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 September 30, 2001
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 2-90679
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation of organization)
66 Main Street, Ellsworth, Maine
(Address of Principal Executive Offices)
(Zip Code)
04605
Registrant's telephone number, including area code
(207) 667-2504
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES XXX NO_____
Indicate the number of shares outstanding of each of the issue's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2001
(Common stock, $12.50 Par Value) 577,495
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART 1 Financial Information Page No.
Item 1 Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets -
September 30, 2001, September 30, 2000 and December
31, 2000 4
Condensed Consolidated Statements of Income -
nine months ended September 30, 2001 and September 30, 2000
three months ended September 30, 2001 and September 30, 2000 5-6
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2001 and September 30, 2000 7
Consolidated Statements of Changes in Shareholders' Equity
nine months ended September 30, 2001 and September 30, 2000 9
Notes to Consolidated Financial Statements 10-11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 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' REVIEW 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
September 30, 2001 and 2000, and for the three- and nine-month
periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our reviews 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 U.S.
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 reviews, we are not aware of any material modifications
that should be made to the accompanying financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
Berry Dunn McNeil & Parker
Portland, Maine
November 5, 2001
UNION BANKSHARES COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET
September 30 September 30 December 31
2001 2000 2000
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 14,413,469 $ 12,725,682 $ 10,309,649
Federal funds sold 11,062,850 3,058,131 43,829
Cash and cash equivalents 25,476,319 15,783,813 10,353,478
Available for sale securities 86,861,107 103,728,991 101,458,470
Held to maturity securities, at cost 3,629,572 4,154,661 3,851,461
Other investment securities, at cost 5,039,950 4,468,350 4,968,350
Loans (net of deferred fees) 213,691,695 207,404,260 204,931,089
Less: Allowance for loan losses 3,501,146 3,189,012 3,376,395
Net Loans $210,190,549 $204,215,248 $201,554,694
Premises, furniture & equip, net 6,562,462 5,484,620 6,371,464
Deferred tax asset 1,490,795 1,130,083 233,749
CSV life insurance 6,794,202 6,409,253 6,578,657
Core deposit intangible 272,662 319,115 307,619
Goodwill 6,258,231 6,749,350 6,572,652
Other assets 4,940,946 6,427,592 5,991,532
Total Assets $357,516,795 $358,871,076 $348,242,126
LIABILITIES
Deposits:
Demand $ 34,743,850 $ 32,685,066 $ 28,313,749
Savings 127,810,328 118,836,796 109,801,146
Time 105,875,709 109,858,272 107,465,822
Total Deposits 268,429,887 261,380,134 245,580,717
Borrowed funds 37,115,134 46,416,250 51,123,250
Sweep repurchase 11,955,838 16,361,133 15,079,311
Accrued expenses & other
liabilities 5,805,458 5,574,978 5,339,174
Total Liabilities $323,306,317 $329,732,495 $317,122,452
Commitments (Note D)
SHAREHOLDERS' EQUITY
Common Stock, $12.50 par value. Authorized
1,200,000 shares, issued 582,394 shares
in 2001 and 2000. $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 3,963,116 3,963,534 3,963,472
Retained Earnings 21,933,672 20,151,151 20,682,146
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gain/(Loss) on
Securities Available for Sale 1,366,162 (1,914,302) (466,522)
Less: Treasury Stock (4,899 shares as of
September 30, 2001, 4,928 shares as of
September 30, 2000 and 4,900 shares as of
December 31, 2000) 332,397 341,727 339,347
Total Shareholders' Equity $ 34,210,478 $ 29,138,581 $ 31,119,674
Total Liabilities & Shareholders'
Equity $357,516,795 $358,871,076 $348,242,126
*Condensed from audited financial statements
See Independent Accountants' review report. The accompanying notes
are an integral part of these consolidated financial statements.
