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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 2-90679
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation of organization)
66 Main Street, Ellsworth, Maine
(Address of Principal Executive Offices)
(Zip Code)
04605
Registrant's telephone number, including area code
(207) 667-2504
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES XXX NO_____
Indicate the number of shares outstanding of each of the issue's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2000
(Common stock, $12.50 Par Value) 577,466
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, 2000, September 30, 1999 and December 31, 1999 4
Condensed Consolidated Statements of Income -
nine months ended September 30, 2000 and September 30, 1999
three months ended September 30, 2000 and September 30, 1999 5-6
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2000 and September 30, 1999 7
Consolidated Statement of Changes in Shareholders' Equity -
nine months ended September 30, 2000 and September 30, 1999 9
Notes to Consolidated Financial Statements 10-12
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-21
PART II Other Information
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Shareholders
Union Bankshares Company
We have reviewed the accompanying interim consolidated financial information
of Union Bankshares Company and Subsidiary as of September 30, 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 review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is to express an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Berry Dunn McNeil & Parker
Portland, Maine
November 7, 2000
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30 September 30 December 31
2000 1999 1999
(Unaudited) (Unaudited) (Audited)*
ASSETS
Cash and due from banks $ 12,725,682 $ 9,526,972 $ 9,035,081
Federal funds sold 3,058,131 13,544,460 39,698
Cash and cash equivalents 15,783,813 23,071,432 9,074,779
Available for sale securities 103,728,991 104,680,727 100,309,096
Held to maturity securities, at cost 4,154,661 4,290,102 4,236,504
Other investment securities, at cost 4,468,350 3,557,700 3,557,700
Loans (net of unearned discount) 207,404,260 122,915,738 127,649,151
Less: Allowance for loan losses 3,189,012 2,557,322 2,629,472
Net Loans $204,215,248 $120,358,416 $125,019,679
Premises, furniture & equip, net 5,484,620 2,991,755 2,987,572
Deferred tax asset 1,130,083 878,184 1,095,184
CSV life insurance 6,409,253 576,806 6,231,251
Core deposit intangible 319,115 0 0
Goodwill 6,749,350 0 0
Other assets 6,427,592 4,955,855 5,337,900
Total Assets $358,871,076 $265,360,977 $257,849,665
LIABILITIES
Deposits:
Demand $ 32,685,066 $ 26,708,670 $ 25,368,731
Savings 118,836,796 94,479,666 92,067,463
Time 109,858,272 76,771,273 75,411,640
Total Deposits 261,380,134 197,959,609 192,847,834
Borrowed Funds 46,416,250 25,451,250 18,451,250
Sweep Repurchase 16,361,133 9,373,977 13,140,423
Accrued Expenses & Other Liabilities 5,574,978 5,028,081 5,767,167
Total Liabilities $329,732,495 $237,812,917 $230,206,674
SHAREHOLDERS' EQUITY
Common Stock, $12.50 par value. Authorized
1,200,000 shares, issued 582,394 shares
in 2000 and 1999. $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 3,963,534 3,963,432 3,963,533
Retained Earnings 20,151,151 18,274,739 18,837,028
Net Unrealized Gain/(Loss) on Securities
Available for Sale (1,914,302) (1,659,569) (2,128,324)
Less: Treasury Stock (341,727) (310,467) (309,171)
Total Shareholders' Equity $ 29,138,581 $ 27,548,060 $ 27,642,991
Total Liabilities &
Shareholders' Equity $358,871,076 $265,360,977 $257,849,665
*Condensed from audited financial statements
The accompanying consolidated financial statements include the accounts
of the Company and its majority-owned subsidiary.
