UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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
of incorporation of organization) Identification No.)
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 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 by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 28, 2004
-------------------------------- ----------------------------
(Common stock, $12.50 Par Value) 573,127
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
- ------ --------------------- --------
Item l: Financial Statements (Unaudited)
Independent Accountants' Report 3
Consolidated Balance Sheets - 4
June 30, 2004, June 30, 2003, December 31, 2003
Consolidated Statements of Income - 5-6
six months ended June 30, 2004 and June 30, 2003
three months ended June 30, 2004 and June 30, 2003
Consolidated Statements of Cash Flows - 7
six months ended June 30, 2004 and June 30, 2003
Consolidated Statements of Changes in Shareholders' 8
Equity - six months ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements 9-11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4: Controls and Procedures 20
PART II Other Information
- ------- -----------------
Item 1: Legal Proceedings 20
Item 2: Changes in Securities, Use of Proceeds and Issuer
Purchases Of Equity Securities 20-21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21-22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits
2
PART 1
------
Item 1: FINANCIAL STATEMENTS
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 June 30, 2004
and 2003, and for the three- and six-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board
(United States), 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 accounting principles generally accepted in the United
States of America.
Berry Dunn McNeil & Parker
Portland, Maine
July 30, 2004
3
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30 June 30 December 31
2004 2003 2003
(Unaudited) (Unaudited) (Audited)*
----------- ----------- -----------
<s> <c> <c> <c>
ASSETS
- ------
Cash and due from banks $ 10,878,603 $ 11,356,181 $ 14,701,490
Federal funds sold 406 403 0
------------ ------------ ------------
Cash and cash equivalents 10,879,009 11,356,584 14,701,490
------------ ------------ ------------
Available for sale securities, at market value 129,764,004 111,524,219 128,954,447
Held to maturity securities, at cost 2,863,949 3,065,656 2,869,750
Other investment securities, at cost 8,068,406 5,505,954 6,330,950
Assets available for sale - loans 69,000 3,233,141 937,000
Loans (net of deferred loan fees) 297,515,510 246,548,604 286,332,778
Less: Allowance for loan losses 4,471,085 4,164,960 4,339,336
------------ ------------ ------------
Net Loans 293,044,425 242,383,644 281,993,442
------------ ------------ ------------
Premises, furniture & equipment, net 5,839,614 6,014,880 5,819,098
Cash surrender value of life insurance 8,216,367 8,005,557 8,040,950
Core deposit intangible, net 144,121 190,864 167,492
Goodwill 6,305,130 6,305,130 6,305,130
Other assets 8,744,320 6,813,012 8,073,755
------------ ------------ ------------
Total Assets $473,938,345 $404,398,641 $464,193,504
============ ============ ============
LIABILITIES
- -----------
Deposits:
Demand $ 39,971,649 $ 34,738,373 $ 41,209,175
Savings and money market 150,419,340 142,646,619 159,411,067
Time 94,020,861 100,795,149 97,833,521
------------ ------------ ------------
Total Deposits 284,411,850 278,180,141 298,453,763
------------ ------------ ------------
Advances from Federal Home Loan Bank 134,662,662 67,562,583 105,026,706
Sweep repurchase agreements 8,036,443 9,946,211 12,456,358
Other liabilities 6,932,074 8,279,081 7,504,215
------------ ------------ ------------
Total Liabilities 434,043,029 363,968,016 423,441,042
------------ ------------ ------------
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, $12.50 par value. Authorized
1,200,000 shares, 570,887 shares issued and
outstanding at June 30, 2004 and 582,394
shares issued at June 30, 2003 and December
31, 2003. 7,136,088 7,279,925 7,279,925
Surplus 3,976,959 4,024,564 4,056,394
Retained Earnings 29,668,443 27,301,436 28,676,861
Accumulated other comprehensive income (loss)
Net Unrealized Gain (Loss) on Securities
Available for Sale, net of tax (886,174) 2,931,157 1,542,454
Minimum pension liability adjustment, net
of tax 0 (326,168) 0
Less: Treasury stock (9,731 shares as of
June 30, 2003 and 9,614 shares as of
December 31, 2003) 0 780,289 803,172
------------ ------------ ------------
Total Shareholders' Equity 39,895,316 40,430,625 40,752,462
------------ ------------ ------------
Total Liabilities & Shareholders' Equity $473,938,345 $404,398,641 $464,193,504
============ ============ ============
<FN>
* Refer to Company's Annual Report on Form 10-K dated December 31, 2003.