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Nine Months Ended - September 30, 2001 2000
INTEREST INCOME
Interest and Fees on Loans $12,808,670 $ 8,634,107
Interest and Fees on Municipal Loans and Bonds 855,371 783,463
Interest and Dividends on Securities 3,962,671 4,727,002
Interest on Federal Funds Sold 108,864 52,037
Amortization & Accretion - Net 79,233 1,438
Total Interest Income 17,814,809 14,198,047
INTEREST EXPENSE
Interest on Deposits 5,945,148 4,472,605
Interest on Funds Purchased/Borrowed 2,345,346 1,796,700
Total Interest Expense 8,290,494 6,269,305
NET INTEREST INCOME 9,524,315 7,928,742
Provision for Loan Losses 225,000 176,000
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 9,299,315 7,752,742
NONINTEREST INCOME
Exchange, Commission & Fees 955,475 678,755
Trust Department 960,998 850,627
Safe Deposit Box Rental Fees 62,345 53,371
Other Income 1,563,053 964,684
Total Noninterest Income 3,541,871 2,547,437
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,747,315 3,735,662
Building Maintenance & Operations 642,269 406,460
FDIC Insurance 46,185 41,813
(Gain)/Loss on Sale of Equipment (684) 0
Net Securities (Gains)/Losses (17,610) 43,691
Other Expenses 4,417,910 2,961,346
Total Noninterest Expense 9,835,385 7,188,972
INCOME BEFORE TAXES 3,005,801 3,111,207
Income Taxes 859,000 931,000
NET INCOME $ 2,146,801 $ 2,180,207
Per Share Data:
Net Income $3.72 $3.78
Dividends Declared $1.55 $1.50
See Independent Accountants' review report. The accompanying notes
are an integral part of these consolidated financial statements.
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-September 30, 2001 2000
INTEREST INCOME
Interest and Fees on Loans $4,223,828 $3,313,293
Interest and Fees on Municipal Loans and Bonds 295,391 279,730
Interest and Dividends on Securities 1,186,836 1,590,590
Interest on Federal Funds Sold 24,652 33,866
Amortization & Accretion - Net (17,432) 1,837
Total Interest Income 5,713,275 5,219,316
INTEREST EXPENSE
Interest on Deposits 1,763,337 1,714,603
Interest on Funds Purchased/Borrowed 674,848 768,535
Total Interest Expense 2,438,185 2,483,138
NET INTEREST INCOME 3,275,090 2,736,178
Provision for Loan Losses 75,000 101,000
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,200,090 2,635,178
NONINTEREST INCOME
Exchange, Commission & Fees 304,271 239,157
Trust Department 327,789 306,987
Safe Deposit Box Rental Fees 20,606 18,043
Other Income 671,775 440,161
Total Noninterest Income 1,324,441 1,004,348
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,562,872 1,253,374
Building Maintenance & Operations 203,196 131,782
FDIC Insurance 11,021 12,624
(Gain)/Loss on Sale of Equipment (684) 0
Net Securities (Gains)/Losses (17,610) (223)
Other Expenses 1,634,354 1,160,777
Total Noninterest Expense 3,393,149 2,558,334
INCOME BEFORE TAXES 1,131,382 1,081,192
Income Taxes 317,000 354,000
NET INCOME $ 814,382 $ 727,192
Per Share Data:
Net Income $1.41 $1.26
Dividends Declared $ .55 $ .50
See Independent Accountants' review report. The accompanying notes
are an integral part of these consolidated financial statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
2001 2000
Net Cash Flows Provided by Operating Activities:
Net Income $ 2,146,801 $ 2,180,207
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,017,665 370,332
Provision for loan losses 225,000 176,000
(Gain)/loss on sale of equipment (684) 183,639
Net securities (gains)/losses (17,610) 43,691
Net change in other assets (1,243,718) (1,349,519)
Net change in other liabilities 466,284 (724,790)
Net amortization of premium (accretion
of discount) on investments (79,233) (1,438)
Net change in deferred loan origination fees 12,423 (95,029)
Origination of loans held for sale (17,304,247) (2,965,865)
Proceeds from loans held for sale 15,522,728 3,510,329
Total adjustments (1,401,392) (852,650)
Net cash provided by operating activities 745,409 1,327,557
Cash Flows From Investing Activities:
Cash paid to Mid-Coast stockholders in connection with
Mid-Coast acquisition 0 (11,809,047)
Cash received through Mid-Coast acquisition 0 4,403,785
Purchase of securities available for sale (23,545,115) (2,366,941)
Purchase of securities held to maturity (107,464) (50,023)