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Nine Months Ended - September 30,
2000 1999
INTEREST INCOME
Interest and Fees on Loans $ 8,634,107 $ 7,172,582
Interest and Fees on Municipal Loans and Bonds 783,463 762,094
Interest and Dividends on Securities 4,727,002 4,761,201
Interest on Federal Funds Sold 52,037 181,724
Amortization & Accretion - Net 1,438 (54,924)
Total Interest Earned 14,198,047 12,822,677
INTEREST EXPENSE
Interest on Deposits 4,472,605 4,197,985
Interest on Funds Purchased/Borrowed 1,796,700 1,063,456
Total Interest Expense 6,269,305 5,261,441
NET INTEREST INCOME 7,928,742 7,561,236
Provision for Loan Losses 176,000 155,000
NET INTEREST INCOME AFTER LOAN PROVISION 7,752,742 7,406,236
NONINTEREST INCOME
Exchange, Commission & Fees 678,755 707,317
Trust Department 850,627 661,383
Financial Service Fees 53,371 52,062
Other Income 964,684 1,079,053
Gain on Sale of Other Real Estate Owned 0 153,984
Net Securities Losses (43,691) (17,595)
Total Noninterest Income 2,503,746 2,636,204
NONINTEREST EXPENSE
Salaries and Employee Benefits 3,735,662 3,365,363
Building Maintenance & Operations 406,460 413,018
FDIC Insurance 41,813 21,414
Other Expenses 2,961,346 2,620,779
Total Noninterest Expense 7,145,281 6,420,574
INCOME BEFORE TAXES 3,111,207 3,621,866
Income Taxes 931,000 1,118,355
NET INCOME $ 2,180,207 $ 2,503,511
Per Share Data:
Net Income $3.77 $4.33
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
Three Months Ended-September 30,
2000 1999
INTEREST INCOME
Interest and Fees on Loans $3,313,293 $2,427,014
Interest and Fees on Municipal Loans and Bonds 279,730 269,967
Interest and Dividends on Securities 1,590,590 1,580,551
Interest on Federal Funds Sold 33,866 64,535
Amortization & Accretion - Net 1,837 8,294
Total Interest Earned 5,219,316 4,350,361
INTEREST EXPENSE
Interest on Deposits 1,714,603 1,402,214
Interest on Funds Purchased/Borrowed 768,535 365,370
Total Interest Expense 2,483,138 1,767,584
NET INTEREST INCOME 2,736,178 2,582,777
Provision for Loan Losses 101,000 45,000
NET INTEREST INCOME AFTER LOAN PROVISION 2,635,178 2,537,777
NONINTEREST INCOME
Exchange, Commission & Fees 239,157 239,985
Trust Department 306,987 227,835
Financial Service Fees 18,043 17,944
Other Income 440,161 410,467
Net Securities Gains/(Losses) 223 (60,304)
Total Noninterest Income 1,004,571 835,927
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,253,374 1,100,355
Building Maintenance & Operations 131,782 129,992
FDIC Insurance 12,624 5,353
Other Expenses 1,160,777 997,905
Total Noninterest Expense 2,558,557 2,233,605
INCOME BEFORE TAXES 1,081,192 1,140,099
Income Taxes 354,000 342,000
NET INCOME $ 727,192 $ 798,099
Per Share Data:
Net Income $1.26 $1.38
Dividends Declared $ .50 $ .50
UNION BANKSHARES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
2000 1999
Net Cash Flows Provided by Operating Activities:
Net Income $2,180,207 $2,503,511
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 370,332 343,321
Provision for loan losses 176,000 155,000
Disposals 183,639 27,996
Net securities losses 43,691 17,595
Net change in other assets (1,349,519) (507,248)
Net change in other liabilities (724,790) 1,884,521
Net amortization of premium (accretion of
discount) on investments (1,438) 54,924
Net change in deferred loan origination fees (95,029) 468
Origination of loans held for sale (2,965,865) (15,834,176)
Proceeds from loans held for sale 3,510,329 16,630,989
Total adjustments (852,650) 2,773,390
Net cash provided by operating activities 1,327,557 5,276,901
Cash Flows From Investing Activities:
Cash paid to Mid-Coast stockholders in
connection with Mid-Coast acquisition (11,809,047) 0
Cash received through Mid-Coast acquisition 4,403,785 0
Purchase of securities available for sale (2,366,941) (48,430,430)
Purchase of securities held to maturity (50,023) (100,000)
Proceeds from sales of securities
available for sale 2,830,309 33,255,795
Proceeds from maturities of securities
available for sale 4,969,945 9,990,317
Proceeds from maturities of securities
held to maturity 321,250 175,000
Net change in loans to customers (13,331,148) (7,560,747)
Capital expenditures (1,026,819) (709,297)
Net cash used in investing activities (16,058,689) (13,379,362)
Cash Flows From Financing Activities:
Net increase in other Borrowed Funds 17,220,711 5,000,000
Net increase in demand, savings and
money market accounts 4,746,777 12,817,477
Net increase/(decrease) in time deposits 371,317 (2,886,265)
Purchase of Treasury Stock (85,260) (80,468)
Proceeds from sale of Treasury Stock 52,705 59,020