</FN>
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
4
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended - June 30,
---------------------------
2004 2003
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans $ 7,999,885 $7,297,574
Interest and Fees on Municipal Loans and Bonds 407,749 447,774
Interest and Dividends on Securities 2,585,561 2,488,675
Interest on Federal Funds Sold 1 13,200
Amortization & Accretion - Net (280,000) (458,881)
----------- ----------
Total Interest and Dividend Income 10,713,196 9,788,342
----------- ----------
INTEREST EXPENSE
Interest on Deposits 1,324,817 1,778,585
Interest on Funds Purchased/Borrowed 1,533,832 1,223,931
----------- ----------
Total Interest Expense 2,858,649 3,002,516
----------- ----------
NET INTEREST INCOME 7,854,547 6,785,826
Provision for Loan Losses 130,002 210,000
----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,724,545 6,575,826
----------- ----------
NONINTEREST INCOME
Net Securities Gains 237,301 147,313
Service Charges on Deposit Accounts 778,097 624,105
Financial Services Income 975,288 910,036
Loan Department Income 471,290 980,398
Visa Income 90,598 227,712
Other Income 434,714 607,189
----------- ----------
Total Noninterest Income 2,987,288 3,496,753
----------- ----------
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,420,602 3,892,404
Building Maintenance & Operations 570,080 581,622
FDIC Insurance 32,968 33,556
Other Expenses 2,144,303 2,453,611
----------- ----------
Total Noninterest Expense 7,167,953 6,961,193
----------- ----------
INCOME BEFORE INCOME TAXES 3,543,880 3,111,386
Income Taxes 1,073,000 895,000
----------- ----------
NET INCOME $ 2,470,880 $2,216,386
=========== ==========
Weighted Average Common Shares Outstanding 572,174 573,605
Per Share Data:
Net Income $ 4.32 $ 3.86
Cash Dividends Declared $ 1.25 $ 1.15
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
5
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended - June 30,
-----------------------------
2004 2003
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans $3,958,299 $3,663,069
Interest and Fees on Municipal Loans and Bonds 206,438 225,204
Interest and Dividends on Securities 1,334,663 1,270,143
Interest on Federal Funds Sold 0 683
Amortization & Accretion - Net (149,293) (237,720)
---------- ----------
Total Interest and Dividend Income 5,350,107 4,921,379
---------- ----------
INTEREST EXPENSE
Interest on Deposits 650,734 872,941
Interest on Funds Purchased/Borrowed 808,295 637,294
---------- ----------
Total Interest Expense 1,459,029 1,510,235
---------- ----------
NET INTEREST INCOME 3,891,078 3,411,144
Provision for Loan Losses 65,001 105,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,826,077 3,306,144
---------- ----------
NONINTEREST INCOME
Net Securities Gains 82,665 147,313
Service Charges on Deposit Accounts 464,646 329,412
Financial Services Income 527,246 470,879
Loan Department Income 244,990 484,592
Visa Income 49,107 75,095
Other Income 70,370 315,143
---------- ----------
Total Noninterest Income 1,439,024 1,822,434
---------- ----------
NONINTEREST EXPENSE
Salaries and Employee Benefits 2,195,675 2,073,604
Building Maintenance & Operations 291,989 308,022
FDIC Insurance 10,250 10,692
Other Expenses 1,105,235 1,318,334
---------- ----------
Total Noninterest Expense 3,603,149 3,710,652
---------- ----------
INCOME BEFORE INCOME TAXES 1,661,952 1,417,926
Income Taxes 468,000 415,000
---------- ----------
NET INCOME $1,193,952 $1,002,926
========== ==========
Weighted Average Common Shares Outstanding 571,859 573,016
Per Share Data:
Net Income $ 2.09 $ 1.75
Cash Dividends Declared $ .65 $ .60
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
6
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
---- ----
<s> <c> <c>
Net Cash Flows Provided by Operating Activities:
- ------------------------------------------------
Net Income $ 2,470,880 $ 2,216,386
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 341,624 380,879
Provision for loan losses 130,002 210,000
Net securities gains (237,301) (147,313)
Net increase in other assets (845,215) (950,168)
Net increase in other liabilities 678,971 356,728
Net amortization of premium on investments 220,107 494,016
Net decrease in deferred loan origination fees (59,725) (57,572)
Origination of loans held for sale (5,450,726) (33,383,401)
Proceeds from loans held for sale 6,318,726 37,758,513
------------ ------------
Net cash provided by operating activities 3,567,343 6,878,068
------------ ------------
Cash Flows From Investing Activities:
- -------------------------------------
Purchase of securities available for sale (38,270,114) (34,975,793)
Proceeds from sales of securities available for sale 19,744,999 6,569,072
Proceeds from calls or maturities of securities available for sale 12,321,359 18,297,020
Proceeds from maturities of securities held to maturity 0 245,000
Net increase in loans to customers (11,121,260) (22,176,379)
Capital expenditures (338,768) (243,329)
------------ ------------
Net cash used by investing activities (17,663,784) (32,284,409)
------------ ------------
Cash Flows From Financing Activities:
- -------------------------------------
Net decrease in other borrowed funds (4,419,915) (3,117,420)
Net increase in advances from FHLB 29,635,956 21,602,754
Net (decrease) increase in deposits (14,041,914) 2,415,447
Purchase of Treasury stock (365,879) (288,200)
Proceeds from sale of Treasury stock 185,411 162,981
Dividends paid (719,699) (659,398)
------------ ------------
Net cash provided by financing activities 10,273,960 20,116,164
------------ ------------
Net decrease in cash and cash equivalents (3,822,481) (5,290,177)
Cash and cash equivalents at beginning of year 14,701,490 16,646,761
------------ ------------
Cash and cash equivalents at end of period $ 10,879,009 $ 11,356,584
============ ============
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
7
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2004 and 2003
(Unaudited)
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME (LOSS) EQUITY
<s> <c> <c> <c> <c> <c> <c>
Balance at December 31, 2002 $7,279,925 $4,024,564 $(655,070) $25,744,448 $ 1,924,528 $38,318,395
Net income, six months ended June 30, 2003 0 0 0 2,216,386 0 2,216,386
Change in net unrealized gain on available
for sale securities, net of tax of $350,540 0 0 0 0 680,461 680,461
---------------------------------------------------------------------------
Total comprehensive income 0 0 0 2,216,386 680,461 2,896,847
Sale of 1,949 shares Treasury stock 0 0 162,981 0 0 162,981
Repurchase of 3,424 shares Treasury stock 0 0 (288,200) 0 0 (288,200)
Cash dividends declared 0 0 0 (659,398) 0 (659,398)
---------- ---------- --------- ----------- ----------- -----------
Balance at June 30, 2003 $7,279,925 $4,024,564 $(780,289) $27,301,436 $ 2,604,989 $40,430,625
---------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 2003 $7,279,925 $4,056,394 $(803,172) $28,676,861 $ 1,542,454 $40,752,462
Net income, six months ended June 30, 2004 0 0 0 2,470,880 0 2,470,880
Change in net unrealized gain on available
for sale securities, net of tax of $(1,251,111) 0 0 0 0 (2,428,628) (2,428,628)
---------------------------------------------------------------------------
Total comprehensive income 0 0 0 2,470,880 (2,428,628) 42,252
Sale of 2,079 shares Treasury stock 0 769 185,411 0 0 186,180
Repurchase of 3,973 shares Treasury stock 0 0 (365,879) 0 0 (365,879)
Retirement of Treasury stock (143,837) (80,204) 983,640 (759,599) 0 0
Cash dividends declared 0 0 0 (719,699) 0 (719,699)
---------- ---------- --------- ----------- ----------- -----------
Balance at June 30, 2004 $7,136,088 $3,976,959 $ 0 $29,668,443 $ (886,174) $39,895,316
---------- ---------- --------- ----------- ----------- -----------
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
8
Union Bankshares Company and Subsidiary
---------------------------------------
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 June 30, 2004 and 2003 and for the three- and six 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. Interim results are not
necessarily indicative of results to be expected for the entire year.