Proceeds from sales of securities
available for sale 9,690,952 2,830,309
Proceeds from sale of equipment 8,000 0
Proceeds from calls or maturities of
securities available for sale 32,922,039 4,969,945
Proceeds from maturities of securities
held to maturity 320,000 321,250
Net change in loans to customers (8,873,278) (13,331,148)
Increase in other assets (24,144) 0
Acquisition of premises, furniture
and equipment (842,458) (1,026,819)
Net cash provided by (used in)
investing activities 9,548,532 (16,058,689)
Cash Flows From Financing Activities:
Net increase/(decrease) in other borrowed funds (17,131,589) 17,220,711
Net increase in demand, savings and
money market accounts 24,439,281 4,746,777
Net increase/(decrease) in time deposits (1,590,113) 371,317
Purchase of Treasury Stock (40,906) (85,260)
Proceeds from sale of Treasury Stock 47,500 52,705
Dividends paid (895,273) (866,084)
Net cash provided by financing activities 4,828,900 21,440,166
Net increase in cash and cash equivalents 15,122,841 6,709,034
Cash and cash equivalents at beginning of year 10,353,478 9,074,779
Cash and cash equivalents at end of period $25,476,319 $15,783,813
Supplemental Schedule of Non-Cash Investing and Financing Activities
2001 2000
Net increase/(decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities $2,635,043 $(324,276)
Deferred income tax liability (802,359) 110,254
Net unrealized gain/(loss) on available
for sale securities $1,832,684 $(214,022)
In 2001, the Company converted construction in process costs totaling
$421,340 to premises of the same amount. In addition, the Company
disposed of assets with a cost of $77,662 and accumulated depreciation
of $77,662.
See Independent Accountants' review report. The accompanying notes
are an integral part of these consolidated financial statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 2001 and 2000
ACCUMULATED
OTHER SHARE
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
(LOSS)
Balance at December 31,
1999 $7,279,925 $3,963,534 $(309,172) $18,837,028 $(2,128,324) $27,642,991
Net income, nine months ended September 30,
2000 0 0 0 2,180,207 0 2,180,207
Change in net unrealized loss
on available for sale securities
net of tax of
$110,254 0 0 0 0 214,022 214,022
Total comprehensive
income 0 0 0 2,180,207 214,022 2,394,229
Sale of 488 shares Treasury
stock 0 0 52,705 0 0 52,705
Repurchase of 870 shares Treasury
stock 0 0 (85,260) 0 0 (85,260)
Cash dividends
declared 0 0 0 (866,084) 0 (866,084)
Balance at September 30,
2000 $7,279,925 $3,963,534 $(341,727) $20,151,151 $(1,914,302) $29,138,581
Balance at December 31,
2000 $7,279,925 $3,963,472 $(339,347) $20,682,146 $ (466,522) $31,119,674
Net income, nine months ended September 30,
2001 0 0 0 2,146,801 0 2,146,801
Change in net unrealized gain
(loss) on available for sale
securities, net of tax of
$802,359 0 0 0 0 1,832,684 1,832,684
Total comprehensive
income 0 0 0 2,146,801 1,832,684 3,979,485
Sale of 563 shares Treasury
stock 0 (356) 47,856 0 0 47,500
Repurchase of 562 shares Treasury
Stock 0 0 (40,906) 0 0 (40,906)
Cash dividends
declared 0 0 0 (895,275) 0 (895,275)
Balance at September 30,
2001 $7,279,925 $3,963,116 $(332,397) $21,933,672 $1,366,162 $34,210,478
Notes to Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying consolidated financial statements of Union Bankshares
Company (the Company) and its subsidiary, Union Trust Company (the Bank),
as of September 30, 2001 and 2000 and for the three- and nine month
periods then ended 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, 2000.
(B) Earnings Per Share
Earnings per common share are computed by dividing the net income
available for common stock by the weighted average number of common
shares outstanding during this period. Weighted shares for the nine
months ended September 30, 2001 and 2000 were 577,517 and 577,796,
respectively.
(C) Intangible Assets
Goodwill is being amortized using the straight line method over 15
years. Core deposit intangible is being amortized using the straight
line method over 7 years. Amortization charged to operations is
$373,521 and $40,601 in the nine-months ended September 30, 2001 and
2000, respectively.
