UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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)
04605
-----
(Zip Code)
(207) 667-2504
--------------
(Registrant's telephone number, including area code)
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 XXX NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) YES NO XXX
--- ---
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 October 25, 2004
----- -------------------------------
(Common stock, $12.50 Par Value) 571,033
1
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART 1 Financial Information Page No.
- ------ --------------------- --------
Item 1 Financial Statements (Unaudited)
Independent Accountants' Report 3
Consolidated Balance Sheets -
September 30, 2004, September 30, 2003 and December 31, 2003 4
Consolidated Statements of Income -
nine months ended September 30, 2004 and September 30, 2003
three months ended September 30, 2004 and September 30, 2003 5
Consolidated Statements of Cash Flows -
nine months ended September 30, 2004 and September 30, 2003 7
Consolidated Statements of Changes in Shareholders' Equity -
nine months ended September 30, 2004 and September 30, 2003 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4 Controls and Procedures 21
PART II Other Information
- ------- -----------------
Item 1: Legal Proceedings 22
Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds 22
Item 3: Defaults Upon Senior Securities 22
Item 4: Submission of Matters to a Vote of Security Holders 22
Item 5: Other Information 22
Item 6: Exhibits 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 September 30,
2004 and 2003, and for the three- and nine-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards 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
November 2, 2004
3
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30 September 30 December 31
2004 2003 2003
(Unaudited) (Unaudited) (Audited)
------------ ------------ -----------
<s> <c> <c> <c>
ASSETS
- ------
Cash and due from banks $ 11,589 $ 11,995 $ 14,701
Available for sale securities, at market value 135,057 106,976 128,954
Held to maturity securities, at cost 2,477 2,993 2,870
Other investment securities, at cost 8,144 5,470 6,331
Assets available for sale - loans 204 363 937
Loans (net of deferred loan fees) 304,741 275,451 286,333
Less: Allowance for loan losses 4,485 4,222 4,339
-------- -------- --------
Net loans 300,256 271,229 281,994
-------- -------- --------
Premises, furniture & equipment, net 5,731 5,919 5,819
Cash surrender value of life insurance 8,305 7,691 8,041
Core deposit intangible, net 132 179 167
Goodwill 6,305 6,305 6,305
Other assets 8,340 6,623 8,074
-------- -------- --------
Total assets $486,540 $425,743 $464,193
======== ======== ========
LIABILITIES
- -----------
Deposits:
Demand $ 47,074 $ 40,525 $ 41,209
Savings and money market 170,966 159,242 159,411
Time 91,285 102,528 97,834
-------- -------- --------
Total deposits 309,325 302,295 298,454
-------- -------- --------
Advances from Federal Home Loan Bank 112,307 59,975 105,027
Sweep repurchase agreements 14,932 15,690 12,456
Other liabilities 7,415 7,741 7,504
-------- -------- --------
Total liabilities 443,979 385,701 423,441
-------- -------- --------
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, $12.50 par value. 1,200,000
shares authorized, 571,233 shares issued and
outstanding at September 30, 2004 and 582,394
shares issued at September 30, 2003 and
December 31, 2003. 7,169 7,280 7,280
Surplus 3,977 4,039 4,056
Retained earnings 30,546 28,061 28,677
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available for
sale, net of tax 869 1,770 1,542
Minimum pension liability adjustment, net of
taxes 0 (326) 0
Less: Treasury Stock (9,572 shares as of
September 30, 2003 and 9,614 shares as of
December 31, 2003) 0 782 803
-------- -------- --------
Total shareholders' equity 42,561 40,042 40,752
-------- -------- --------
Total liabilities & shareholders' equity $486,540 $425,743 $464,193
======== ======== ========
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)
(dollars in thousands except per share data)
Nine Months Ended - September 30,
---------------------------------
2004 2003
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans $12,264 $11,232
Interest and dividends on securities 4,092 3,514
Interest on federal funds sold 0 14
------- -------
Total interest and dividend income 16,356 14,760
------- -------
INTEREST EXPENSE
- ----------------
Interest on deposits 2,017 2,579
Interest on funds purchased/borrowed 2,420 1,854
------- -------
Total interest expense 4,437 4,433
------- -------
NET INTEREST INCOME 11,919 10,327
- -------------------
Provision for loan losses 143 315
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,776 10,012
------- -------
NONINTEREST INCOME
- ------------------
Net securities gains 237 147
Financial services income 1,485 1,376
Deposit fees and charges 1,261 958
Bankcard income 158 341
Loan fees 694 1,394
Income from cash surrender value of life
insurance 264 240
Other income 272 460
------- -------
Total noninterest income 4,371 4,916
------- -------
NONINTEREST EXPENSE
- -------------------
Salaries and wages 4,887 4,382
Pension and other employee benefits 1,754 1,404
Net occupancy expenses 839 853
Equipment expenses 704 785
Advertising 210 173
Other professional fees 483 525
Other expenses 1,927 2,044
------- -------
Total noninterest expense 10,804 10,166
------- -------
INCOME BEFORE INCOME TAXES 5,343 4,762
- --------------------------
Income taxes 1,622 1,442
------- -------
NET INCOME $ 3,721 $ 3,320
======= =======
Weighted average common shares outstanding 571,915 573,446
Per share data:
Net income $ 6.51 $ 5.79