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. All significant intercompany balances and transactions have
been eliminated in the Company's financial statements. 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, 2003.
(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 the period.
(C) Intangible Assets
-----------------
The Company has goodwill with a carrying amount of $6,305,130 as of June
30, 2004 and 2003, and as of December 31, 2003. Upon adoption of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, amortization of goodwill was
discontinued and the goodwill is evaluated for impairment at least
annually.
The Company has an intangible asset subject to amortization related to the
acquisition of a bank in 2000. The core deposit intangible is being
amortized on a straight-line basis over 7 years, and reviewed for possible
impairment when it is determined that events or changed circumstances may
affect the underlying basis of the asset. The carrying amount is as
follows:
June 30, 2004 June 30, 2003 December 31, 2003
------------- ------------- -----------------
<s> <c> <c> <c>
Core deposit intangible, cost $323,000 $323,000 $323,000
Accumulated amortization 178,879 132,136 155,508
-------- -------- --------
Core deposit intangible, net $144,121 $190,864 $167,492
Amortization expense related to the core deposit intangible amounted to
$23,371 for the six months ended June 30, 2004 and 2003. Amortization
expense amounted to $11,686 for the three month periods ended June 30, 2004
and 2003. The expected amortization expense is estimated to be $46,744 per
year through 2006 and $27,260 in 2007.
(D) Regulatory Agencies
-------------------
The Bank's primary regulators are the Federal Reserve Bank of Boston and,
as a state chartered bank, the Bureau of Financial Institutions of the
State of Maine.
(E) Recent Accounting Developments
------------------------------
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. 106-2. The FSP supersedes FSP No. 106-1, which was
issued to address the accounting impact of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The Act includes a
prescription drug benefit under Medicare Part D and a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D.
FSP No. 106-2 applies only to sponsors of single-employer plans for which
(1) the employer concludes that prescription drug benefits under the plan
are actuarially equivalent to Medicare Part D and thus qualify for the
9
subsidy, and (2) the expected amount of the subsidy will offset or reduce
the employer-sponsor's share of the plan's prescription drug coverage. The
FSP provides accounting guidance and required disclosures. For public
companies, the FSP is effective for the first interim or annual period
beginning after June 15, 2004.
(F) Stock Repurchase Plan
---------------------
On April 14, 2004, the Board of Directors voted to authorize the Company to
purchase up to 28,850 shares or approximately 5% of its outstanding common
stock. The authority may be exercised from time to time and in such
amounts as market condition warrants. The Company repurchased 2,240
shares as part of this plan during the second quarter of 2004 at an average
price of $94.70.
(G) Reclassification
----------------
Certain items from the prior year were reclassified in the financial
statements to conform with the current year presentation. The
reclassifications do not have a material impact on the balance sheet and
statement of income presentation.
(H) Employee Benefits
-----------------
The Company's subsidiary sponsors a noncontributory defined benefit pension
plan covering substantially all permanent full-time employees.
The Company sponsors a postretirement benefit program that provides medical
coverage and life insurance benefits to certain employees and directors who
meet minimum age and service requirements. Active employees and directors
accrue benefits over a 25-year period.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act
includes the following two new features to Medicare (Medicare Part D) that
could affect the measurement of the accumulated postretirement benefit
obligation (APBO) and net periodic postretirement benefit cost for the
Plan:
* A subsidy to plan sponsors that is based on 28% of an
individual beneficiary's annual prescription drug costs between
$250 and $5,000, and
* The opportunity for a retiree to obtain a prescription drug
benefit under Medicare.
The effects of the Act on the APBO or net periodic postretirement benefit
cost have not been determined and are not reflected in these financial
statements or accompanying notes. Pending specific authoritative guidance
on the accounting for the federal subsidy could require the Company to
change previously reported information when the guidance is issued.
10
Net periodic benefit cost of these plans includes the following components
for the three and six month periods ended June 30:
Three months ended June 30,
2004 2003
- -----------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
------------------------------------------------
<s> <c> <c> <c> <c>
Service cost $ 117,197 $ 18,230 $ 87,330 $ 18,230
Interest cost 113,990 24,344 102,786 24,344
Expected return on plan assets (115,299) 0 (82,822) 0
Recognized net actuarial (gain) loss 26,078 (392) 18,367 (392)
Amortization (accretion) of
unrecognized transition asset
or obligation 0 11,400 (3,288) 11,400
Amortization of prior service cost (636) 0 (637) 0
- -----------------------------------------------------------------------------------------
Net periodic benefit cost $ 141,330 $ 53,582 $121,736 $ 53,582
- -----------------------------------------------------------------------------------------
Six months ended June 30,
2004 2003
- -----------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
------------------------------------------------
<s> <c> <c> <c> <c>
Service cost $234,393 $ 36,460 $174,660 $ 36,460
Interest cost 227,940 48,688 205,572 48,688
Expected return on plan assets (230,598) 0 (165,644) 0
Recognized net actuarial (gain) loss 52,156 (784) 36,734 (784)
Amortization (accretion) of
unrecognized transition asset
or obligation 0 22,800 (6,576) 22,800
Amortization of prior service cost (1,273) 0 (1,274) 0
- -----------------------------------------------------------------------------------------
Net periodic benefit cost $282,618 $107,164 $243,472 $107,164
- -----------------------------------------------------------------------------------------
The expected pension contribution for the Company during 2004 is $55,000.