(D) 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 balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments. At September 30, 2001, and September
30, 2000, the following financial instruments, whose contract amounts
represent credit risk, were outstanding.
September 30
(000's omitted)
2001 2000 1.Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines $ 7,221 $ 6,658
B. Credit card lines 6,493 6,354
C. Secured real estate loans 11,402 7,473
D. Other 16,114 17,690
2.Financial Standby Letters of Credit: 86 61
(E) Regulatory Agencies
The Bank's primary regulators are the Federal Reserve Bank of Boston
and, as a state chartered bank, the Bureau of Banking of the State
of Maine.
(F) Classified Loans
Any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention that were not disclosed under Item
III of Securities and Exchange Commission 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.
(G) 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.
(H) Recent Accounting Developments
The Financial Accounting Standards Board recently issued the following
Statement of Financial Accounting Standards (SFAS):
SFAS No. 141 Business Combinations
SFAS No. 142 Goodwill and Other Intangible Assets
SFAS No. 143 Accounting for Asset Retirement Obligations
SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets
SFAS No. 141 requires that the purchase method be used to account for
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. The amortization of goodwill
ceases upon adoption of the Statement on January 1, 2002. Management
is in the process of evaluating the effects of this statement on the
Company's consolidated financial condition and results of operations.
SFAS Nos. 143 and 144 provide guidance concerning the recognition
and measurement of an impairment loss for certain types of long-lived
assets and obligations associated with the retirement of tangible
long-lived assets. Management does not expect these statement s to
affect the Company's consolidated financial condition and results of
operations.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Safe Harbor Statement Under The Private Securities Litigation Reform
Act Of 1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
company intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and is including this
statement for purposes of these safe harbor provisions. Forward-
looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Important factors which
could cause actual events to differ from the Company's expectations
include, but are not limited to, fluctuations in interest rates and
loan and deposit pricing, which could reduce the Company's net interest
margins, asset valuations and expense expectations; a deterioration in
the economy or business conditions, either nationally or in the
Company's market areas, that could increase credit-related losses and
expenses; increases in defaults by borrowers and other loan
delinquencies resulting in increases in the Company's provision for
loan losses and related expenses; higher than anticipated costs
related to the Company's new banking centers or slower than expected
earning assets growth which could extend anticipated breakeven periods
at these locations; significant increases in competition; legislative
or regulatory changes applicable to bank holding companies or the
Company's banking subsidiary; and possible changes in tax rates, tax
laws, or tax law interpretation.
Earnings and Performance Overview
The following discussion and analysis focuses on the factors affecting
Union Bankshares Company's (The Company) financial condition and results
of operation at September 30, 2001 as compared to September 30, 2000.
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 (in particular, acquisition related expenses increased during
2000); and income tax expense. Each of these major components of the
Company's operating results is highlighted below.
Net Income
The Company reported net income for the three months ended September 30,
2001 of $814,382 versus $727,192 for the same period in 2000, and net
income for the first nine months of 2001 of $2,146,801 versus $2,180,207
for the same period in 2000.
The following table summarizes the status of the Company's earnings
and performance for the periods stated:
September 30,
2001 2000
Earnings Per Share 3.72 3.78
Return on Average Shareholders Equity 6.72%A 7.24%B
Return on Average Assets 0.60%A 0.70%B
Return on Average Earning Assets 0.66%A 0.73%B
A=annualized returns are: 8.96%, 0.80%, and 0.88%, respectively.
B=annualized returns are: 9.65%, 0.93%, and 0.97%, respectively.
The increase in net income for the three months ended September 30, 2001
versus the same period in 2000 is due to an increase in all income
categories offset by increases in operating expenses. The decrease in
net income for the nine months ended September 30, 2001 versus the same
period in 2000 is due to margin compression (primarily the result of
declining interest rates of some 400 basis points) and 2001 results
reflecting the amortization of goodwill related to the acquisition of
The Waldoboro Bank, FSB in August 2000.
As a result of narrowing margins, (offset in part by loan growth
attributable to the acquisition of The Waldoboro Bank, FSB and a strong
sales effort), net interest income for the third quarter of 2001 and for
the first nine months of 2001 was up $538,912 or 19.7% and $1,595,573
or 20.1%, respectively, from the same periods last year. Overall
margin compression, increased competition and pricing pressures
continue to be a significant factor in the Bank's ability to grow net
interest income at a faster pace.