Dividends paid (866,084) (849,229)
Net cash provided by financing activities 21,440,166 14,060,535
Net increase in cash and cash equivalents 6,709,034 5,958,074
Cash and cash equivalents at beginning of period 9,074,779 17,113,358
Cash and cash equivalents at end of period $15,783,813 $23,071,432
Supplemental Schedule of Non-Cash Investing and Financing Activities
2000 1999
Net increase/(decrease) as a result of adopting Statement
of Financial Accounting Standards No. 115
Available for sale securities $ (324,276) $ 4,275,153
Deferred income/(expense) liability 110,254 (1,453,552)
Net unrealized gain/(loss) on available
for sale securities $ (214,022) $ 2,821,601
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 2000 and 1999
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDER'S
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
Balance at December 31,
1998 $7,279,925 $3,963,432 $(289,019) $16,623,348 $ 1,162,032 $28,739,718
Net income, September 30,
1999 0 0 0 2,503,511 0 2,503,511
Change in net unrealized
gain (loss) on available
for sale securities,
net of tax of
$1,453,552 0 0 0 0 (2,821,601) (2,821,601)
Net Comprehensive
Loss 0 0 0 2,503,511 (2,821,601) (318,090)
Sale of 454 shares Treasury
stock 0 0 59,020 0 0 59,020
Repurchase of 726 shares
Treasury stock 0 0 (80,468) 0 0 (80,468)
Cash dividends
declared 0 0 0 (852,120) 0 (852,120)
Balance at September 30,
1999 $7,279,925 $3,963,432 $(310,467) $18,274,739 $(1,659,569) $27,548,060
Balance at December 31,
1999 $7,279,925 $3,963,533 $(309,171) $18,837,028 $(2,128,324) $27,642,991
Net income, September 30,
2000 0 0 0 2,180,207 0 2,180,207
Change in net unrealized gain
(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 $3,963,533 $(341,726) $20,151,151 $(1,914,302) $29,138,581
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 and for
the nine month periods ended September 30, 2000 and 1999 are unaudited. However,
in the opinion of the Company, all adjustments consisting of normal, recurring
accruals necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but which
is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 1999.
(B) Earnings Per Share
Earnings per common share are computed by dividing the net income available for
common stock by the weighted average number of common shares outstanding during
this period. Weighted shares for the nine months ended September 30, 2000 and
1999 were 577,796 and 578,178, respectively, and have been restated for 1999
to reflect a May 28, 1999 20% stock dividend.
(C) Acquisition of Mid-Coast Bancorp
On August 31, 2000, the Bank acquired the outstanding stock of Mid-Coast Bancorp
and its subsidiary, Waldoboro Bank FSB. The acquisition was accounted for under
the purchase method of accounting for business combinations. The following is
a summary of the transaction.
Cash and equivalents $ 4,403,785
Loans acquired 65,945,392
Investments 10,215,683
Fixed Assets 2,024,200
Goodwill 5,315,225
Other Assets 1,739,664
Deposits and accrued interest assumed (63,414,205)
Borrowings (13,965,000)
Other Liabilities (455,697)
Net Cash Paid to the Stockholders of Mid-Coast Bancorp $11,809,047
Goodwill is being amortized using the straight line method over 15 years.
Core deposit intangible of $323,000 is being amortized using the straight line
method over 7 years. Acquisition costs incurred amounted to $1,462,711 and is
being amortized over 15 years using the straight line method. Amortization
charged to operations was $40,601 in 2000.
(D) Proforma Results of Operation
Following are proforma results of operations for the nine month periods ended
September 30, 2000 and 1999, as though Union Bankshares and Mid-Coast Bancorp
had been combined at the beginning of each period.
9/30/00 9/30/99
Net Interest Income $9,973,000 $9,505,000
Net Income $2,083,000 $2,353,000
Earnings Per Share $ 3.61 $ 4.07
(E) Off-Balance Sheet Items
In the normal course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. The instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the statement of financial position. The
contract amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments. At September 30, 2000, and
September 30, 1999, the following financial instruments, whose contract amounts
represent credit risk, were outstanding.
September 30
(000's omitted)
2000 1999
1. Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines 6,658 6,562
B. Credit card lines 6,354 6,242
C. Secured real estate loans 7,473 5,625
D. Other 17,690 21,131
2. Financial Standby Letters of Credit: 61 165
(F) 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.