Cash dividends declared $ 1.90 $ 1.75
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)
(dollars in thousands except per share data)
Three Months Ended - September 30,
----------------------------------
2004 2003
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans $ 4,207 $ 3,844
Interest and dividends on securities 1,437 1,127
Interest on federal funds sold 0 0
------- -------
Total interest and dividend income 5,644 4,971
------- -------
INTEREST EXPENSE
- ----------------
Interest on deposits 693 801
Interest on funds purchased/borrowed 886 629
------- -------
Total interest expense 1,579 1,430
------- -------
NET INTEREST INCOME 4,065 3,541
- -------------------
Provision for loan losses 13 105
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,052 3,436
------- -------
NONINTEREST INCOME
- ------------------
Financial services income 510 466
Deposit fees and charges 482 334
Bankcard income 68 113
Loan fees 223 414
Income from cash surrender value of life
insurance 88 67
Other income 13 26
------- -------
Total noninterest income 1,384 1,420
------- -------
NONINTEREST EXPENSE
- -------------------
Salaries and wages 1,649 1,423
Pension and other employee benefits 571 471
Net occupancy expenses 269 271
Equipment expenses 257 255
Advertising 63 58
Other professional fees 178 133
Other expenses 649 594
------- -------
Total noninterest expense 3,636 3,205
------- -------
INCOME BEFORE INCOME TAXES 1,800 1,651
- --------------------------
Income taxes 549 547
------- -------
NET INCOME $ 1,251 $ 1,104
======= =======
Weighted average common shares outstanding 571,401 573,133
Per share data:
Net income $ 2.19 $ 1.93
Cash dividends declared $ 0.65 $ 0.60
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
Nine Months Ended September 30, 2004 and 2003
(dollars in thousands)
(Unaudited)
2004 2003
---- ----
<s> <c> <c>
Net cash flows provided by operating activities:
- ------------------------------------------------
Net Income $ 3,721 $ 3,320
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 512 562
Provision for loan losses 143 315
Provision for overdraft privilege program 50 0
Net securities gains (237) (147)
Net (increase)/decrease in other assets (530) 139
Net increase/(decrease) in other liabilities 257 (431)
Net amortization of premium on investments 349 693
Net increase in deferred loan origination fees 137 122
Origination of loans held for sale (6,496) (39,352)
Proceeds from loans held for sale 7,229 46,597
-------- --------
Total adjustments 1,414 8,598
-------- --------
Net cash provided by operating activities 5,135 11,818
-------- --------
Cash flows from investing activities:
- -------------------------------------
Purchase of securities available for sale (45,739) (46,092)
Proceeds from sales of securities available for sale 19,982 6,569
Proceeds from calls or maturities of securities
available for sale 16,717 32,057
Proceeds from maturities of securities held to
maturity 385 315
Net increase in loans to customers (18,592) (51,307)
Capital expenditures (388) (317)
-------- --------
Net cash used in investing activities (27,635) (58,775)
-------- --------
Cash flows from financing activities:
- -------------------------------------
Net increase in other borrowed funds 2,475 2,626
Net increase in advances from FHLB 7,281 14,265
Net increase in deposits 10,871 26,530
Purchase of treasury stock (414) (328)
Proceeds from sale of treasury stock 266 216
Dividends paid (1,091) (1,004)
-------- --------
Net cash provided by financing activities 19,388 42,305
-------- --------
Net decrease in cash and cash equivalents (3,112) (4,652)
Cash and cash equivalents at beginning of year 14,701 16,647
-------- --------
Cash and cash equivalents at end of period $ 11,589 $ 11,995
======== ========
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 SHAREHOLDERS' EQUITY
Nine months ended September 30, 2004 and 2003
(Unaudited)
(dollars in thousands)
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 $7,280 $4,025 $(655) $25,745 $1,925 $38,320
Net income, nine months ended September 30, 2003 0 0 0 3,320 3,320
Change in net unrealized gain on available
for sale securities, net of tax of $248 0 0 0 0 (481) (481)
------ ------ ----- ------- ------ -------
Total comprehensive income 0 0 0 3,320 (481) 2,839
Sale of 2,569 shares treasury stock 0 14 201 0 0 215
Repurchase of 3,885 shares treasury stock 0 0 (328) 0 0 (328)
Cash dividends declared 0 0 0 (1,004) 0 (1,004)
------ ------ ----- ------- ------ -------
Balance at September 30, 2003 $7,280 $4,039 $(782) $28,061 $1,444 $40,042
====== ====== ===== ======= ====== =======
Balance at December 31, 2003 $7,280 $4,056 $(803) $28,677 $1,542 $40,752
Net income, nine months ended September 30, 2004 0 0 0 3,721 0 3,721
Change in net unrealized gain on available
for sale securities, net of tax benefit of $347 0 0 0 0 (673) (673)
------ ------ ----- ------- ------ -------
Total comprehensive income 0 0 0 3,721 (673) 3,048
Sale of 2,925 shares treasury stock 81 0 185 0 0 266
Repurchase of 4,172 shares treasury stock (48) 0 (366) 0 0 (414)
Retirement of treasury Stock (144) (79) 984 (761) 0 0
Cash dividends declared 0 0 0 (1,091) 0 (1,091)
------ ------ ----- ------- ------ -------
Balance at September 30, 2004 $7,169 $3,977 $ 0 $30,546 $ 869 $42,561
====== ====== ===== ======= ====== =======
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 September 30, 2004 and 2003 and for the three- and nine
month periods then ended are unaudited. However, in the opinion of the
Company, all adjustments consisting of normal, recurring accruals necessary
for a fair presentation have been reflected therein. 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 this period.