The increase in noninterest income for the first nine months of 2001
results primarily from improvements in bankcard, trust fees, loan fees
and service charges on customer accounts.
Noninterest expenses, consisting primarily of employee compensation
and benefits, occupancy and equipment expense and other general
operating expenses, for the third quarter of 2001 and the nine months
ended September 30, 2001 increased $834,815 and $2,646,413, respectively,
from the same periods in 2000 due to increased staffing, the expenses
related to upgrading equipment and facilities and the acquisition of
The Waldoboro Bank, FSB.
During 2001, the Company continues to implement specific strategic
priorities that focus on increasing fee based revenues and gaining
operational efficiencies where possible on the combined organizations
of Union Trust Company and The Waldoboro Bank, FSB. 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 also
focuses 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 world events and
Their effect on the banking industry in New England, and in particular,
in Maine, in Hancock and Washington counties, in addition to our newest
market area in the Mid-Coast region - Knox, Lincoln and Waldo counties.
While the economy of Hancock and Washington counties continues to lag
the national trend, our newest market area has been named as one of
the fastest growing areas in the state. The Bank continues to operate
in a conservatively planned manner. We are growing according to our
strategic plan and remain within the 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 third quarter of 2001 was $3,275,090, up
$538,912 or 19.7% and for the first nine months of 2001 was $9,524,315,
up $1,595,573 or 20.1% over the same periods in 2000.
The following table illustrates the bank's net interest spread position:
Nine Months Ended September 30,
2001 2000
Yield on Earning Assets 7.33% 7.70%
Cost of all Funds 2.80% 3.52%
Net Interest Margin 4.53% 4.18%
The Bank continues to monitor short and long-term interest rates, balance
sheet volumes and maturities in order to evaluate the potential impact
on its net interest spreads and capital.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the nine month period ended September
30, 2001 increased $49,000 to $225,000 from the same period last year,
resulting from management's ongoing evaluation of the allowance for loan
losses. The process to evaluate the adequacy of the allowance for loan
losses involves a high degree of management judgement. Such judgement
is based, in part, on systematic methods. These methods, which are
generally quantitative measures, are employed, not so the allowance will
be the result of routine mathematical exercises, but to help ensure
that all relevant matters affecting loan collectability will
consistently be identified. Such methods at September 30, 2001
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, including consideration of loans placed on
non-accrual status during the first three quarters and increased loan
growth, 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.
The Bank has a Loan Review Program whereby an independent loan review
service firm conducted a review of the commercial loan portfolio. The
review included updates to comments on all criticized and classified
assets over $100,000, all loans delinquent over 30 days and over $100,000,
non accruals over $100,000, new (closed) and renewed loans over $100,000
as well as the adequacy of the loan loss reserve.
Although management utilized its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to
increase its provision for possible loan losses in the future as a result
of increased loan demand in the Company's primary market areas, future
increases in non-performing assets or otherwise which would adversely
affect the Company's results of operations.
The following table reflects the quality of the Bank's loan portfolio and
the emphasis placed upon the management of credit risk:
(000's Omitted)
Nine Months Ended
September 30,
2001 2000
Nonaccrual Loans 2,839 3,306
Loans past due 90 days & accruing 101 536
Restructured loans 0 0
Other real estate owned (including
insubstance foreclosure) 0 0
Total nonperforming assets 2,940 3,842
Ratio of total nonperforming loans to
capital and the allowance for loan
losses (Texas ratio) 8.09 11.88
Ratio of net chargeoffs to loans 0.047 0.066
Ratio of allowance for loan losses to loans 1.64 1.54
Coverage ratio (allowance for loan
losses divided by nonperforming assets) 119.08 83.00
Ratio of nonperforming assets to total assets .82 1.07
Ratio of nonperforming loans to total loans 1.38 1.85
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.
Noninterest income increased $320,093 or 31.9% and $994,434 or 39.0%
for the three and nine months ended September 30, 2001 over the same
periods in 2000.
The increase for the nine months is primarily due to an increase in
credit card income of $108,410 or 17.9%, trust income of $110,371 or
12.9%, loan fees of $294,208 or 107.3% and customer account fees of
$276,720 or 40.8%.