(I) Treasury Stock
--------------
A revision to the Maine Business Corporation Act requires that stock
reacquired by a corporation be classified as "authorized but unissued",
effectively eliminating a corporation's ability to hold stock in treasury.
In order to recognize the effect of the revision, the Company retired its
treasury stock as of June 30, 2004. The 11,507 shares so retired are
available for reissuance as authorized, but unissued shares.
11
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ---------------------------------------------------------------------------
Forward Looking Statements
- --------------------------
This Form 10-Q contains "forward-looking statements" which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-
looking statements include, but are not limited to, estimates with respect
to our financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not
limited to:
General and local economic conditions;
Changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
Changes in accounting principles, policies, or guidelines;
Changes in legislation or regulation; and
Other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products
and services.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of the Company's financial condition
are based on the consolidated financial statements which are prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of such financial statements requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to the allowance for loan
losses. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis in making judgments
about the carrying values of assets that are not readily apparent from
other sources. Actual results could differ from the amount derived from
management's estimates and assumptions under different assumptions or
conditions.
Management believes the allowance for loan losses is a critical accounting
policy that requires the most significant estimates and assumptions used in
the preparation of the consolidated financial statements. The allowance
for loan losses is based on management's evaluation of the level of the
allowance required in relation to the estimated loss exposure in the loan
portfolio. Management believes the allowance for loan losses is a
significant estimate and therefore regularly evaluates it for adequacy by
taking into consideration factors such as prior loan loss experience, the
character and size of the loan portfolio, business and economic conditions
and management's estimation of potential losses. The use of different
estimates or assumptions could produce different provisions for loan
losses.
Earnings and Performance Overview
- ---------------------------------
The following discussion compares the financial condition of Union
Bankshares Company (the "Company") and its wholly owned subsidiary, Union
Trust Company (the "Bank"), at June 30, 2004 to December 31, 2003, and the
results of operations for the three- and six months ended June 30, 2004,
compared to the same periods in 2003. This discussion and analysis should
be read in conjunction with the unaudited consolidated financial statements
and related notes thereto included within this report.
Executive Summary
- -----------------
Net earnings for the second quarter and six-month periods increased
$191,000 or 19.0% and $254,000 or 11.5%, respectively. The major component
of the increase continues to be the healthy rise in net interest income due
to strong earning asset growth since the first quarter of 2003. At June
30, 2004, total loans and investments stood at $438.2 million, representing
an increase of $68.4 million or 18.5% over June 30, 2003. Our net interest
margin has remained under pressure and has declined 16 basis points on a
year-to-year basis. In spite of this decline, net
12
interest income after provision increased $520,000 or 15.7% compared with
the second quarter of 2003. For the six months ended June 30, 2004, net
interest income after provision totaled $7.7 million, an increase of $1.1
million over the same period last year. We see no relief from net
interest margin pressure during the remainder of the year.
Non-interest income continued to show a decline for the second quarter and
six month periods as compared to the same periods last year primarily due
to a reduction in loan fees resulting from the dramatic slowdown in
mortgage financing activity. This reduction was not unexpected and is
consistent with industry-wide trends. Bankcard income is also down from
the same period last year, a direct result of our sale of the credit card
portfolio during 2003. Net security gains totaled $83,000 during the
second quarter, representing a decrease of $65,000, or 43.5%, compared with
the same period last year. These declines were partially offset by
increased income relating to deposit fees and charges and increased income
in from our financial services area.
Total non-interest expenses amounted to $3.6 million during the quarter,
representing a decline of $108,000, or 2.9% compared with the second
quarter of 2003 primarily as a result of our continued efforts towards
controlling costs and improving overall operating efficiencies.
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 expense and income tax expense.
Each of these major components of the Company's operating results is
highlighted below.
Net Income. Net income for the first six months of 2004 was $2,470,880, or
$4.32 per share, an 11.5% increase compared to $2,216,386, or $3.86 per
share for the first six months of 2003. The increase was primarily a
result of an increase in net interest income due to strong earnings asset
growth offset in part by a decline in noninterest income due to a reduction
in loan fees resulting from the dramatic slowdown in mortgage financing
activity during the first six months of 2004. Net income for the second
quarter of 2004 was $1,193,952, or $2.09 per share, a 19.0% increase
compared to $1,002,926 or $1.75 per share for the second quarter of 2003.
The increase was primarily a result of an increase in net interest income
of $480,000 or 14.1%.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
Six months ended
June 30,
2004 2003
---- ----
<s> <c> <c>
Earnings Per Share $4.32 $3.86
Return on Average Shareholders' Equity 6.18% A 5.68% B
Return on Average Assets 0.54% A 0.57% B
Return on Average Earning Assets 0.59% A 0.61% B
<FN>
A=annualized returns are: 12.35%, 1.09%, and 1.19%, respectively.
B=annualized returns are: 11.37%, 1.14%, and 1.21%, respectively.
</FN>
Interest and Dividend Income. Total interest and dividend income increased
by $924,854 or 9.4% to $10.7 million for the six month period ended June
30, 2004 from $9.8 million for the six month period ended June 30, 2003 and
increased by $428,728 or 8.7% to $5.4 million for the three month period
ended June 30, 2004 from $4.9 million for the three month period ended June
30, 2003. The increase in interest income for the six month and second
quarter periods was primarily the result of an increase in earning assets
offset in part by lower yields. The average balance of net loans for the
six month period ended June 30, 2004 was $281.2 million compared to $226.8
million for the six month period ended June 30, 2003. The average tax
equivalent yield on loans was 5.8% for the six month period ended June 30,
2004 compared to 6.5% for the six month period ended June 30, 2003. The
average balance of investments for the six month period ended June 30, 2004
was $134.5 million compared to $118.1 million for the six month period
ended June 30, 2003. The average tax equivalent yield on investments was
4.2% for the six month period ended June 30, 2004 compared to 4.2% for the
six month period ended June 30, 2003.