(C) Intangible Assets
-----------------
The Company has goodwill with a carrying amount of $6.3 million as of
September 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:
(in thousands) September 30, 2004 September 30, 2003 December 31, 2003
------------------ ------------------ -----------------
<s> <c> <c> <c>
Core deposit intangible, cost $323 $323 $323
Accumulated amortization 191 144 156
---- ---- ----
Core deposit intangible, net $132 $179 $167
Amortization expense related to the core deposit intangible amounted to
$35,000 for the nine month periods ended September 30, 2004 and 2003.
Amortization expense amounted to $12,000 for the three month periods ended
September 30, 2004 and 2003. The expected amortization expense is estimated
to be $47,000 per year through 2006 and $27,000 in 2007.
(D) Securities
----------
The following table sets forth the Company's securities at the dates
indicated.
9
September 30, 2004 September 30, 2003 December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Securities available for sale:
U.S. Government & federal
agency obligations $ 29,710 $ 30,183 $ 42,365 $ 44,688 $ 38,317 $ 39,433
Mortgage-backed securities 84,823 85,562 40,688 40,687 67,637 67,958
Obligations of state and
political subdivisions 11,761 12,467 11,801 12,485 11,772 12,580
Other bonds & obligations 6,781 6,845 8,924 9,116 8,891 8,983
- ------------------------------------------------------------------------------------------------------------
Total 133,075 135,057 103,778 106,976 126,617 128,954
Securities held to maturity:
Obligations of state and
political subdivisions $ 2,477 $ 2,613 $ 2,993 $ 2,992 $ 2,870 $ 3,041
(E) Loans
-----
The following table presents selected data relating to the composition of
the Company's loan portfolio by type of loan on the dates indicated.
September 30, 2004 September 30, 2003 December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Real estate loans $255,064 83.7% $228,170 82.8% $241,801 84.5%
Commercial and industrial loans 21,616 7.1 20,940 7.6 23,837 8.3
Consumer loans 22,597 7.4 17,299 6.3 17,494 6.1
Municipal loans 5,403 1.8 8,967 3.3 3,276 1.1
- ------------------------------------------------------------------------------------------------------------
Total loans 304,680 100.0 275,376 100.0 286,408 100.0
Less:
Deferred loan origination
fees (costs) 61 75 (75)
Allowance for loan losses 4,485 4,222 4,339
- ------------------------------------------------------------------------------------------------------------
Loans, net 300,256 271,229 281,994
(F) Allowance for Loan Losses
-------------------------
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c>
Average loans, net $286,348 $235,386
Period-end net loans 300,256 271,229
Allowance for loan losses at beginning of period 4,339 3,679
Provision for loan losses 143 315
Other - overdraft privilege program 50 0
Plus recoveries 190 313
Loans charged-off 238 85
- -------------------------------------------------------------------------------------------
Allowance for loan losses at end of period 4,485 4,222
Non-performing loans 990 1,771
Ratios:
Allowance for loan losses to period-end net loans .02 .02
Net charge-offs (recoveries to average loans, net) .0002 (.0010)
10
(G) Deposits and Borrowed Funds
---------------------------
The following table sets forth the Company's various types of deposit
accounts and the balances in these accounts as well as the borrowings of
the Company at the dates indicated.
September 30, 2004 September 30, 2003 December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Deposits
Savings deposits $ 62,434 20.2% $ 54,840 18.1% $ 55,395 18.6%
Now accounts 76,609 24.8 65,780 21.8 65,657 22.0
Money market deposits 31,923 10.3 38,622 12.8 38,359 12.8
Demand deposits 47,074 15.2 40,525 13.4 41,209 13.8
Certificates of deposit 91,285 29.5 102,528 33.9 97,834 32.8
- ------------------------------------------------------------------------------------------------------------
Total deposits 309,325 100.0 302,295 100.0 298,454 100.0
Borrowed funds:
Advances from Federal Home
Loan Bank of Boston:
Maturities less than
one year $ 82,157 73.2% $ 22,760 37.9% $ 78,789 75.0%
Maturities greater than
one year 30,150 26.8 37,215 62.1 26,238 25.0
- ------------------------------------------------------------------------------------------------------------
Total borrowed funds 112,307 100.0 59,975 100.0 105,027 100.0
(H) Income Taxes
------------
Income taxes resulted from applying normal, expected tax rates on income
earned and on losses during the three months ended September 30, 2004 and
2003. The income tax expense was $549,000 for the three months ended
September 30, 2004 compared to the income tax expense of $547,000 for the
three months ended September 30, 2003. The effective tax rate for the three
month period ended September 30, 2004 and September 30, 2003 was 30.5% and
33.1%, respectively.
(I) 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.
