3 million decrease in loans held for sale and a $1.6 million decrease in consumer loans accounted for most of the growth, the remaining growth was among the other loans types. Cash and cash equivalents, including Federal funds sold, decreased approximately $1.7 million or 11.1% to $13.4 million at March 31, 2000 from $15.1 million at December 31, 1999, which was primarily attributable to the temporary drop in balances of municipal Now accounts whose balances are cyclical. Deposits decreased $5.7 million or 2.2% to $251.9 million at March 31, 2000 from $257.6 million at December 31, 1999. A $7.2 million drop in Now accounts, mainly Municipal accounts, offset by increased investment in time deposits of $2.8 million accounted for the majority of the decrease. Total borrowings increased $1.2 million to $4.1 million at March 31, 2000 from $2.9 million at December 31, 1999. The increase was in short-term liquidity borrowing from the Federal Home Loan Bank under existing lines of credit. Loan Portfolio. Union's loan portfolio (including loans held for sale) primarily consists of adjustable- and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. As of March 31, 2000, Union's loan portfolio totaled $211.0 million, or 72.2%, of assets, of which $90.7 million, or 43% of gross loans, consisted of residential mortgages and construction loans, and $76.3 million, or 36.1%, of total loans consisted of commercial real estate loans. As of such date, Union's loan portfolio also included $16.8 million of commercial loans, $10.2 million of municipal loans, and $17.0 million of consumer loans representing, in order, 8.0%, 4.8% and 8.1% of total loans outstanding on March 31, 2000. The following table shows information on the composition of Union's loan portfolio as of March 31, 2000 and December 31, 1999: <TABLE> <CAPTION> March 31, December 31, ---------------------------- Loan Type 2000 1999 - --------- ---------------------------- <S> <C> <C> Real Estate $ 87,582,899 $ 87,153,823 Commercial real estate 72,847,139 69,806,893 Commercial 16,606,057 16,246,118 Consumer 17,033,783 18,661,352 Municipal loans 10,161,219 9,656,703 Loans held for sale 6,798,349 8,101,815 ---------------------------- Total loans 211,029,446 209,626,704 Deduct: Allowance for loan losses 2,899,412 2,869,983 Net deferred loan fees, premiums & discounts 268,065 273,305 ---------------------------- 3,167,477 3,143,288 ---------------------------- $207,861,969 $206,483,416 ============================ </TABLE> Union originates and sells residential mortgages into the secondary market, with most such sales made to the Federal Home Loan Mortgage Corporation (FHLMC). Union services a $138.6 million residential mortgage portfolio, approximately $47.9 million of which is serviced for unaffiliated third parties at March 31, 2000. Additionally, Union originates commercial loans under various SBA programs that provide an agency guarantee for a portion of the loan amount. Union will typically sell the guaranteed portion of the loan to other financial concerns and will retain servicing rights, which generates fee income. Union capitalizes mortgage servicing rights on these fees and recognizes gains and losses on the sale of the principal portion of these notes as they occur. As of March 31, 2000, Union serviced $12.9 million of commercial and commercial real estate loans for unaffiliated third parties. Gross loans and loans held for sale have increased $1.4 million or .7% since December 31, 1999. The increase in Commercial Real Estate loans was $3 million or a growth rate of 4.36%. There was growth in the residential real estate loan arena but it was mainly negated by the sale of $2.3 million of these loans during the quarter. We also experienced moderate growth in both the commercial and municipal loan markets. The growth was offset by the shrinkage of our consumer loan portfolio by $1.6 million or 8.7%. This runoff is the continuing result of the discontinuance of the dealer floorplan program in late 1998. Asset Quality. Union, like all financial institutions, is exposed to certain credit risks related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Management closely monitors Union's loan and investment portfolios and other real estate owned for potential problems on a periodic basis and reports to Union's Board of Directors at regularly scheduled meetings. Union had loans on nonaccrual status totaling $709,000 at March 31, 2000, $951,000 at December 31, 1999 and $706,000 at March 31, 1999. Interest income not recognized on such loans amounted to approximately $215 thousand and $133 thousand as of March 31, 2000 and 1999, respectively and $183 thousand as of December 31, 1999. Union had $2.61 million and $3.17 million in loans past due 90 days or more and still accruing at March 31, 2000 and December 31, 