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 doing.
Noninterest expenses increased $834,815 or 32.6% and $2,646,413 or 36.8%
for the three and nine months ended September 30, 2001 over the same
periods in 2000. The increase was primarily attributable to increased
staffing, the expenses related to upgrading equipment and facilities and
the acquisition of The Waldoboro Bank, FSB.
Net security gains/(losses) amounted to $7,989 for the three and nine
months ended September 30, 2001 compared to $(223) and $(43,691) for the
same periods in 2000.
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
2001 2000 2001 2000
Nine Months Ended September 30, $859,000 $931,000 28.6% 29.9%
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap analysis as of
December 31, 2000 as provided on page 10 in the Bank's 2000 Annual Report.
As of September 30, 2001 the net changes in net interest income is
essentially negatively impacted by the declining rate environment.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' Equity, before accumulated other comprehensive income,
was as follows for the following periods:
SHAREHOLDERS' EQUITY
Amount Book Value
Per Share
September 30, 2001 $32,844,316 $56.87
September 30, 2000 $31,052,883 $53.77
December 31, 2000 $31,586,196 $54.70
The Federal Reserve Board guidelines for a risk-based approach to
measuring the capital adequacy of bank holding companies and state
chartered banks that are members of the Federal Reserve System
generally call for an 8% total capital ratio of which 4% must be
comprised of Tier 1 capital. Risk-based capital ratios are calculated
by weighing assets and off-balance sheet instruments according to their
relative credit risks.
At September 30, 2001, the Company had met the minimum capital ratios.
In fact, the Bank's strong capital position at September 30, 2001 exceeded
the minimums established by the Federal Reserve Board as follows:
Minimum Regulatory
September 30, 2001 Requirements
Leverage Capital Ratio 7.44 4.0%
Risk Based Ratio 13.53 8.0%
Tier 1 Ratio 12.27 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 $.55 for the
third quarter of 2001 and .50 for the third quarter of 2000.
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 resources and strategies
to reduce and manage the vulnerability of its operations to changes in
interest rates.
When a Company's ability to reprice interest-bearing liabilities exceeds
its ability to reprice interest-earning assets within shorter time
periods, material and prolonged increases in interest rates generally
adversely affect net interest income, while material and prolonged
decreases in interest rates generally have the opposite effect.
A principal objective of the Company is to reduce and manage the
vulnerability of its operations to changes in interest rates by
managing the ratio of interest rate sensitive assets to interest
rate sensitive liabilities within specified maturities or repricing
dates.
As of September 30, 2001, Union Trust Company's overall balance sheet
structure remains biased towards asset sensitivity. A rising rate
environment benefits earnings versus flat or falling rate environments,
as increases in asset yields outpaced funding costs.
As of September 30, 2001, the Bank's ratio of rate sensitive assets to
rate sensitive liabilities at the one year horizon was 92%, its one year
GAP (measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a point in time) was 2% or 98% matched,
and $143,546,000 in assets and $156,030,000 in liabilities will be
repriceable in one year.
In addition to the "traditional" GAP calculation, the Company analyzes
future net interest income based on budget projections including
anticipated business activity, anticipated changes in interest rates and
other variables, which are adjusted periodically by management to take
into account current economic conditions, the current interest rate
environment, and other factors.
The status of the Bank's sources of cash to fund its operation are
as follows:
September 30,
2001 2000
Net cash from operations $ 745,409 $ 1,327,557
Net cash (from) used by investing activities $ 9,548,532 $(16,058,689)
Net cash from financing activities $ 4,828,900 $ 21,440,166
Net increase $15,122,841 $ 6,709,034
BALANCE SHEET ANALYSIS
Total assets at September 30, 2001 were $357,516,795, an increase of
$9,274,669 or 2.7% from December 31, 2000. The change in assets
consisted primarily of a $14,747,652 or 13.4% decrease in securities
offset by an increase in loans of $8,760,606 or 4.3% and an increase in
cash and cash equivalents of $15,122,841 or 146.1%. On the liability
side, there was an increase in deposits of $22,849,170 or 9.3% offset
by a decrease of $17,131,589 or 25.9% in borrowings and sweep
repurchase agreements.