(J) Recent Accounting Developments
------------------------------
In December 2003, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 03-3, "Accounting for Certain Loans and/or
Debt Securities Acquired in a Transfer." This SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to credit
quality. This SOP does not apply to loans originated by the entity, and it
prohibits both the creating and carry over of valuation allowances in the
initial accounting of all loans acquired in a transfer within the scope of
this SOP. This prohibition of the carry over applies to purchase of an
individual loan, a pool of loans, a group of loans and loans acquired in a
purchase business combination. This SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. Based on presently
available information, management believes the adoption of this SOP will
not have a significant effect on its consolidated financial statements.
On March 9, 2004, the SEC issued Staff Accounting Bulletin 105,
"Application of Accounting Principles to Loan Commitments," ("SAB 105") to
inform registrants of the Staff's view that the fair value of the recorded
loan commitments should not consider the expected future cash flows related
to the associated servicing of the future loan. The provisions of SAB 105
must be applied to loan commitments accounted for as derivatives that are
entered into after March 31, 2004. The Staff will not object to the
application of existing accounting practices to loan commitments accounted
for as derivatives that are entered into on or before March 31, 2004, with
appropriate disclosures. On April 1, 2004, the Company adopted the
provisions of SAB 105. The Company records the value of its mortgage loan
commitments at fair market value for mortgages it intends to sell. The
Company does not currently include, and was not including, the value of
mortgage servicing or any other internally developed intangible assets in
the valuation of its
11
mortgage loan commitments. Therefore, the adoption of SAB 105 did not have
an impact on the Company's financial condition or results of operations.
(K) 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 conditions warrant. The Company repurchased 500 shares as part of
this plan during the third quarter of 2004 at an average price of $97.44.
(L) 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
income statement presentation.
(M) 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.
Net periodic benefit cost of these plans includes the following components
for the three and nine month periods
ended September 30:
12
Three months ended September 30,
(in thousands) 2004 2003
- -------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
--------------------------------------------
<s> <c> <c> <c> <c>
Service cost $117 $ 18 $ 87 $ 18
Interest cost 114 24 103 24
Expected return on plan assets (115) 0 (83) 0
Recognized net actuarial (gain) loss 26 0 18 0
Amortization (accretion) of
unrecognized transition asset
or obligation 0 11 (3) 11
Amortization of prior service cost 0 0 0 0
- -----------------------------------------------------------------------------------
Net periodic benefit cost $142 $ 53 $122 $ 53
- -----------------------------------------------------------------------------------
Nine months ended September 30,
(in thousands) 2004 2003
- -------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
--------------------------------------------
<s> <c> <c> <c> <c>
Service cost $352 $ 55 $262 $ 55
Interest cost 342 73 308 73
Expected return on plan assets (346) 0 (248) 0
Recognized net actuarial (gain) loss 78 (1) 55 (1)
Amortization (accretion) of
unrecognized transition asset
or obligation 0 34 (10) 34
Amortization of prior service cost (2) 0 (2) 0
- -----------------------------------------------------------------------------------
Net periodic benefit cost $424 $161 $365 $161
- -----------------------------------------------------------------------------------
The expected pension contribution for the Company during 2004 is $55,000.
(N) 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.
13
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- -----------------------------------------------------------------------
The following discussion compares the consolidated financial condition of
Union Bankshares Company at September 30, 2004 and September 30, 2003 and
September 30, 2004 to December 31, 2003, and the results of operations for
the nine months ended September 30, 2004, compared to the same period in
2003. This discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes thereto included within
this report.
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:
* The strength of the United States economy in general and the strength
of the local economies in which we operate;
* Changes in deposit flows, demand for mortgages and other loans, real
estate values, and
competition;
* Changes in trade, monetary and fiscal policies and laws, including
interest rate policies of the Federal Reserve Board;
* Changes in accounting principles, policies, or guidelines; and
* Other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and
services.
This list of important factors is not exclusive. Union Bankshares and its
wholly-owned subsidiary, Union Trust Company, disclaims any obligation to
update any forward-looking statement, whether written or oral, that may be
made from time to time by or on their behalf.
General
Union Bankshares is a one-bank holding company, organized under the laws of
the State of Maine and headquartered in Ellsworth, Maine. Union Bankshares'
only subsidiary is Union Trust Company, which is a full service,
independent, community bank with fifteen offices located along Maine's
coast, stretching from Waldoboro to Machias.
Union Trust's business consists of attracting deposits from the general
public and using these funds to originate various types of loans, including
mortgage loans secured by one-to four-family residences, commercial loans
secured by general business assets, commercial real estate loans secured by
commercial property, and to invest in U.S. Government and federal agency
and others securities. To a lesser extent, Union Trust engages in various
forms of consumer and home equity lending.
Our profitability depends primarily on its net interest income, which is
the difference between the interest income earned on loans and investment
portfolio and the cost of funds, which consists mainly of interest paid on
deposits and on borrowings from the FHLB. Net interest income is affected
by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on these balances. When
interest-earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate net interest income.
Our profitability is also affected by the level of non-interest income and
non-interest expense. Non-interest income consists primarily of service
fees, loan servicing and other loan fees and gains on sales of securities.
Non-interest expense consists of salaries and benefits, occupancy related
expenses and other general operating expenses.