1999, respectively. At March 31, 2000, Union had internally classified certain loans totaling $1.1 million. In management's view, such loans represent a higher degree of risk and could become nonperforming loans in the future. While still on a performing status, in accordance with Union's credit policy, loans are internally classified when a review indicates any of the following conditions making the likelihood of collection highly questionable: * the financial condition of the borrower is unsatisfactory; * repayment terms have not been met; * the borrower has sustained losses that are sizable, either in absolute terms or relative to net worth; * confidence is diminished; * loan covenants have been violated; * collateral is inadequate; or * other unfavorable factors are present. At March 31, 2000, Union had acquired by foreclosure or through repossession real estate worth $83,000, consisting of commercial property, undeveloped land and a residential home. Allowance for Loan Losses. Some of Union's loan customers ultimately do not make all of their contractually scheduled payments, requiring Union to charge off the remaining principal balance due. Union maintains an allowance for loan losses to absorb such losses. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. While Union allocates the allowance for loan losses based on the percentage category to total loans, the portion of the allowance for loan losses allocated to each category does not represent the total available for future losses which may occur within the loan category since the total allowance for possible loan losses is a valuation reserve applicable to the entire portfolio. The following table reflects activity in the allowance for loan losses for the three months ended March 31, 2000 and 1999: <TABLE> <CAPTION> Three Months Ended, March 31 ---------------------------- 2000 1999 ---------------------------- (dollars in thousands) <S> <C> <C> Balance at the beginning of period $2,870 $2,845 Charge-offs: Real Estate 0 16 Commercial 14 3 Consumer and other 64 62 ------------------ Total charge-offs 78 81 ------------------ Recoveries: Real Estate 0 1 Commercial 21 4 Consumer and other 24 16 ------------------ Total recoveries 45 21 ------------------ Net charge-offs (33) (60) Provision for loan losses 62 100 ------------------ Balance at end of period $2,899 $2,885 ================== </TABLE> The following table shows the breakdown of Union's allowance for loan loss by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated: <TABLE> <CAPTION> March 31, December 31, -------------------------------------- 2000 1999 -------------------------------------- (dollars in thousands) Amount Percent Amount Percent ------ ------- ------ ------- <S> <C> <C> <C> <C> Real Estate Residential $ 550 42.3% $ 557 42.3% Commercial 1,050 31.0% 1,014 30.6% Construction 80 3.8% 77 3.7% Other Loans Commercial 468 8.3% 416 8.1% Consumer installment 415 7.8% 448 8.6% Home equity loans 28 1.8% 28 1.8% Municipal, Other and Unallocated 308 5.0% 330 4.9% ------------------------------------- Total $2,899 100.0% $2,870 100.0% ===================================== Ratio of Net Charge Offs to Average Loans (1) .06% 0.16% -------------------------- Ratio of Allowance for Loan Losses to Loans 1.42% 1.42% -------------------------- <FN> <F1> Annualized </FN> </TABLE> Investment Activities At March 31, 2000, the reported value of investment securities available-for-sale was $57.2 million or 19.6% of its assets. Union had no securities classified as held-to-maturity or trading securities. The reported value of securities available-for-sale at March 31, 2000, reflects a negative valuation adjustment of $1.9 million. The offset of this adjustment, net of income tax effect, was a $1.25 million decrease in Union's other comprehensive income component of shareholders' equity and an increase in net deferred tax assets of $645,300. Deposits. The following table shows information concerning Union's deposits by account type, and the weighted average nominal rates at which interest was paid on such deposits as of March 31, 2000 and December 31, 1999: <TABLE> <CAPTION> Three Months Ended, March 31 Year Ended December 31, ---------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------- (dollars in thousands) Percent Percent Average of Total Average Average of Total Average Amount Deposits Rate Amount Deposits Rate ---------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Non-certificate deposits: Demand deposits $ 32,250 12.74% $ 32,505 12.83% Now accounts 32,008 12.65% 1.91% 34,654 13.67% 1.95% Money Markets 54,675 21.61% 4.26% 49,296 19.45% 4.14% Savings 36,193 14.30% 2.69% 38,064 15.02% 2.71% ------------------ ------------------ Total non-certificate deposits 155,126 61.30% 154,519 60.97% ------------------ ------------------ Certificates