The following financial statistics give a general overview and profile
of the Company:
As of September 30, Increase
2001 2000 (Decrease)
Total Assets $357,516,795 $358,871,076 $ (1,354,281)
Total Earnings Assets $316,784,028 $319,625,381 $ (2,841,353)
Loans, Net $210,190,549 $204,215,248 $ 5,975,301
Assets AFS at Market $ 91,901,057 $108,197,341 $(16,296,284)
Assets Held to Maturity $ 3,629,572 $ 4,154,661 $ (525,089)
Deposits $268,429,887 $261,380,134 $ 7,049,753
Borrowings and Sweep Repurchase
Agreements $ 49,070,972 $ 62,777,383 $(13,706,411)
Capital $ 34,210,478 $ 29,138,581 $ 5,071,897
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 $16,821,373 to $95,530,629 or 26.7% of total assets
as of September 30, 2001, as compared to 31.3% at September 30, 2000.
A portion of this decrease is due to the normal course of maturities,
principal payments and security sales.
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 in most of the
Bank's market area, in particular the mid-coast region. Net loans as
of September 30, 2001 were $210,190,549, an increase of $5,975,301 or
2.9% from September 30, 2000. This resulted primarily from a continuation
of the strong loan growth experienced by the Company during 2001.
Residential real estate mortgage loans as of September 30, 2001 increased
by $12,326,473 or 11.9% over September 30, 2000 results. Residential real
estate loans consist of loans secured by one-to-four family residences.
The Company generally retains adjustable rate mortgages in its portfolio
but will, from time to time, retain fixed rate mortgages in its portfolio.
It should be noted that the Bank has sold and serviced $80,565,648 of
real estate loans and $2,712,375 of commercial mortgages and has $2,101,644
of loans held for sale at September 30, 2001.
Commercial loans decreased at September 30, 2001 by $2,913,520 or 4.7%
over the same period in 2000. Commercial loans consist of loans secured
by various corporate assets, as well as loans to provide working capital
in the form of lines of credit, which may be secured or unsecured. Union
Trust Company focuses on lending to the wide array of financially sound
small to medium-sized businesses within its service area.
Consumer loans decreased at September 30, 2001 by $2,391,497 or 8.0%
over September 30, 2000. Consumer loans are originated by the Bank for
a wide variety of purposes to meet our customers' needs, and include
personal notes, reserve checking, installment and VISA loans.
The section of management's discussion and analysis entitled "Provision
for Loan Losses" discusses the quality of the loan portfolio at September
30, 2001.
The Bank's loan-to-deposit ratio was 79.6% and the allowance for loan
losses was 1.64% of total loans at September 30, 2001.
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 as of September 30, 2001 increased $7,049,753, or 2.7%
over September 30, 2000. The Company continues to offer competitive
interest rates on its products offered and maintains an active calling
program. The proportion of interest-bearing funds continues to place
emphasis on the need for properly matching our assets and liabilities
to maintain stable net interest margins.
The Company has continued its overall asset and liability management
strategy which is to maintain flexibility in its interest sensitivity
gap in order to take advantage of both short term and long term changes
in market rates while minimizing the risk of adverse effects on operations.
The Bank is not reliant on volatile liabilities as evidenced by such
comprising only 6.21% of its deposit base.
BORROWINGS AND SWEEP REPURCHASE AGREEMENTS
Total advances from the Federal Home Loan Bank (FHLB) as of September 30,
2001 decreased $9,301,116 or 20.0% over September 30, 2000.
Sweep repurchase agreements totaling $11,955,838 as of September 30, 2001
versus $16,361,133 as of September 30, 2000 decreased $4,405,295 or 26.9%.
The decrease was primarily due to a classification change which moved
some sweep repurchase accounts into the municipal NOW account category.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in the reported market risks since
December 31, 2000.
PART II
Item 1: N/A
Item 2: N/A
Item 3: N/A
Item 4: N/A
Item 5: N/A
Item 6:Exhibits, Financial Statement Schedules and Reports on Form 8-K
A. Non-Applicable
B. Reports on Form 8-K
During the Registrants' fiscal quarter ended September 30, 2001, the
Registrant was not required to and did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
UNION BANKSHARES COMPANY
Peter A. Blyberg, President
Sally J. Hutchins, Senior Vice
President/Treasurer
November 13, 2001