The operations of Union Trust, and banking institutions in general, are
significantly influenced by general economic conditions and related
monetary and fiscal policies of financial institution's regulatory
agencies. Deposit flows and the cost of funds are influenced by interest
rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for financing real estate and
other types of loans, which in turn are affected by the interest rates at
which such financing may be offered and other factors affecting loan demand
and the availability of funds.
14
Business Strategy
Our business strategy is to operate as a well-capitalized, profitable
community bank dedicated to financing home ownership, small business and
consumer needs in its market area and providing quality service to its
customers. We have implemented this strategy by: (i) monitoring the needs
of customers and providing quality service; (ii) emphasizing consumer-
oriented banking by originating residential mortgage loans and consumer
loans, and by offering various deposit accounts and other financial
services and products; (iii) emphasizing commercial banking and lending by
originating loans for small businesses and providing greater services in
its commercial and commercial real estate loan department; (iv) maintaining
high asset quality through conservative underwriting; and (v) producing
stable earnings.
Critical Accounting Policies
The Notes to Consolidated Financial Statements for the year ended December
31, 2003 included in our Annual Report on Form 10-K for the year ended
December 31, 2003 contain a summary of the Company's significant accounting
policies. We believe that our policy with respect to the methodology for
determining the allowance for loan losses involves a higher degree of
complexity and requires management to make difficult and subjective
judgments which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates
could cause reported results to differ materially. These critical policies
and their application are periodically reviewed with Union Bankshares'
Audit Committee and Board of Directors.
Average Balances, Interest and Average Yields
The following tables set forth certain information relating to Union
Bankshares' average balance sheet and reflect the interest earned on assets
and interest cost of liabilities for the periods indicated and the average
yields earned and rates paid for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average monthly
balances of assets and liabilities, respectively, for the periods
presented. Average balances are derived from daily balances. Loans on
nonaccrual status are included in the average balances of loans shown in
the tables. The securities in the following tables are presented at
amortized cost.
15
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Nine Months Ending September 30, 2004 Nine Months Ending September 30, 2003
- ------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<s> <c> <c> <c> <c> <c> <c>
INTEREST-EARNING ASSETS:
- ------------------------
Securities available for sale $134,681 $ 5,630 4.18 $113,445 $ 4,803 4.23
Securities held to maturity 2,738 210 7.66 3,108 240 7.72
Federal funds sold 0 0 0 917 10 1.09
Loans (net) 291,172 16,409 5.64 242,087 15,140 6.25
-------- ------- -------- -------
Total interest-earning assets 428,591 $22,249 5.19 359,557 $20,193 5.62
======= =======
Other assets 28,279 27,987
-------- --------
Total Assets $456,870 $387,544
======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
Savings deposits $118,311 $ 361 0.31 $107,020 $ 513 0.48
Time deposits 95,304 2,047 2.15 101,241 2,504 2.47
Money market accounts 34,457 282 0.82 36,409 427 1.17
Borrowings 126,220 3,213 2.55 67,576 2,457 3.64
-------- --------
Total interest-bearing liabilities 374,292 $ 5,903 1.58 312,246 $ 5,901 1.89
======= =======
Other noninterest bearing liabilities
and shareholders' equity 82,578 75,298
-------- --------
Total liabilities and shareholders'
equity $456,870 $387,544
======== ========
Net interest income $16,346 $14,292
Interest rate spread 3.61 3.73
Net interest margin 3.81 3.98
16
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ending September 30, 2004 Three Months Ending September 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<s> <c> <c> <c> <c> <c> <c>
INTEREST-EARNING ASSETS:
- ------------------------
Securities available for sale $140,630 $ 5,893 4.19 $114,491 $ 4,609 4.03
Securities held to maturity 2,593 187 7.21 3,124 229 7.33
Federal funds sold 0 0 0 917 10 1.09
Loans (net) 300,990 16,632 5.53 257,639 15,348 5.96
-------- ------- -------- -------
Total interest-earning assets 444,213 $22,712 5.11 376,171 $20,196 5.37
======= =======
Other assets 29,310 26,850
-------- --------
Total Assets $473,523 $403,021
======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
Savings deposits $126,299 $ 434 0.34 $113,774 $ 415 0.37
Time deposits 92,997 2,033 2.19 102,206 2,376 2.32
Money market accounts 34,526 284 0.82 37,840 381 1.01
Borrowings 132,591 3,507 2.65 69,065 2,476 3.59
-------- ------- -------- -------
Total interest-bearing liabilities 386,413 $ 6,258 1.62 322,885 $ 5,648 1.75
======= =======
Other noninterest bearing liabilities
and shareholders' equity 87,110 80,136
-------- --------
Total liabilities and shareholders'
equity $473,523 $403,021
======== ========
Net interest income $16,454 $14,548
Interest rate spread 3.49 3.62
Net interest margin 3.70 3.87
Liquidity and Capital Resources. Our 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 September 30,
2004 the Company's basic surplus was $91.4 million, or 18.8% of total
assets. Total basic surplus (basic surplus plus funding available by using
qualifying loans to secure Federal Home Loan Bank ("FHLB") advances) was
$115.6 million, or 23.8% 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 September 30, 2004, the Bank had borrowings of $112.3 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.
17
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 September 30,
2004, the Company and the Bank had exceeded all the minimum capital ratios.