of deposit: Less than $100,000 76,595 30.27% 4.97% 78,030 30.79% 5.05% $100,000 and over 21,330 8.43% 5.59% 20,870 8.24% 5.48% ------------------ ------------------ Total certificates of deposit 97,925 38.70% 98,900 39.03% ------------------ ------------------ Total deposits $253,051 100.00% 3.54% $253,419 100.00% 3.49% ================== ================== </TABLE> The following table sets forth information regarding the amounts of Union's certificates of deposit in amounts of $100,000 or more at March 31, 2000 and December 31, 1999 that mature during the periods indicated: <TABLE> <CAPTION> March 31, 2000 December 31, 1999 ----------------------------------- (dollars in thousands) <S> <C> <C> Within 3 months $13,107 $ 2,301 3 to 6 months 2,620 11,872 6 to 12 months 4,591 3,751 Over 12 months 2,508 3,491 -------------------------- $22,826 $21,415 ========================== </TABLE> Borrowings. Borrowings from the Federal Home Loan Bank of Boston were $4.1 million at March 31, 2000 at a weighted average rate of 6.09%. Borrowings from the Federal Home Loan Bank of Boston were $2.9 million at December 31, 1999 at a weighted average rate of 5.94%. The change between year end 1999 and the end of the first quarter of 2000 is a net increase of $1.3 million in short-term borrowing to fund loan demand. Other Financial Considerations Market Risk and Asset and Liability Management. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Union's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. Union does not have any market risk sensitive instruments acquired for trading purposes. Union attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. Union's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. Union's Asset/Liability Committee's methods for evaluating interest rate risk include an analysis of Union's interest-rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of Union's entire balance sheet, and a simulation analysis, which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest. Union's Asset/Liability Committee meets at least weekly to set loan and deposit rates, make investment decisions, monitor liquidity and evaluate the loan demand pipeline. Deposit runoff is monitored daily and loan prepayments evaluated monthly. Union historically has maintained a substantial portion of its loan portfolio on a variable rate basis and plans to continue this ALM strategy in the future. The investment portfolio is classified as available for sale and the modified duration is relatively short. Union does not utilize any derivative products or invest in any "high risk" instruments. Our interest rate sensitivity analysis (simulation) as of December 1999 for a flat rate environment projected a Net Interest Income of $3.54 million for the first three months of 2000 compared to actual results of $3.48 million or a .17% difference. Net income was projected to be $1.15 million compared to actual results of $1.08 million. Of the $69 thousand difference, the majority is related to net interest margin being lower than anticipated. Interest income was $22K less than anticipated due to a contraction in our consumer loan portfolio resulting from the discontinuance of the Dealer Floorplan program and reduced investment income as our portfolio shrank from $63 million to $60 million due to stronger loan demand than expected combined with a temporary reduction in deposit growth. The second component of net interest margin that was lower than predicted was loan fees due to the continuing strong economy and the market's preference for "no point" loans. The third component of net interest margin is interest expense which was higher than anticipated as we had to raise interest rates paid faster than expected to remain competitive and we drew down some short term borrowing lines at the Federal Home Loan Bank of Boston for liquidity utilization. Return on Assets was projected to be 1.57% and actual results were 1.48%. Return on Equity was projected to be 14.37% compared to actual of 13.48%. The lower results of these ratios is based on lower net income as explained above. The Company generally requires collateral or other security to support financial instruments with credit risk. As of March 31, 2000, the contract or notional amount of financial instruments whose contract amount represents credit risk were as follows: <TABLE> <S> <C> Commitments to extend credit $19,503,000 ----------- Standby letters of credit and commercial letters of credit $ 675,000 ----------- Credit Card arrangements $ 1,995,000 ----------- Home Equity Lines of Credit $ 3,679,000 ----------- </TABLE> Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Union prepares its interest rate sensitivity "gap" analysis by scheduling interest-earning assets and interest-bearing liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except that: * adjustable-rate loans, securities, and FHLB advances are included in the period when they are first scheduled to adjust and not in the period in which they mature; * fixed-rate mortgage-related securities reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by Union, and empirical data; * fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and * NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by Union of the sensitivity of each such category of deposit to changes in interest rates. Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of Union's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. The following tables show Union's rate sensitivity analysis as of March 31, 2000: <TABLE> <CAPTION> March 31, 2000 Cumulative repriced within 3 Months 4 to 12 1 to 3 3 to 5 Over 5 or Less Months Years Years Total Total ---------------------------------------------------------------------- (dollars in thousands, by repricing date) <S> <C> <C> <C> <C> <C> <C> Interest sensitive assets: Federal Funds Sold $ 3,308 $ -0- $ -0- $ -0- $ -0- $ 3,308 Interest bearing deposits 397 693 772 191 -0- 2,053 Investments available for sale (1) 1,748 4,053 15,709 12,791 22,226 56,527 FHLB Stock -0- -0- -0- -0- 1,019 1,019 Loans (fixed and adjustable rate) 61,771 34,532 26,598 32,200 55,928 211,029 ---------------------------------------------------------------------- Total interest sensitive assets $ 67,224 $ 39,298 $ 43,079 $45,182 $79,173 $273,936 ---------------------------------------------------------------------- Interest sensitive liabilities: Certificates of deposit $ 32,753 $ 44,309 $ 20,513 $ 1,010 $ -0- $ 98,585 Money markets 45,108 -0- -0- -0- 8,936 54,044 Regular savings 15,865 -0- -0- -0- 21,015 36,880 Now accounts 20,104 -0- -0- -0- 10,270 30,374 Borrowed funds 2,080 228 719 529 570 4,126 ---------------------------------------------------------------------- Total interest sensitive liabilities $115,910 $ 44,537 $ 21,232 $ 1,539 $40,791 $224,009 ---------------------------------------------------------------------- Net interest rate sensitivity gap (48,686) (5,259) 21,847 43,643 38,382 49,927 Cumulative net interest rate Sensitivity gap (48,686) (53,945) (32,098) 11,545 49,927 Cumulative net interest rate sensitivity gap as a percentage of total assets (16.67%) (18.47%) (10.99%) 3.95% 17.09% Cumulative interest sensitivity gap as a percentage of total interest-earning assets (17.77%) (19.69%) (11.72%) 4.21% 18.16% Cumulative net interest earning assets as a percentage of cumulative interest-bearing liabilities (21.72%) (24.08%) (14.33%) 5.15% 22.29% - -------------------- <FN> <F1> Investments available for sale exclude marketable equity securities with a fair value of $638,000 which may be sold by Union at any time. </FN> </TABLE> Simulation Analysis. In its simulation analysis, Union uses computer software to simulate the estimated impact on net interest income and capital under various interest rate scenarios, balance sheet trends, and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loans and deposit growth, product pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Based on the results of these simulations, Union is able to quantify its interest rate risk and develop and implement appropriate strategies. The following chart reflects the results of our latest simulation analysis for each of the next three year ends on Net Interest Income, Net Income, Return on Assets, Return on Equity and Capital Value. The projection utilizes a rate shock of 150 basis points from the current prime rate of 9%, this is the highest internal slope monitored and shows the best and worse scenarios analyzed. This slope range was determined to be the most relevant during this economic cycle. UNION BANKSHARES, INC. INTEREST RATE SENSITIVITY ANALYSIS MATRIX MARCH 31, 2000 (in thousands) <TABLE> <CAPTION> Return Return on on Year Prime Net Interest Change Net Assets Equity Capital Change Ending Rate Income % Income % % Value % - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> December-00 10.50 14,229 2.37 4,645 1.57 13.48 20,566 (28.01) 9.00 13,900 0.00 4,424 1.50 12.87 28,567 0.00 7.50 13,570 (2.38) 4,201 1.42 12.26 37,465 31.15 December-01 10.50 15,674 4.22 5,528 1.79 14.84 23,279 (25.47) 9.00 15,039 0.00 5,103 1.65 13.86 31,237 0.00 7.50 14,410 (4.18) 4,681 1.52 12.86 40,077 28.31 December-02 10.50 17,135 6.13 6,319 1.94 15.58 26,000 (23.57) 9.00 16,146 0.00 5,660 1.74 14.30 34,019 0.00 7.50 15,176 (6.00) 5,015 1.55 12.99 42,914 26.15 </TABLE> Liquidity. Liquidity is a measurement of Union's ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, and for other general business purposes. Union's principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities and other short-term investments, sales of securities available-for-sale, and earnings