Interest Expense. Total interest expense decreased by $143,867 or 4.8% to
$2.9 million for the six month period ended June 30, 2004 from $3.0 million
for the six month period ended June 30, 2003 and decreased by $51,206 or
3.4% to $1.5 million for the three month period ended June 30, 2004 from
$1.5 million for the three
13
month period ended June 30, 2003. The decrease in interest expense for the
first two quarters and for the second quarter was primarily the result of
lower cost on deposits and borrowings, offset in part by a higher level of
deposits and borrowings. Average interest-bearing deposits increased by
$5.1 million or 2.1% to $245.2 million for the six month period ended June
30, 2004. Average borrowings of $123.0 million for the six month period
ended June 30, 2004 were up $55.9 million or 83.3% from June 30, 2003
levels primarily due to funding new asset growth, in particular loans and
investments. The average rate on interest-bearing deposits decreased 40
basis points to 1.1% for the six month period ended June 30, 2004 from 1.5%
for the six month period ended June 30, 2003, while the average rate on
borrowed funds decreased 112 basis points to 2.5% from 3.6% for the same
periods.
Net Interest Income. Net interest income for the six month period ended
June 30, 2004 was $7.9 million compared to $6.8 million for the six month
period ended June 30, 2003 and for the three month period ended June 30,
2004 was $3.9 million compared to $3.4 million for the three month period
ended June 30, 2003. The $1,068,721 or 15.7% increase for the six month
period is attributed to the $924,854 increase in interest and dividend
income and a decrease in interest expense on deposits of $453,768 or 25.5%.
The $479,934 or 14.1% increase for the three month period ended June 30,
2004 is attributed to the $428,728 or 8.7% increase in interest and
dividend income and a $222,207 or 25.5% decrease in interest expense on
deposits. The average tax equivalent yield on interest earning assets
decreased 52 basis points to 5.3% for the six month period ended June 30,
2004 from 5.8% for the six month period ended June 30, 2003, while the
average cost of interest-bearing liabilities decreased by 40 basis points
to 1.6% for the six month period ended June 30, 2004 from 2.0% for the six
month period ended June 30, 2003. The interest rate spread remained
basically unchanged due to a period of flat interest rates.
The following table presents the effect of tax exempt income on the
calculation of the net interest margin:
Six months ended June 30,
(in thousands) 2004 2003
- ----------------------------------------------------------------
<s> <c> <c>
Net interest income as presented $7,855 $6,786
Effect of tax-exempt income 338 125
- ----------------------------------------------------------------
Net interest income, tax equivalent $8,193 $6,911
====== ======
The net interest margin calculation for the six month periods ended June
30, 2004 and 2003 is shown below (interest income and average rate on non-
taxable securities and loans are reflected on a tax equivalent basis,
assuming a 34% federal income tax rate for 2004 and 2003).
14
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Dollars In Thousands)
(On a Tax Equivalent Basis)
June 30,
2004 2003
---- ----
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
(annualized) (annualized)
-------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Assets
Interest Earning Assets:
Securities available for sale $131,667 $ 5,466 4.15 $115,058 $ 4,870 4.23
Securities held to maturity 2,867 218 7.60 3,065 244 7.96
Federal funds sold 0 0 0 1,300 16 1.23
Loans (net) (1) 281,227 16,398 5.83 226,766 14,678 6.47
-------- ------- ---- -------- ------- ----
Total interest earning assets 415,761 $22,082 5.31 346,189 $19,808 5.72
======= =======
Other nonearning assets 39,683 41,048
-------- --------
$455,444 $387,237
======== ========
Liabilities
Interest Bearing Liabilities:
Savings deposits $126,938 $ 442 0.35 $117,805 $ 750 0.64
Time deposits 96,471 2,040 2.11 100,750 2,548 2.53
Money market accounts 21,758 166 0.76 21,463 260 1.21
Borrowings 122,990 3,048 2.48 67,075 2,428 3.62
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 368,157 $ 5,696 1.55 307,093 $ 5,986 1.95
======= =======
Other noninterest bearing liabilities
& shareholders' equity 87,287 80,144
-------- --------
$455,444 $387,237
======== ========
Net interest income $16,386 $13,822
Net interest rate spread 3.76 3.77
Net interest margin 3.94 3.99
<FN>
<F1> Nonaccrual loans are included in the average balance, however, these
loans are not earning any interest.
</FN>
Provision For Loan Losses. The provision for loan losses for the six month
period ended June 30, 2004, decreased $79,998 to $130,002 from the same
period last year, resulting from management's ongoing evaluation of the
allowance for loan losses. The provision for loan losses for the three
month period ended June 30, 2004, decreased $39,999 to $65,001 from the
same period last year. The allowance for loan losses was $4.5 million or
1.5% of total loans as of June 30, 2004 and $4.2 million or 1.7% at June
30, 2003. The decrease in the provision for loan losses was appropriate
given the overall credit quality of the portfolio and the Bank's historical
loan trends. The Company establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan losses
at a level which is deemed to be appropriate based upon an assessment of a
number of factors which include, among other factors, the current loan mix
and loan volume, loan growth, delinquency trends and historical net loan
loss experience for each loan type. Please refer to Financial Condition -
"Allowance for Loan Losses" for further details.
The Bank has a Loan Review Program whereby an independent loan review
service firm conducts a periodic review of the commercial loan portfolio.
The review includes updates to comments on all criticized and classified
assets over $100,000, all loans delinquent over 30 days and over $100,000,
nonaccrual loans over $100,000, new (closed) and renewed loans over
$100,000 as well as the adequacy of the loan loss reserve.
15
Although management utilizes its best judgment in providing for probable
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 other factors, both within and
outside of management's control.