The Bank's capital position at September 30, 2004 was as follows:
Minimum Regulatory
September 30, 2004 Requirements
------------------ ------------------
<s> <c> <c>
Leverage Capital Ratio 7.39% 4.0%
Risk Based Ratio 12.91% 8.0%
Tier 1 Ratio 11.66% 4.0%
The Company's aggregate contractual obligations at September 30, 2004 were
as follows:
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 $112,307 $82,157 $23,399 $4,751 $2,000
Operating leases 36 26 9 1 0
-------- ------- ------- ------ ------
Total $112,343 $82,183 $24,408 $4,752 $2,000
Financial Condition and Results of Operations
Comparison of Financial Condition at September 30, 2004 and December 31,
2003
Total assets amounted to $486.5 million at September 30, 2004 compared to
$464.2 million at December 31, 2003, an increase of $22.3 million or 4.8%.
The increase in total assets was resulted from an increase in net loans of
$18.3 million or 6.5% and an increase in available for sale securities of
$6.1 million or 4.7%.
Cash and due from banks were $11.6 million at September 30, 2004 compared
to $14.7 million at December 31, 2003, a decrease of $3.1 million or 21.2%,
primarily due to higher than normal seasonal outflows and funding of new
loan growth. Securities available for sale increased to $135.1 million at
September 30, 2004 from $129.0 million at December 31, 2003. The growth in
the investment portfolio was primarily due to an increase in US Government
Agency Securities in an effort to maintain and grow earning assets.
Net loans increased by $18.3 million or 6.5% to $300.3 million or 61.7% of
total assets at September 30, 2004 as compared to $282.0 million or 60.7%
of total assets at December 31, 2003. The increase was primarily due to
growth in residential real estate loans, the Bank's efforts to develop new
lending relationships, and the expansion of existing borrowing
relationships.
Real estate loans increased by $13.3 million or 5.5% to $255.1 million at
September 30, 2004 from $241.8 million at December 31, 2003, primarily due
to competitive pricing and market share growth.
Commercial and industrial, municipal and consumer loans increased by $5.0
million or 11.2% to $49.6 million at September 30, 2004 from $44.6 million
at December 31, 2003, primarily due to growth in home equity loans. The
increase in municipal loans was primarily due to our success in the loan
bidding process.
The Company's deposits increased to $309.3 million at September 30, 2004
from $298.5 million at December 31, 2003, an increase of $10.9 million or
3.6%. Demand deposit accounts increased by $5.9 million or 14.2% to $47.1
million at September 30, 2004 from $41.2 million at December 31, 2003.
Savings deposits, including NOW deposits, increased by $18.0 million or
14.9% to $139.0 million at September 30, 2004 from $121.1 million at
December 31, 2003. The increase in deposits was primarily due to seasonal
inflows and market growth. The Bank also offered a new deposit product
during the third quarter of 2004.
18
Borrowings increased by $7.3 million or 6.9%, to $112.3 million at
September 30, 2004 from $105.0 million at December 31, 2003, primarily as a
result of an increase in funding to support the growth in net loans.
Comparison of the Operating Results for the Three and Nine Months Ended
September 30, 2004 and 2003
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.
Net Income. Net income increased to $1.3 million for the three months ended
September 30, 2004, from $1.1 million for the three months ended September
30, 2003. The third quarter results reflect an increase in net interest
income of $524,000, or 14.8%, a decrease in non-interest income of $36,000
or 2.5% and an increase in non-interest expense of $431,000, or 13.4%.
Return on average assets was 1.04% for the three months ended September 30,
2004 as compared to 1.07% for the three months ended September 30, 2003.
Return on average equity was 12.13%for the three months ended September 30,
2004 as compared to 11.03% for the three months ended September 30, 2003.
Net income increased to $3.7 million for the nine months ended September
30, 2004, from $3.3 million for the nine months ended September 30, 2003.
The nine months ended September 30 results reflect an increase in net
interest income of $1.6 million, or 15.4%, a decrease in non-interest
income of $545,000 or 11.1% and an increase in non-interest expense of
$638,000, or 6.3%. Return on average assets was 1.07% for the nine months
ended September 30, 2004, compared to 1.11% for the nine months ended
September 30, 2003. Return on average equity was 12.01% for the nine months
ended September 30, 2004, compared to 11.15% for the nine months ended
September 30, 2003.
Interest and Dividend Income. Total interest and dividend income increased
by $673,000 or $13.5 to $5.6 million for the three months ended September
30, 2004 from $5.0 million. The increase was primarily due to higher
earning assets, in particular, loans and investments. The average balance
of net loans for the three months ended September 30, 2004 was $301.0
million compared to $257.6 million for the three months ended September 30,
2003. The average tax equivalent yield on loans was 5.53% for the three
months ended September 30, 2004 compared to 5.96% for the three months
ended September 30, 2003.
The average balance of investments for the three months ended September 30,
2004 was $143.2 million compared to $117.6 million for the three months
ended September 30, 2003. The average tax equivalent yield on investments
was 4.24% for the three months ended September 30, 2004, versus 4.11% for
the same period ended September 30, 2003.