(G) General
Any loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that were not disclosed under Item III of Industry Guide 3 do
not (1) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity
or capital resources or (2) represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
(H) 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.
(I) Recent Accounting Developments
The Financial Accounting Standards Board recently issued the following Statement
of Financial Accounting Standards (SFAS):
SFAS No. 137 Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 138 Accounting for Certain Derivative Instruments and
Certain Hedging Activities
SFAS No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities
SFAS No. 137 and 138, which amend SFAS No. 133 and establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities, are
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not expect these statements to have any material impact
to its consolidated financial condition and results of operations.
SFAS No. 133, establishes accounting and reporting standards for derivative
instruments and for hedging activity. The Company adopted SFAS No. 133
effective July 1, 1998. During the nine month periods ended September 30,
2000 and 1999, the Company did not hold any derivative instruments and
management does not expect to enter into derivative transactions in the near
future. The effect of adopting SFAS No. 133 on the consolidated financial
statements of the Company was limited to the transfer of securities from held
to maturity to available for sale.
SFAS No. 140 replaces SFAS No. 125. It is effective for transfers occurring
after March 31, 2001. The Company does not expect this statement to have any
material impact to its consolidated financial condition and results of
operations.
(J) Recent Developments
On August 31, 2000, the Company completed the acquisition of Mid-Coast Bancorp,
Inc., a bank holding company with one principal subsidiary, Waldoboro Bank, FSB.
On September 29, 2000, Waldoboro Bank, FSB was merged with and into Union Trust
Company, a subsidiary of Union Bankshares Company. The acquisition of Mid-Coast
Bancorp, Inc. was accounted for under the purchase method of accounting.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Earnings and Performance Overview
The following discussion and analysis focuses on the factors affecting Union
Bankshares Company (The Company) financial condition at September 30, 2000 as
compared to September 30, 1999.
Results of Operations
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on earning assets
(primarily loans and investments) and interest expense (primarily deposits and
borrowings). The Company's results are also affected by the provision for loan
losses; noninterest income, including gains and losses on the sales of loans
and securities; noninterest expenses (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, 2000 of
$727,192 versus $798,099 for the same period in 1999, and net income for the
first nine months of 2000 of $2,180,207 versus $2,503,511 for the same period
in 1999.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
September 30,
2000 1999
Earnings Per Share 3.77 4.33
Return on Average Shareholders Equity 7.24%A 8.76%B
Return on Average Assets 0.70%A 0.98%B
Return on Average Earning Assets 0.73%A 1.05%B
A=annualized returns are: 9.65%, 0.93%, and 0.97%, respectively.
B=annualized returns are: 11.68%, 1.30%, and 1.40%, respectively.
The decrease in net income for the three and nine months ended September 30,
2000 versus the same periods in 1999 was not unexpected due to several events
that occurred in the first nine months of 1999, including one time gains on a
sale of bank owned property and security gains realized on the Company's
security portfolio and acquisition related costs incurred in 2000.
As a result of narrowing margins, (offset in part by loan growth attributable
to the acquisition and a strong sales effort), net interest income for the third
quarter of 2000 and for the first nine months of 2000 was up a modest $153,401
or 5.9% and $367,506 or 4.9%, 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 decrease in noninterest income for the first nine months of 2000 results
primarily from one time events in 1999 which was a gain on the sale of other
real estate owned of $153,984 and security losses of $17,595, offset by
improvements in bankcard, trust fees and additional fees gained from the Mid-
Coast acquisition.
Noninterest expenses, consisting primarily of employee compensation and
benefits, occupancy and equipment expense and other general operating expenses,
for the third quarter of 2000 and the nine months ended September 30, 2000
increased $324,952 and $724,707, respectively, from the same periods in 1999
due to increased staffing, the expenses related to upgrading equipment and
facilities and costs associated with the acquisition.
During 2000, the Company is implementing specific strategic priorities that will
focus on increasing fee based revenues and controlling overall expense. With
the ever changing environment of interest rate risk, fee income has developed
into a significant component in the Bank's total revenue generation goals.
While revenue generation is a top priority, the Company will also focus on
productivity and maximizing the returns of its financial and human resources
and exploring new fee generation opportunities.