Noninterest Income. Noninterest income was $3.0 million for the six month
period ended June 30, 2004 compared to $3.5 million for the six month
period ended June 30, 2003. Noninterest income was $1.4 million for the
three month period ended June 30, 2004 compared to $1.8 million for the
three month period ended June 30, 2003. The $509,465 or 14.6% decrease for
the six month period and the $383,410 or 21.0% decrease for the second
quarter as compared to the same periods last year were due to a reduction
in loan fees resulting from the dramatic slowdown in mortgage financing
activity. This reduction was not unexpected and is consistent with
industry wide trends. Bankcard income is also down from the same period
last year, a direct result of the sale of the credit card portfolio during
2003. These declines were partially offset by increased income relating to
deposit fees and charges and increased income from our financial services
area. The other noninterest income to average assets ratio was 0.32% for
the three month period ended June 30, 2004 and 2003.
Loan fees decreased $509,108 or 51.9% during the first six months of 2004
from the comparable period in 2003 and $239,602 or 49.4% during the second
quarter of 2004 from the comparable period in 2003. The decrease is due
primarily to the increase in mortgage loan interest rates and a slowdown of
refinancing activity. As a result of 2003's growth, related mortgage
servicing income increased $58,052 or 58.7% during the six month period.
Financial services income increased by 7.2% or $65,252 to $975,288 for the
six month period ended June 30, 2004 and 12.0% or $56,357 to $527,246 for
the three month period ended June 30, 2004 compared to $910,036 and
$470,879 for the similar periods in 2003. Financial services income is
derived, in part, from trust fees, which are derived from the market value
of trust assets under management and transactional charges. Trust assets
under management were $242.5 million as of June 30, 2004 compared to $229.2
million as of June 30, 2003. Financial services income is also derived
from financial planning and investment brokerage commissions.
Noninterest Expense. Noninterest expense increased by $206,760 or 3.0% to
$7.2 million for the six month period ended June 30, 2004 over the same
period in 2003 and decreased by $107,503 or 2.9% to $3.6 million for the
three month period ended June 30, 2004 over the same period in 2003.
Salaries and employee benefits increased $122,071 and $528,198 for the
three- and six month periods due primarily to additional staffing as a
result of specific strategic initiatives during 2004. Other noninterest
expenses for the six month period ended June 30, 2004 decreased $309,308 or
12.6% due to cost containment efforts, in particular, expenses related to
equipment, other professional fees and mortgage valuation expense.
During 2003, several tactical moves were made to better position the Bank
to focus on key growth areas for the future. Merchant card processing was
outsourced with a third party and the credit card portfolio was sold to
another community bank group. While revenue is negatively impacted for the
short term, the Bank's cost structure was significantly reduced.
Additionally, the Bank elected to consolidate its Jefferson branch with the
Waldoboro facility to reduce the overall cost of the Bank's branch
structure.
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.
Deferred income taxes are recognized in the balance sheets 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 Company's income tax expense is as follows:
Tax Expense Effective Rate
---------------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Three Months Ended June 30, $ 468,000 $415,000 28.2% 29.3%
Six Months Ended June 30, $1,073,000 $895,000 30.3% 28.8%
16
Liquidity and Capital Resources. The Company's primary sources of funds
consist of deposits, borrowings, repayments and prepayments of loans, sales
and participation of loans, maturities of securities and interest-bearing
deposits and funds provided from operations. While scheduled repayments of
loans and maturities of securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general
level of interest rates, economic conditions and competition. The Company
uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-
earning assets, to maintain liquidity and to meet operating expenses.
The Company is required to maintain adequate levels of liquid assets. This
guideline, which may be varied depending upon economic conditions and
deposit flows, is measured by the core basic surplus. As of June 30, 2004
the Company's basic surplus was $66.7 million or 14.4% of total assets.
Total basic surplus (basic surplus plus funding available by using
qualifying loans to secure Federal Home Loan Bank ("FHLB") advances) was
$81.7 million, or 17.7% of total assets. This provides the Bank with
meaningful capacity and flexibility to fund new loan and investment
opportunities, and provide protection for unanticipated deposit
fluctuations.
A major portion of the Company's liquidity consists of cash and cash
equivalents, short-term U.S. Government and federal agency obligations and
corporate bonds. The level of these assets is dependent upon the Company's
operating, investing, lending and financing activities during any given
period.
Liquidity management is both a daily and long-term function of management.
If the Company requires funds beyond its ability to generate them
internally, the Bank has the ability to borrow additional funds from the
FHLB. At June 30, 2004, the Bank had borrowings of $134.7 million from the
FHLB. The Company anticipates that it will continue to have sufficient
funds, through repayments, deposits and borrowings, to meet its current
commitments.
The Federal Reserve Board guidelines for 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 I capital. Risk-
based capital ratios are calculated by weighing assets and off-balance
sheet instruments according to their relative credit risks. At June 30,
2004, the Company and the Bank had exceeded all the minimum capital ratios.
The Bank's capital position at June 30, 2004 was as follows:
Minimum Regulatory
June 30, 2004 Requirements
------------- ------------------
<s> <c> <c>
Leverage Capital Ratio 7.47% 4.0%
Risk Based Ratio 12.62% 8.0%
Tier 1 Ratio 13.87% 4.0%
The Company's aggregate contractual obligations are as follows at June 30,
2004:
Payments due by period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
----- --------- ----- ----- ---------
(in thousands)
<s> <c> <c> <c> <c> <c>
FHLB borrowings $134,663 $81,595 $40,548 $5,966 $6,554
Operating leases 33 20 9 4 0
-------- ------- ------- ------ ------
Total $134,696 $81,615 $40,557 $5,970 $6,554
Financial Condition
- -------------------
The Company's total assets amounted to $473.9 million at June 30, 2004
compared to $464.2 million at December 31, 2003, an increase of $9.7
million or 2.1%. The increase in total assets is primarily attributable to
an increase in net loans. Year on year, total assets increased $69.5
million or 17.2%. The increase in total assets from June 30, 2003 to June
30, 2004 is primarily attributable to an increase in gross loans of $51.07
million or 20.7% and investment securities of $17.4 million or 14.1%.