Total interest and dividend income increased by $1.6 million or 10.8% to
$16.4 million for the nine months ended September 30, 2004 from $14.8
million for the nine months ended September 30, 2003. The increase was
primarily the result of an increase in earning assets offset in part by
lower yields. The average balance of net loans for the nine months ended
September 30, 2004 was $291.2 million compared to $242.1 million for the
nine months ended September 30, 2003. The average tax equivalent yield on
loans was 5.6% for the nine months ended September 30, 2004 compared to
6.3% for the nine months ended September 30, 2003.
The average balance of investments for the nine months ended September 30,
2004 was $137.4 million compared to $116.6 million for the nine months
ended September 30, 2003. The average tax equivalent yield on investments
was 4.2% for the nine months ended September 30, 2004, and 4.3% for the
nine months ended September 30, 2003. The decrease was primarily due to an
overall investment strategy to maintain interest income revenue levels
while maintaining adequate liquidity on the balance sheet, offset in part
by lower yields.
Interest Expense. Total interest expense increased by $149,000 or 10.4% for
the three months ended September 30, 2004 from $1.4 million for the three
months ended September 30, 2003. The increase in interest expense was
primarily due to higher costs of borrowings. Average interest-bearing
deposits of $253.8 million remained flat for the three months ended
September 30, 2004 to September 30, 2003. Average borrowings increased by
$63.5 million to $132.6 million for the three months ended September 30,
2004 from $69.1 million for the three months ended September 30, 2003, as a
result of an increase in the funding of new loans and investments. The
average rate on interest-bearing deposits decreased 17 basis points to
1.1%, while the average rate on borrowed funds decreased 94 basis points to
2.65% from 3.59% during the same period.
Total interest expense increased by $4,000 or 0.1% for the nine months
ended September 30, 2004 from $4.4 million for the nine months ended
September 30, 2003. The increase in interest expense was primarily due to
higher costs of
19
borrowings. Average interest-bearing deposits increased by $3.4 million or
1.4% to $248.1 million for the nine months ended September 30, 2004. Average
borrowings increased by $58.6 million to $126.2 million for the nine months
ended September 30, 2004 from $67.8 million for the nine months ended
September 30, 2003, as a result of an increase in the funding of new loans
and investments. The average rate on interest-bearing deposits decreased 33
basis points to 1.1% for the nine months ended September 30, 2004 from 1.4
% for the nine months ended September 30, 2003, while the average rate on
borrowed funds decreased 109 basis points to 2.6% from 3.6% during the same
period.
Net Interest Income. Net interest income for the three months ended
September 30, 2004 was $4.1 million as compared to $3.5 million for the
three months ended September 30, 2003. The increase in net interest income
was the result of an increase in interest and dividend income. The average
yield on interest earning assets decreased 26 basis points to 5.11% for the
three months ended September 30, 2004 from 5.37% for the three months ended
September 30, 2003, while the average cost on interest-bearing liabilities
decreased by 13 basis points to 1.62% for the three months ended September
30, 2004 from 1.75% for the three months ended September 30, 2003. As a
result, the interest rate spread decreased by 13 basis points to 3.49% for
the three months ended September 30, 2004 from 3.62% for the three months
ended September 30, 2003. The net interest margin decreased by 17 basis
points to 3.70% for the three months ended September 30, 2004 from 3.87%
from the three months ended September 30, 2003.
Net interest income for the nine months ended September 30, 2004 was $11.9
million as compared to $10.3 million for the nine months ended September
30, 2003. The increase in net interest income was the result of an increase
in interest and dividend income. The average yield on interest earning
assets decreased 43 basis points to 5.2% for the nine months ended
September 30, 2004 from 5.6% for the nine months ended September 30, 2003,
while the average cost on interest-bearing liabilities decreased by 31
basis points to 1.6% for the nine months ended September 30, 2004 from 1.9%
for the nine months ended September 30, 2003. As a result, the interest
rate spread decreased by 12 basis points to 3.6% for the nine months ended
September 30, 2004 from 3.7% for the nine months ended September 30, 2003.
The net interest margin decreased by 0.17% to 3.81% for the nine months
ended September 30, 2004 from 3.98% from the nine months ended September
30, 2003.
The following table presents the effect of tax exempt income on the
calculation of the net interest margin:
Nine months ended September 30,
2004 2003
- ----------------------------------------------------------------------
(in thousands)
<s> <c> <c>
Net interest income as presented $11,919 $10,327
Effect of tax-exempt income 439 448
------- -------
Net interest income, tax equivalent $12,358 $10,775
======= =======
Provision for Loan Losses. Provisions for loan losses, which are charged to
operations and resulting loan loss allowances, are amounts that we believe
will be adequate to absorb probably losses on existing loans may become
uncollectible. Loans are charged off against the allowance when we believe
collection is unlikely. We engage an independent loan review service to
conduct a periodic review of our commercial loan portfolio.
Our provision for loan losses for the nine months ended September 30, 2004
was $143,000 plus an additional $50,000 for the overdraft privilege
program, compared to $315,000 for the nine months ended September 30, 2003,
and $13,000 for the three months ended September 30, 2004, compared to
$105,000 for the three months ended September 30, 2003. The decrease in the
provision for loan losses was the result of management's evaluation of
Union Trust's prior loan loss experience, changes in the nature of the loan
portfolio, overall portfolio quality and overall economic conditions. The
allowance for loan losses was $4.5 million or 1.5% of total loans as of
September 30, 2004 and $4.2 million or 1.5% at September 30, 2003.