The Bank is constantly monitoring the economy and its effect on the banking
industry in New England, and in particular, in Maine, in Hancock and Washington
counties, 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 will continue
to operate in a conservative planned manner. We are growing according to our
strategic plan and remain within the parameter 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 2000 was $2,736,178, up $153,401
or 5.9% over the third quarter of 1999 and for the first nine months of 2000
was $7,928,742, up $367,506 or 4.9% over the same period in 1999.
The following table illustrates the bank's net interest spread position:
Nine Months Ended September 30,
2000 1999
Yield on Earning Assets 8.02% 7.39%
Cost of all Funds 3.58% 2.72%
Net Interest Margin 4.44% 4.67%
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,
2000 increased $21,000 to $176,000 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,
2000 included a loan-by-loan analysis of all larger commercial loans and
commercial real estate loans which were non-performing or which were being
closely monitored by management for potential problems, and a quantitive
analysis of residential real estate and consumer loans. Based on these
analyses, including consideration of loans placed on non-accrual status during
the third quarter 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 judgement in providing for possible
losses, there can be no assurance that the Company will not have to increase
its provision for possible loan losses in the future as a result of increased
loan demand in the Company's primary market areas, future increases in non-
performing assets or otherwise which would adversely affect the Company's
results of operations.
The following table reflects the quality of the Bank's loan portfolio and the
emphasis placed upon the management of credit risk:
(000's Omitted)
Nine Months Ended
September 30,
2000 1999
1. Nonaccrual Loans 3,306 524
2. Loans past due 90 days & accruing 536 383
3. Restructured loans 0 0
4. Other real estate owned (including
insubstance foreclosure) 0 0
5. Total nonperforming assets 3,842 907
6. Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) 11.88 3.01
7. Ratio of net chargeoffs to loans 0.066 0.026
8. Ratio of allowance for loan losses to loans 1.54 2.08
9. Coverage ratio (allowance for loan losses divided by
nonperforming assets) 83.00 281.92
10. Ratio of nonperforming assets to total assets 1.07 .34
11. Ratio of nonperforming loans to total loans 1.85 .74
It is important to note that the directors, officers and employees of the Bank
are proud of the above data and their efforts in serving its community while
simultaneously working hand-in-hand with state and federal regulators in
structuring its financial position during these times. Most assuredly all
parties concerned benefit from just such cooperative effort.
NONINTEREST INCOME
The Company receives noninterest income from trust fees, service charges on
deposit accounts and other income comprised of fees earned from a variety of
other services. Securities gains and losses are another major component of
this category.
Noninterest income, excluding one time gains/(losses), increased $108,117 or
12.1% and $47,622 or 1.9% for the three and nine months ended September 30,
2000 over the same periods in 1999. The increase for the nine months ended
September 30, 2000 is primarily due to an increase in credit card income of
$81,686 or 15.7%, trust income of $189,244 or 28.6% and fees gained from the
acquisition.
Net security gains/(losses) amounted to $223 and $(43,691) for the three and
nine months ended September 30, 2000 compared to $(60,304) and $(17,595) for
the same periods in 1999.
NONINTEREST EXPENSES
Noninterest expenses consist of employee compensation and benefits, occupancy
and equipment expenses and miscellaneous expenses. Management is continually
reviewing expenses to control them and develop more efficient delivery systems
for all Bank services.
A generally flat economy in Maine and in particular in Downeast Maine, has
compelled or should compel banking institutions of our size to manage their
institutions prudently and conservatively. This we are committed to do.
Noninterest expenses increased $324,952 or 14.5% and $724,707 or 11.3% for the
three and nine months ended September 30, 2000 over the same periods in 1999.
The increase was primarily attributable to increased staffing, the expenses
related to upgrading equipment and facilities and acquisition related costs.
INCOME TAXES
Income taxes are provided in accordance with the comprehensive income tax
allocation method which recognizes the tax effects of all income and expense
transactions in each year's statement of income, regardless of the year the
transactions are reported for tax purposes. The tax effects of these timing
differences are reflected in deferred income tax accounts in the consolidated
financial statements.
Deferred income taxes are recognized for income and expense items that are
reported in different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the year of the calculation.