Cash and Cash Equivalents. Cash and cash equivalents were $10.9 million at
June 30, 2004 compared to $14.7 million at December 31, 2003. Cash and
cash equivalents decreased $3.8 million to $10.9 million at June 30,
17
2004 from $14.7 million at December 31, 2003 primarily due to higher than
normal seasonal outflows and funding of new loan growth.
Securities. The Bank manages its securities portfolio to provide a source
of both liquidity and earnings. The Bank's asset/liability committee
develops an investment policy based upon the Bank's operating need and
market circumstances. The investment policy is reviewed and approved
annually by the Board of Directors in terms of its objectives, investment
guidelines and consistency with overall Bank performance and risk
management goals. The asset/liability committee is responsible for
reporting and monitoring compliance with the investment policy. Reports
are provided to the Board of Directors on a regular basis.
Securities are classified as available for sale and they may be sold as
part of the Company's asset/liability management strategy in response to
changes in interest rates, liquidity needs or significant prepayment risk.
Securities available for sale are carried at fair value, with related
unrealized net gains or losses, net of deferred income taxes, recorded as
an adjustment to shareholders' equity. At June 30, 2004, unrealized
losses, net of taxes on securities available for sale were $886,174
compared to unrealized gains of $1.5 million at December 31, 2003. The
unrealized losses on securities available for sale resulted in a
$(2,428,628) decrease in shareholders' equity.
Securities available for sale increased $15.0 million or 13.1% to $129.8
million at June 30, 2004 from $114.8 million at June 30, 2003. The
increase from June 30, 2003 was primarily due to an overall investment
portfolio strategy to maintain interest income revenue levels while
maintaining adequate liquidity on the balance sheet.
Loans. Gross loans increased by $11.1 million or 3.9% to $297.5 million or
62.8% of total assets at June 30, 2004 as compared to $286.4 million or
61.7% of total assets at December 31, 2003. Year on year, gross loans
increased by $51.0 million or 20.7% as of June 30, 2004, from $246.5
million or 61.1% of total assets at June 30, 2003. This increase in loans
is due to the Bank's efforts to develop new lending relationships and also
due to lower interest rates and the expansion of existing borrowing
relationships.
Residential real estate loans increased $1.2 million, or 0.7%, to $189.7
million at June 30, 2004 from $188.4 million at December 31, 2003.
Residential real estate loans increased $43.5 million, or 29.7%, to $189.7
million at June 30, 2004 from $146.2 million as of June 30, 2003.
Residential real estate loans consist of loans secured by one to four
family residences. The Bank generally retains adjustable rate mortgages in
its portfolio but during 2003 also elected to retain a large percentage of
fixed rate mortgages as part of an overall asset/liability strategy to
retain loans. The Bank has also sold and serviced $114.8 million of real
estate loans and $893,486 of commercial mortgages and has $69,000 of loans
held for sale during the six month period ended June 30, 2004.
Commercial loans at June 30, 2004 increased by $1.6 million or 2.0% to
$78.8 million from $77.2 million at December 31, 2003. As of June 30 ,
2004, commercial loans increased by $6.6 million or 9.1% from June 30,
2003. 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. The Bank focuses on lending to
what it believes to be a wide array of financially sound, small- to medium-
sized businesses within its service area.
Consumer loans increased $4.1 million or 23.6% to $21.6 million at June 30,
2004 from $17.5 million at December 31, 2003. As of June 30, 2004,
consumer loans increased by $2.9 million or 15.4% from $18.7 million from
June 30, 2003. Consumer loans are originated by the Bank for a wide
variety of purposes to meet our customers' needs, and include personal
notes, reserve checking, home equity and installment loans. The Bank sold
its credit card portfolio of $1.2 million on July 1, 2003.
Municipal loans at June 30, 2004 increased by $4.3 million or 129.3% to
$7.6 million from $3.3 million at December 31, 2003, primarily due to the
Bank being successful in the loan bidding process. As of June 30, 2004,
municipal loans decreased by $1.9 million or 20.5% from $9.5 million from
June 30, 2003.
Allowance for Loan Losses. The allowance for loan losses is a general
allowance established by management to absorb probable loan losses as they
may exist in the loan portfolio. This allowance is increased by provisions
charged to operating expenses and by recoveries on loans previously
charged-off. Management determines the adequacy of the allowance from
independent reviews of the quality of new and existing loans, from the
results of reviews of the loan portfolio by regulatory agency examiners,
evaluation of past loan loss experience, the character and size of the loan
portfolio, current economic conditions and other observable data.
The process of evaluating the adequacy of the allowance for loan losses
involves a high degree of management judgment, based in part on systematic
methods. Actual losses could vary from these estimates. A detailed
18
analysis of the allowance for loan losses is reviewed quarterly, at which
time necessary increases or decreases are made to the allowance for loan
losses, with a related adjustment to the provision for loan losses. The
Bank's Board of Directors reviews and approves the analysis of the adequacy
of the allowance for loan losses quarterly.
The allocated portion of the allowance for loan losses is comprised of
general reserves for specific loan types and specific reserves for impaired
loans. The general reserve categories consist of reserve checking,
personal and commercial installments, commercial notes and mortgages,
residential mortgages and Visa loans.
A reserve percentage is assigned to each general reserve category. The
determination of the reserve percentage for each category starts with the
five year historical average of loan losses to loans and makes adjustments
for factors such as loan volumes, trends in non-performing loans, economic
and industrial conditions, credit concentrations and changes in lending
policies, procedures and practices.
The specific allocation for impaired loans is determined based on a loan by
loan review of impaired loans and specific loans under close monitoring by
management for potential problems.
As of June 30, 2004, the Bank had impaired loans (consisting of real estate
loans) totaling $1,092,624, down $294,686 or 27.0% from $1,387,310 as of
December 31, 2003. The fair value of the collateral was used to evaluate
the adequacy of the allowance for loan losses allocated to these loans.
A loan is considered impaired by management when it is probable that the
creditor will be unable to collect all amounts due under the contractual
terms of the loan, including principal and interest. Based upon
management's periodic review of loans on nonaccrual status, impairment is
based on a loan by loan analysis and not set by a defined period of
delinquency before a loan is considered impaired.