and funds provided from operations. In addition, as members of the FHLB, Union's subsidiaries have access to preapproved lines of credit up to 5.62% of total assets or $16.4 million. In addition, both subsidiaries maintain Federal Fund lines of credit with upstream correspondent banks and repurchase agreement lines with selected brokerage houses. While scheduled loan and securities payments and FHLB advances are relatively predictable sources of funds, deposit flows and prepayments on loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions, and competition. Union's liquidity is actively managed on a daily basis, monitored by the Asset/Liability Committee, and reviewed periodically with the Board of Directors. Union's Asset/Liability Committee sets liquidity targets based on Union's financial condition and existing and projected economic and market conditions. The committee measures Union's marketable assets and credit available to fund liquidity requirements and compares the adequacy of that aggregate amount against the aggregate amount of Union's sensitive or volatile liabilities, such as core deposits and time deposits in excess of $100,000, term deposits with short maturities, and credit commitments outstanding. The committee's primary objective is to manage Union's liquidity position and funding sources in order to ensure that it has the ability to meet its ongoing commitment to its depositors, to fund loan commitments, and to maintain a portfolio of investment securities. Since many of the loan commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Union's management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Although approximately 78.2% of Union's certificates of deposit will mature within twelve months, management believes, based upon past experience, that Union will retain a substantial portion of these deposits. Management will continue to offer a competitive but prudent pricing strategy to facilitate retention of such deposits. Any reduction in total deposits could be offset by purchases of federal funds, short-term FHLB borrowings, or liquidation of investment securities or loans held for sale. Such steps could result in an increase in Union's cost of funds and adversely impact the net interest margin. Regulatory Capital Requirements.: Union Bank and Citizens (the Banks) are subject to various regulatory capital requirements administered by the federal banking agencies. Management believes, as of March 31, 2000 that the Banks meet all capital adequacy requirements to which they are subject. As of March 31, 2000, the most recent notification from the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed either Bank's category. The Banks' actual capital amounts (000's omitted) and ratios are presented in the table: <TABLE> <CAPTION> Minimums To Be Well Minimums Capitalized Under For Capital Prompt Corrective Actual Requirements Action Provisions --------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> As of March 31, 2000: Total capital to risk weighted assets Union Bank $23,893 18.86% $10,134 8.0% $12,669 10.0% Citizens 11,998 17.50% 5,486 8.0% 6,857 10.0% Tier I capital to risk weighted assets Union Bank $22,295 17.60% $ 5,067 4.0% $ 7,601 6.0% Citizens 11,138 16.24% 2,743 4.0% 4,114 6.0% Tier I capital to average assets Union Bank $22,295 11.44% $ 7,795 4.0% $ 9,744 5.0% Citizens 11,138 11.52% 3,866 4.0% 4,833 5.0% </TABLE> Impact of Inflation and Changing Prices. Union's consolidated financial statements, included in this document, have been prepared in accordance with generally accepted accounting principles, which require the measurements of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Banks have asset and liability structures that are essentially monetary in nature, and their general and administrative costs constitute relatively small percentages of total expenses. Thus, increases in the general price levels for goods and services have a relatively minor effect on Union's total expenses. Interest rates have a more significant impact on Union's financial performance than the effect of general inflation. Interest rates do not necessarily move in the same direction or change in the same magnitude as the prices of goods and services, although periods of increased inflation may accompany a rising interest rate environment. PART II OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS IN FORM 10-Q A. Exhibits. 27 - Financial Data Schedule B. Current Reports on Form 8-K Report to Shareholders on Fourth Quarter Results filed on February 16, 2000 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, Inc. /s/ Kenneth D. Gibbons ------------------------------ Kenneth D. Gibbons Director and Chief Executive Officer /s/ Marsha A. Mongeon ------------------------------ Marsha A. Mongeon Chief Financial Officer and Treasurer