The status of the Bank's income tax expense is as follows:
Tax Expense Effective Rate
2000 1999 2000 1999
Nine Months Ended September 30, $931,000 $1,118,355 29.9% 30.9%
INTEREST RATE GAP ANALYSIS
Attention should be directed to the interest rate gap analysis as of December
31, 1999 as provided on page 12 in the Bank's 1999 Annual 10K. Data as of
September 30, 2000 is essentially identical to that reported in the Annual
Report.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' Equity was as follows for the following periods:
SHAREHOLDERS' EQUITY
Amount Book Value
Per Share
September 30, 2000 $29,138,581 $50.46
September 30, 1999 $27,548,060 $47.67
December 31, 1999 $27,642,991 $47.84
The Federal Reserve Board guidelines for a risk-based approach to measuring the
capital adequacy of bank holding companies and state- chartered banks that are
members of the Federal Reserve System generally call for an 8% total capital
ratio of which 3% must be comprised of Tier 1 capital. Risk-based capital
ratios are calculated by weighing assets and off-balance sheet instruments
according to their relative credit risks. At September 30, 2000, the Company
had met the minimum capital ratios. In fact, the Bank's strong capital
position at September 30, 2000 exceeded the minimums established by the Federal
Reserve Board as follows:
Minimum Regulatory
September 30, 2000 Requirements
Leverage Capital Ratio 8.66 3.0%
Risk Based Ratio 12.58 8.0%
Tier 1 Ratio 11.32 4.0%
DIVIDENDS
The common stock is not actively traded and therefore, we are not aware of the
price of all trades. The price is established by determining what a willing
buyer will pay a willing seller.
Cash dividends per share declared on common stock were $.50 for the third
quarter of 2000 and 1999, respectively.
STOCK DIVIDENDS
On April 14, 1999, the Board of Directors of Union Bankshares Company declared a
20% stock dividend payable to stockholders of record on April 23, 1999.
LIQUIDITY MANAGEMENT
Liquidity management is the process by which the Bank structures its cash flow
to meet requirements of its customers as well as day to day operating expenses.
Liquidity is provided from both assets and liabilities. The asset side of the
balance sheet provides liquidity through the regular maturities on our
securities portfolio, as well as the interest received on these assets. In
addition, US Government securities may be readily converted to cash by sale in
the open market. On the liability side, liquidity comes from deposit growth
and the Bank's accessibility to other sources of borrowed funds. In this
respect, liquidity is enhanced by a significant amount of core demand and
savings deposits from a broad customer base.
As a part of the Bank's asset and liability management and liquidity needs,
management actively evaluates its funding resources and strategies to reduce
and manage the vulnerability of its operation to changes in interest rates.
When a Company's ability to reprice interest-bearing liabilities exceeds its
ability to reprice interest-earning assets within shorter time periods,
material and prolonged increases in interest rates generally adversely affect
net interest income, while material and prolonged decreases in interest rates
generally have the opposite effect.
A principal objective of the Company is to reduce and manage the vulnerability
of its operations to changes in interest rates by managing the ratio of interest
rate sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates.
As of September 30, 2000, Union Trust Company is liability sensitive. The Bank
becomes asset sensitive between 37 and 60 month horizons. Bank earnings may
be negatively affected, should interest rates fall.
As of September 30, 2000, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 65%, its one year GAP
(measurement of interest sensitivity of interest earning assets and interest
bearing liabilities at a point in time) was 18% or 82% matched, and $117,058,000
in assets and $168,257,000 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,
2000 1999
Net cash from (used by) operations $ (5,222,203) $ 5,243,577
Net cash used by investing activities $(86,888,134) $(13,346,038)
Net cash from financing activities $ 98,819,371 $ 14,060,535
Net increase $ 6,709,034 $ 5,958,074
BALANCE SHEET ANALYSIS
Total assets at September 30, 2000 were $358,871,076, an increase of
$101,021,411 or 39.18% from December 31, 1999. The change in assets was due
primarily from the merger of Union Trust Company and Waldoboro Bank FSB and
consisted primarily of an $79,195,569 or 63.35% increase in loans, an increase
of $3,690,601 or 40.85% in cash and due from banks, and an increase in other
assets of $13,855,678 or 109.42%. The asset growth was supported by an
increase of $68,532,300 or 35.54% in deposits and $31,185,710 or 98.71% in
borrowings and sweep repurchase agreements.