The unallocated component of the allowance for loan losses represents
management's view that, given the complexities of the loan portfolio, there
are estimated losses that have been incurred within the portfolio but not
yet specifically identified. Management has provided for these probable
losses in the allowance for loan losses.
The allowance for loan losses was $4.5 million or 1.5% of total loans as of
June 30, 2004 compared to $4.3 million or 1.5% of total loans at December
31, 2003.
Deposits. Total deposits decreased $14.1 million or 4.7% to $284.4 million
at June 30, 2004 from $298.5 million at December 31, 2003. The decreases
occurred in all categories primarily due to normal seasonal outflows and
general competition. Savings deposits decreased to $54.0 million at June
30, 2004 from $55.4 million at December 31, 2003, a decrease of $1.4
million or 2.6%. NOW deposits decreased to $62.0 million at June 30, 2004
from $65.6 million at December 31, 2003, a decrease of $3.6 million or
5.6%. Money market deposits decreased to $22.1 million at June 30, 2004
from $23.8 million at December 31, 2003, a decrease of $1.7 million or
7.0%. Prestige investment accounts decreased to $12.4 million at June 30,
2004 from $14.6 million at December 31, 2003, a decrease of $2.2 million or
15.4%. Demand deposits decreased to $40.0 million at June 30, 2004 from
$41.2 million at December 31, 2003, a decrease of $1.2 million or 3.0%.
Certificates of deposit decreased to $94.0 million at June 30, 2004 from
$97.8 million at December 31, 2003, a decrease of $3.8 million or 3.9%.
Borrowings. Total advances from the FHLB as of June 30, 2004 increased by
$29.7 million to $134.7 million from $105.0 million at December 31, 2003.
The increase reflects funding to support the growth in net loans and is a
low cost funding alternative.
Shareholders' Equity. Shareholders' equity decreased by $857,146 or 2.1%
from $40.7 million at December 31, 2003 to $39.9 million at June 30, 2004.
The decrease was comprised of cumulative earnings, dividends declared and a
$2,428,628 decrease in accumulated other comprehensive income.
Off-Balance Sheet Arrangements. 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. The contract amounts
of these instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments. At June 30, 2004 and 2003,
the following financial instruments, whose contract amounts represent
credit risk, were outstanding.
19
June 30,
In thousands
2004 2003
---- ----
<s> <c> <c>
1. Unused Commitments:
-------------------
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines $15,424 $12,245
Credit card lines 0 6,452
Secured real estate loans 16,931 16,126
Lines of Credit, Reserve Checking, Municipal Loans 24,305 20,359
2. Financial Standby Letters of Credit: 512 290
------------------------------------
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In Management's opinion, there have been no material changes in the
reported market risks since December 31, 2003 as reported in Item 7A of the
Annual Report on Form 10K.
Item 4: CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls
and procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
-------
Item 1: LEGAL PROCEEDINGS
None
Item 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUE PURCHASES OF
EQUITY SECURITIES
During the three months ended June 30, 2004, the Company repurchased 2,240
shares of its common stock.
20
COMPANY PURCHASES OF EQUITY SECURITIES
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(a) Total Number of (b) Average Price Shares (or Units) Shares (or Units) that
Shares Paid Purchased as Part of may yet be Purchased
(or Units) per Share Publicly Announced under the Plans
Period Purchased (or Unit) ($) Plans or Programs or Programs
------------------- ----------------- -------------------- ----------------------
<s> <c> <c> <c> <c>
April 1, 2004 through April 30, 2004 0 N/A 0 N/A
May 1, 2004 through May 31, 2004 1,554 $94.17 1,554 18,004
June 1, 2004 through June 30, 2004 686 $95.50 686 18,004
Total 2,240 $94.70 2,240 18,004
Item 3: DEFAULTS UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 20, 2004 (the
"Meeting"). All of the proposals submitted to the shareholders at the
Meeting were approved. The proposals submitted to shareholders and the
tabulation of votes for each proposal is as follows:
1. Adopt the proposal to set the number of board of directors to 18.
The number of votes cast with respect to this matter was as follows:
For Against Abstain Broker Non-Votes
419,954 3,097 2,704 0
2. Election of five directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
Blake B. Brown 419,391 0 0
Douglas A. Gott 414,004 0 0
James L. Markos, Jr. 419,391 0 0
John V. Sawyer II 418,397 0 0
Paul L. Tracy 419,391 0 0
The following directors' terms continued after the meeting: Peter A.
Blyberg, Peter A. Clapp, Sandra H. Collier, Arthur J. Billings, Richard C.
Carver, Samuel G. Cohen, Robert B. Fernald, Stephen C. Shea and Robert W.
Spear.
3. Adoption of the proposal to elect Sally J. Hutchins as Clerk of the
Company for the year ended December 31, 2004.
For Against Abstain Broker Non-Votes
425,012 0 743 0
4. Ratification of the appointment of Berry, Dunn, McNeil & Parker as
the Company's independent public accountants for the fiscal year
ending December 31, 2004.
21
For Against Abstain Broker Non-Votes
417,406 5,370 2,979 0
5. Adoption of the proposal to transact such other business as may
properly come before the meeting or any adjournment thereof.
For Against Abstain Broker Non-Votes
425,755 0 0 0
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 31.1 Rule 13a - 14 (a)/15d - 14(a) Certifications
Exhibit 32.1 Section 1350 Certifications
(B) Reports on Form 8-K
Form 8-K dated April 27, 2004, attaching the Company's
earnings report for the quarter ended March 31, 2004.
22
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
August 11, 2004 /s/ Peter A. Blyberg
--------------------
Peter A. Blyberg, President and
Chief Executive Officer
August 11, 2004 /s/ Timothy R. Maynard
----------------------
Timothy R. Maynard, Chief Financial
Officer
23
Exhibit Index
Exhibit Number Description
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
32.1 Section 1350 Certifications
24