Non-performing loans at September 30, 2004 totaled $990,000 as compared to
$1.8 million at September 30, 2003. The decrease is primarily due to
several larger loan upgrades and loan workouts. Although we utilize our
best judgment in providing for probable losses, there can be no assurances
that we will not have to increase the provision for loan losses in the
future as a result of increased loan demand, future increases in non-
performing assets or other factors that may be outside the control of our
management.
Noninterest Income. Noninterest income decreased by $36,000, or 2.5%, to
$1.4 million for the three months ended September 30, 2004 from $1.4
million for the three months ended September 30, 2003. This decrease was
not
20
unexpected and is consistent with industry-wide trends. Loan fees
decreased $191,000, or 46.1%, for the three months ended September 30,
2004, primarily due to the slowdown of mortgage refinancing activity.
Financialservices income increased by $44,000, or 9.4%, to $510,000 for the
three months ended September 30, 2004 from $466,000 for the three months
ended September 30, 2003. The increase in financial services income was a
result of an increase in the market value of trust assets.
Noninterest income, excluding net securities gains, decreased by $635,000,
or 13.3% for the nine months ended September 30, 2004 from $4.9 million for
the nine months ended September 30, 2003. This decrease was not unexpected
and is consistent with industry-wide trends. Loan fees decreased $700,000,
or 50.2%, for the nine months ended September 30, 2004, primarily due to
the slowdown of mortgage refinancing activity. Financial services income
increased by $109,000, or 7.9%, to $1.5 million for the nine months ended
September 30, 2004 from $1.4 million for the nine months ended September
30, 2003, primarily due to market growth and related financial service fees
earned on trust assets.
Noninterest Expense. Noninterest expense increased by $431,000, or 13.4% to
$3.6 million for the three months ended September 30, 2004, as a result of
an increase in salaries and employee benefits, and other professional fees.
Salaries and employee benefits increased $326,000, or 17.2% to $2.2 million
for the three months ended September 30, 2004 from $1.9 million at
September 30, 2003. Other professional fees increased $45,000, or 33.8% to
$178,000 for the three months ended September 30, 2004 from $133,000 at
September 30, 2003, primarily due to expenses related to specific strategic
initiatives.
Noninterest expense increased by $638,000, or 6.3% to $10.8 million for the
nine months ended September 30, 2004, as a result of an increase in
salaries and employee benefits, which were partially offset by decreases in
expenses related to equipment, other professional fees and mortgage
valuation expenses. Salaries and employee benefits increased $855,000, or
14.8% to $6.6 million for the nine months ended September 30, 2004 from
$5.8 million at September 30, 2003. Equipment expenses decreased $81,000,
or $10.3% to $704,000 for the nine months ended September 30, 2004 from
$785,000 at September 30, 2003. Other professional fees decreased $42,000
or 8.0%, to $483,000 for the nine months ended September 30, 2004 from
$525,000 at September 30, 2003.
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 September 30, 2004, and
September 30, 2003, the following financial instruments, whose contract
amounts represent credit risk, were outstanding.
September 30,
2004 2003
- ----------------------------------------------------------------------
(In thousands)
<s> <c> <c>
1. Unused Commitments:
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines $16,127 $13,001
B. Secured real estate loans 20,039 17,541
C. Lines of Credit, Reserve Checking,
Municipal Loans 21,338 22,224
2. Financial Standby Letters of Credit: 453 532
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In management's opinion, there have been no material changes in the
reported market risks since December 31, 2003 as reported in Item 7A of the
Annual Report on Form 10-K.
Item 4: CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules
21
13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls
andprocedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
-------
Item 1: LEGAL PROCEEDINGS
None
Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, the Company repurchased
500 shares of its common stock.
COMPANY PURCHASES OF EQUITY SECURITIES
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
a) Total Number of (b) Average Price Shares (or Units) Shares (or Units) that
Shares Paid Purchased as Part of may yet be Purchased
(or Units) per Share Publicly Announced under the Plans or
Period Purchased (or Unit) ($) Plans or Programs Programs
- ------ ------------------ ----------------- -------------------- ----------------------
<s> <c> <c> <c> <c>
July1, 2004 through July 31, 2004 100 $94.00 100 13,424
August 1, 2004 through August 31, 2004 200 $98.00 200 13,224
September 1, 2004 through
September 30, 2004 200 $98.88 200 13,024
Total 500 $97.44 500 13,024
Item 3: DEFAULTS UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of
the Company
3.2 Restated Bylaws of the Company
31.1 Rule 13a - 14 (a)/15d - 14(a) Certifications
32.1 Section 1350 Certifications
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
November 12, 2004 /s/ Peter A. Blyberg
- ----------------- ------------------------------------
Date Peter A. Blyberg, President and Chief
Executive Officer
November 12, 2004 /s/ Timothy R. Maynard
- ----------------- ------------------------------------
Date Timothy R. Maynard, Chief Financial
Officer
23
Exhibit Index
Exhibit Number Description
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3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Restated Bylaws of the Company
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
32.1 Section 1350 Certifications
24