The following financial statistics give a general overview and profile of the
Company:
As of September 30, Increase
2000 1999 (Decrease)
Total Assets $358,871,076 $265,360,977 $ 93,510,099
Total Earnings Assets $319,625,381 $246,431,405 $ 73,193,976
Loans (Net) $204,215,248 $120,358,416 $ 83,856,832
Assets AFS at Market $108,197,341 $108,238,427 $ (41,086)
Assets Held to Maturity $ 4,154,661 $ 4,290,102 $ (135,441)
Deposits $261,380,134 $197,959,609 $ 63,420,525
Borrowings and Sweep
Repurchase Agreements $ 62,777,383 $ 34,825,227 $ 27,952,156
Capital $ 29,138,581 $ 27,548,060 $ 1,590,521
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
$176,527 to $112,352,002 or 31.3% of total assets as of September 30, 2000, as
compared to 42.4% at September 30, 1999. Investments of $10,215,683 were
acquired from Waldoboro Bank FSB, offset by 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,
2000 were $204,215,248, an increase of $83,856,832 or 68.2% from September 30,
1999. This resulted primarily from the merger of Waldoboro Bank FSB and Union
Trust Company, a continuation of the strong loan growth experienced by the
Company during 2000 and a reclassification of $4,965,343 in Assets AFS - Loans
which were previously held in the investment section of the balance sheet.
These loans were moved into the mortgage loan portfolio on July 15, 1999.
Residential real estate mortgage loans as of September 30, 2000 increased by
$57,771,878 or 124.9% over September 30, 1999 results. Residential real estate
mortgage loans acquired from Waldoboro Bank FSB accounted for $43,909,446 of
this increase. 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 $59,963,065 of real estate loans and $2,235,874 of commercial
mortgages and has $50,000 of loans held for sale at September 30, 2000.
Commercial loans increased at September 30, 2000 by $17,561,072 or 39.9% over
the same period in 1999. Commercial loans acquired from Waldoboro Bank FSB
accounted for $17,613,304 of this increase. 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 increased at September 30, 2000 by $7,931,985 or 46.0% over
September 30, 1999. 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. Consumer loans acquired from
Waldoboro Bank FSB accounted for $6,862,379 of this increase.
The section of management's discussion and analysis entitled "Provision for
Loan Losses" clearly indicates the quality of the loan portfolio at September
30, 2000.
The Bank's loan-to-deposit ratio was 79.3% and the allowance for loan losses
1.54% of total loans at September 30, 2000.
Management's approach to loan growth is to seek out and work with borrowers
whose financial condition, credit history, and performance would warrant
extensions of credit.
In brief, the Company's loan portfolio is driven by a desire to maintain our
credit standards while meeting the financial needs of qualified borrowers in
the community.
DEPOSITS
Total deposits as of September 30, 2000 increased $63,420,525, or 32.0% over
September 30, 1999, primarily due to the acquisition of $63,200,861 of deposits
of Waldoboro Bank FSB. 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 5.54% of its deposit base.
BORROWINGS AND SWEEP REPURCHASE AGREEMENTS
Total advances from the Federal Home Loan Bank (FHLB) as of September 30,
2000 increased $20,965,000 or 82.4% over September 30, 1999. A portion of
this increase was to fund new loan originations for 2000, but primarily it was
due to Union Trust Company assuming Waldoboro Bank FSB's FHLB advances of some
$13,000,000.
Sweep repurchase agreements totaling $16,361,133 as of September 30, 2000
versus $9,373,977 as of September 30, 1999 increased $6,987,156 or 74.5%.
The increase was primarily due to competitive rates and account features.
PART II
Item 1: N/A
Item 2: N/A
Item 3: N/A
Item 4: Submission of Matters to a Vote of Security Holders
A. A special meeting of the shareholders was held on August 3, 2000.
B. Matters voted upon at the meeting:
1. To consider and vote upon a proposal to approve the amended and
restated agreement and Plan of Merger, dated June 20, 2000.
Total vote cast: 446,775
For: 444,192
Against: 1,801
Abstained: 782
2. To consider and vote upon any others matters that properly come
before the special meeting, or any adjournments or postponements of
the special meeting.
Total vote cast: 446,775
For: 440,313
Against: 2,011
Abstained: 4,451
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
Union Bankshares Company filed a current report on Form 8-K dated March
31, 2000 disclosing under Item 5 that Union Trust Company has reached an
agreement to acquire Waldoboro Bank FSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 ,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNION BANKSHARES COMPANY
Peter A. Blyberg, President
November 13, 2000
Sally J. Hutchins, Senior Vice President/Treasurer
